Can Smile keep its customers happy when paying 0pc interest?

Posted in 'Banking' by Richard Catlin

12 June 2012

It’s been almost 13 years since Smile, an offshoot of the Co-op, took internet banking by the scruff of the neck and dragged it into the new millennium. With market leading interest rates and a snazzy online-only image, it was seen as a breath of fresh air, forcing traditional high-street banks to up their game.

Back then it offered an in-credit interest rate of 4.25% (that’s almost 1% higher than the leading cash ISA today) and an overdraft rate of just 9.9%. Smile claimed it was able to offer such good rates by shunning the traditional bricks and mortar model of other banks – which were typically paying just 0.1% on balances at the time.

Fast forward to 2012 and that’s all changed.

The bank has just contacted its customers to let them know that from August, it will no longer be paying interest on balances held on its three main accounts - cutting an already meagre rate of 0.12% to a big fat 0%. Even though this cut will, in reality, make very little financial difference to most customers, the move has still attracted a significant amount of negative publicity – not helped by the decision to also increase overdraft rates from 15.9% to 18.9% – getting close to double what they were 13 years ago.

Of course, the financial climate has changed a lot since 1999, with the current base rate of interest static at 0.5% compared to 5.5% then – meaning that savings rates across the board have been hit hard.

How the move affects customer loyalty remains to be seen, but it’s important to look at it in a wider context. Firstly, consumer expectations have changed in line with the financial climate. Gone are the days when headline interest rates were the most significant factor in selecting a bank, with outstanding customer service now seen as a the main pull.

Rival First Direct has not offered interest on balances for some time (though it does allow customers to earn interest via a linked savings account and innovative ‘sweep’ facility) yet consistently tops our annual Banking and Credit Card surveys, streets ahead of the rest.

To be fair to Smile, they’ve done a lot right over the years, sweeping countless awards for its customer service and ethical policies. It’ll be interesting to see whether competitors such as Santander – who despite spending millions on promoting the virtues of their products still fall short in the ‘customer service’ bracket – manage to steal Smile customers away.

Richard Catlin is Marketing Manager at checkmyfile.com. He has a degree in Geography from the University of Glamorgan and can be contacted at richard@checkmyfile.com