Banks are earning billions from long-standing customers who fail to switch products, leaving loyal clients paying higher fees and interest than newer customers. Critics warn that this “loyalty penalty” has quietly become one of the industry’s most profitable strategies, with limited incentives for banks to change.
The cost of loyalty
Many banks offer attractive rates and terms to entice new customers, particularly in mortgages, savings accounts and credit cards. However, once customers are locked in, the terms often become less favourable over time. Research shows that individuals who stay with the same provider for years are significantly more likely to pay higher interest on loans and receive lower returns on deposits compared to those who regularly switch.
A hidden revenue stream
Industry analysts estimate that the loyalty penalty contributes billions annually to banking profits across major markets. By relying on customer inertia, banks avoid the costs of constant competition for every account. This silent goldmine has grown as consumers face increasingly complex financial products, making it harder to compare offerings or take advantage of better deals.
Regulatory scrutiny
Consumer advocates argue that the practice unfairly punishes loyalty and undermines trust in the financial system. Regulators in the UK, Europe and the US have begun examining whether banks should be required to offer long-term customers terms equal to those given to new ones. Some governments have already pressured lenders to provide greater transparency, but enforcement remains patchy and varies widely between jurisdictions.
Impact on households
For households, the effect can be substantial. A loyal mortgage customer may pay thousands more over the lifetime of a loan than someone who switched providers at renewal. Similarly, savers sticking with the same bank may lose out on higher returns available elsewhere. Financial advisers stress that regular reviews and comparisons are essential to avoid falling victim to the penalty.
Banks defend the model
The banking industry argues that competition remains strong and that customers have the freedom to move their accounts if better deals exist. Lenders also point out that incentives for new customers are a standard marketing practice, not a deliberate attempt to disadvantage loyal ones. Nevertheless, critics maintain that the imbalance between short-term and long-term treatment is too stark to ignore.
What comes next
As pressure builds, regulators may consider stricter rules to curb the loyalty penalty. Proposals range from mandatory reminders to customers when their rates change, to obligations for banks to offer equal terms across the board. For now, the responsibility largely falls on consumers to stay vigilant, but momentum is growing for systemic reform.
REFH – Newshub, 16 August 2025
