The hidden ‘tax’ you’re paying for brand loyalty, and how we stop it

One of us has a partner – let’s call him Colin (because that’s his real name). Recently, his energy retailer wrote to him to tell him he could save money on his bill. And who wouldn’t want to save money given the recent price increases? So, he rang back. But the call centre operator couldn’t tell Colin what a better offer would be, and directed him to the retailer’s website. He couldn’t work it out there either. He gave up.

This kind of experience is all too common. Trying to keep a lid on your household’s key costs – think utilities, insurance, banking and telcos – can be extremely challenging. Many of us simply don’t know if we’re getting a good deal or not.

Loyal customers often pay a big price for sticking with their service provider.
Loyal customers often pay a big price for sticking with their service provider.Credit: Dionne Gain

The data shows that we’re not – some people might even say we’re being ripped off. Recent figures from the Australian Competition and Consumer Commission (ACCC), based on the energy bills from more than 5 million households, found that nearly half are paying equal to, or more than the safety net price – some substantially. The safety net price, which is not a competitive price but is meant to protect us from unreasonably high prices, clearly is not working.

Across these essential services, a common tactic is to offer a cheap introductory price, and to increase that over time. It’s become known as a loyalty penalty or tax. It works because all of these products can be complex and prices difficult to compare. Shopping around, as Colin found, is confusing and time-consuming. Instead, many of us trust these (mainly) big businesses to do the right thing. But they don’t. And that means the loyalty penalty is costing Australians billions of dollars.

In energy, if we want a truly competitive market it isn’t enough to tell people about better offers or send them to price comparison websites. As a minimum, people doing it tough and in retailer hardship programs need to be defaulted to the best offer. It’s also unreasonable for people to be paying higher than the safety net price – this should be a price cap.

In insurance, Australia should follow Britain’s lead and ban loyalty taxes, also known as “price walking”. The regulator there now requires that renewal quotes cannot be more expensive than those offered to new customers. There is no recent data estimating the size of the loyalty penalty in insurance, but it’s probably large: research in 2018 from the NSW insurance monitor found that renewing customers on average paid premiums that were 25 per cent higher than new customers.

For those of us trying to save money, accounts offering bonus interest rates look attractive. But complex terms and conditions mean that most people, in most months, actually don’t receive any bonus interest at all. It also seems standard practice for banks to offer better rates to new savers but leave existing customers on less competitive rates.

Similarly, in home lending, there is a continued gap between the interest rates offered to new customers compared to existing customers. One recent analysis showed there is an average difference of 1.99 per cent between “front book” and “back book” rates and fees, meaning loyal customers are being charged thousands of dollars a year more on an average loan.

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If banks really wanted to be trusted to be providing the best service for their customers, they should ensure both borrowers and depositors are receiving their most competitive rate.

The solutions seem simple, but too often policy makers and regulators think it’s sufficient to encourage people to shop around with prompts, or more information. The reality is that these “better information” remedies consistently fail.

In Victoria, for example, the energy regulator changed the rules so retailers had to tell customers if there was a better offer available. But late last year the regulator reported that residential consumers could still have saved more than $250 million per year.

In the UK, regulators required insurers to include last year’s premium on renewal letters. For home insurance, this actually led to a reduction in shopping around!

Last year an ACCC report recommended that savers be alerted when they are about to lose bonus interest rates, and that banks should be required to prompt people on poor rates to choose better ones.

We have little hope that this will make a significant difference – there is a saying about doing the same thing over and over again and expecting different results.

The federal government has recently made improving competition a policy priority. Effective competition demands that business offer competitive prices to all customers, including loyal customers.

For Colin’s benefit, and so many of us like him, we need to eliminate the penalty that comes from being a loyal customer. We need to design them out of our markets.

Fiona Guthrie is the CEO of financial advisory service Way Forward. Gerard Brody is the Chair of the Consumers’ Federation of Australia.

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