Loyalty is a good thing, right? Wrong. Consumers loyal to brands are quite likely to be ripped off, says the UK’s Citizens Advice Bureau (CAB) - and it’s especially true for people who stay with their home insurer for years, fail to swap their mobile phone or broadband provider, or stay with one bank for life.
That’s the ‘loyalty penalty’ for you – the difference between what new and loyal consumers pay for the same service. The total cost to UK consumers: as much as £4 billion a year.
The CAB first started investigating the issue back in 2002, and raised its first so-called ‘super-complaint’ with regulators. This resulted in some new laws, and ultimately triggered consumer payouts of more than £32bn for issues like mis-sold payment protection insurance (PPI). The fundamental problem, though, hasn’t gone away. “Overcharging has sadly become essential to the business model of many basic services,” says Ewan McGaughey, an economics professor at King’s College London.
Consumers are seeing only slow improvements. One of the worst offenders is the energy sector. In 2015, the ‘big six’ energy providers (British Gas, EDF Energy, E.ON, npower, Scottish Power and SSE) were found to be making huge profits thanks to giving existing customers a poor deal.
Well, now energy bills come with a QR code, making it easier for anyone with a smartphone to use price comparison services for savings. Still though, the overall tariff rates in the industry across companies remain inflated.
Keeping track of spending is arguably easier for mobile phone users who can compare and contrast services offered by different providers (should they bother to do so). With home insurance or mortgages it’s trickier - even for those who are relatively financially astute. There's often no standard tariff available, and firms use their own methods to assess a consumer’s risk, which they can modify as they see fit (and many do). Even if the customer is aware their premium has increased, it’s hard to say you’re being unfairly charged if you don’t know how the decision was made.
“Firms can design contracts to minimise their exposure to costs - and to extract more from customers,” says Joseph Spooner, an assistant professor in economics at the London School of Economics. “We rely on regulators and trust in firms’ reasonableness in order for markets to work, but it seems that we are being let down.”
So how can you make sure you’re not being secretly overcharged? First, spend some time shopping around for deals. Sounds obvious, but most people actually don’t do it, says McGaughey – because of ingrained behavioural biases. “When we make decisions as consumers, we usually apply a quick rule of thumb, because most of us don’t have time to spend looking through all the options,” he says. But you really should.
Second, check what the deal used to cost and what the situation is today. People often find out they’re being overcharged after talking to a friend who’s paying less for a similar service, or having read about it in the news, says Mark Armstrong, economics lecturer at the University of Oxford.
Those in the know may even end up directly benefiting from the penalty imposed on loyal customers, because many service providers offer new joiners lower ‘teaser’ rates on, say, a basic broadband package. “If the savvy customers are in the majority, such as with bank overdraft charges, for example, then there’s little political pressure to mend the system,” says Armstrong.
The tide could be turning, though. The more people realise that they are being overcharged, the more could push for universal basic services. The introduction of such ‘co-op’ systems would take a while - and in the meantime, regulators can play their part by enforcing the law. The Competition and Markets Authority “could also advocate for the real changes that are needed, which are consumer governance rights in basic services,” says McGaughey.
Enforcing the existing law is also important. If a savvy customer complains, chances are that a firm will merely settle their dispute quite discreetly, says Spooner, while continuing to apply the unfair terms against disengaged consumers.
One positive sign is that the Financial Conduct Authority, the regulator for the thousands of financial services firms and financial markets in the UK, is preparing a new study on the country’s insurance market, and will take the CAB’s findings into account. For now, though, you should remember to check regularly what you’re actually paying for - and if you’re being short-changed, be ready to ditch your bank or mobile provider for another. It’s easier than a divorce, so don’t stay loyal if you don’t need to.
This article was originally published by WIRED UK
