'Rational' customers keeping banks on their toes

High street banks in Britain are facing tougher times ahead as their customers ruthlessly shop around for the best deals, according to research out today.

The report from Ernst & Young predicts banks and building societies are about to experience the same challenges facing conventional retailers as customers display decreasing loyalty and insist on value for money.

According to the report, bank customers are behaving rationally and are not “hapless dupes” as some commentators believe.

“Far from plunging into crisis driven by record borrowing, increased interest rates and declining house prices, consumers are sensibly restraining spending, refinancing debt at lower rates and accumulating cash savings,” the report states.’

But while consumers’ confidence in the economy remains static, their personal financial confidence fell for the first time in six quarters, suggesting the impact of five interest rate rises since November 2003 is starting to be felt.

The report, based on interviews with 15,000 adults in the UK between July and September 2004, found that the level of borrowing had fallen from the record levels seen during the summer, as consumers sought to re-appraise their situation at the new, higher level of interest rates.

At the same time the level of savings activity has risen, with cash ISAs and instant access accounts showing noteworthy inflows.

“This preference for cash-based financial products clearly reflects post-Millennium disappointment with the long-term investment markets,” the report says.

With the return of the “rational consumer”, the report predicts banks and building societies will be scrapping among themselves to win new business and will face the choice between maintaining volumes or margins, as they will not be able to have both.

“With no obvious growth sectors of any magnitude in evidence, eating competitors’ lunches whilst protecting one’s own platter will be the name of the game. Scale, innovation, and a perpetual commitment to both service quality and operational efficiency will characterise the winners,” it states.