Nearly one in five adults have bought financial services products through comparison websites over the past 12 months, according to MoneyExpert.com. Around 8.7 million people have used the sites to buy up to 13.6 million financial services products in the past year – more than 1.1 million sales a month.
But a report from Professor Merlin Stone, commissioned by MoneyExpert.com, warns some of these sites are potentially damaging for consumers as they can encourage people with poor credit ratings to apply for loans, credit cards and mortgages they have little chance of being accepted for. This can further damage their credit rating.
Banks are clamping down on easy credit following rises in bad debts and the recent increase in the Bank of England base rate. And MoneyExpert.com research shows over 2.8 million people have had applications for 3.5 million financial products turned down in the past year. Around six per cent of the population have been rejected when applying for credit cards, loans and mortgages and MoneyExpert.com expects the rate of rejection to rise dramatically. It has launched a credit profiling tool which enables consumers to check their credit rating before applying and then highlights products for which they are likely to be approved.
Professor Stone of the Bristol Business School believes comparison sites can focus too much on price and need to do more to educate and advise customers who are often buying complex financial products. He argues that factors like service quality and the features of the product need to be shown in addition to rates, particularly for products where pricing is highly commoditised. Providers would also benefit from more rounded explanations of their products so that they can compete on factors other than price.
Professor Stone is urging financial comparison websites to adopt a best practice charter and issues he highlights include:
- The risk to customers’ credit ratings when they apply for loans or credit cards they have no chance of being accepted for. Failed applications stay on credit files and may be taken into account by other firms customers apply to
- Lack of information on service levels offered by firms. Customers can sign up for products and then find the service offered is not acceptable
- Lack of explanation of the key features of the products on offer. The cheapest deals may often not provide the benefits that a customer needs
- Poor quality leads for providers from financial comparison websites. Customers are encouraged to apply for products which they cannot be accepted for and consequently providers’ systems can be overwhelmed
Professor Stone said: “Money aggregator sites have been a powerful force for good in the financial services industry and have established a strong market presence. However it is now time for them to move up to a new level and that will involve significant changes in the way they operate.
“Currently they are overly focused on price which means they can provide banks and building societies with poor quality business as there is no attempt to detail the wider attributes of the product or understand the credit position of the consumer before making a recommendation.”
Research shows that of the banking products bought through money aggregator sites over the past 12 months, credit cards have been the best seller.
Product - Number of people
Credit card - 1.356 million
Personal loan - 1.1 million
Mortgage - 937,000
Opened a savings account - 826,000
Professor Stone’s report says that aggregators encourage people to focus too much on interest rates or costs at the expense of the quality of service or benefits provided. There is often little or no attempt to provide the right products for customers only the cheapest. He warns that there can sometimes be a lack of advice for people with poor credit ratings that they are unlikely to be accepted for the market-leading rates.
The bottom line is that individuals with poor credit histories are highly unlikely to qualify for the best rates available. Also, products with the most competitive headline rates may not be the best option because of other factors such as redemption penalties.
Professor Stone said: “It is misleading to encourage people to apply for a rate which they will not qualify for and which in turn will impact their credit score as rejections are held on their file. Perversely this worsens an already difficult position and is against the interest of the consumer.”
Sean Gardner, chief executive of MoneyExpert.com, said: “People are recognising the need to take control over their finances and comparison sites provide a valuable free service to enable them to easily compare the best products available. Despite the growing importance of services such as our own, we have long recognised that the industry needs to improve its offer to consumers if it is to fully realise its vast potential.
“As well as allowing customers to compare products in terms of features and service people also need help with credit profiling. We have led the way by allowing comparison of products by price, features and service and have now added an enhanced credit profiling tool which allows customers using our site to be allocated a credit score and then be matched with providers who will be more likely to accept them.
“We believe the industry needs to pay more attention to credit scoring and service issues in order to protect customers and to help the industry develop as it should.”
Professor Stone has developed a best practice charter for financial comparison sites to follow which he believes will help them to grow and reach their full potential.
BEST PRACTICE CHARTER
- Observe transparency on providers’ fees and charges
- Focus on more than just price. Product features and service measures should also be included to allow a rounded evaluation of the products on offer
- Provide best buy tables that are truly comprehensive and uncontaminated by incentives to aggregators
- Give more advice to customers - making the services open to more than just the financially savvy
- Offer a credit rating service which will allow consumers to have a better idea of which products they should – and should not – consider applying for
- Warn customers about potential damage to credit ratings by making too many applications
- Provide health warnings about products
- Provide specialist support for the less well-off and those with poor credit records
Gardner said: “Professor Stone recommends some fundamental changes for our market which we will strive to address. Our industry is becoming increasingly competitive and in dealing with the issues he raises, we hope to further strengthen our proposition and improve our service to our business partners and consumers alike.”