Opinion

Suits you, sir – personalised interest rates could be the future

4 min read

19 September 2015

It is time to start thinking differently about interest rates.

The Bank of England’s chief economist, Andy Haldane, has won many column inches with his comments on the possibility of Bitcoins replacing cash and UK interest rates hitting zero or even moving into negative territory.

He has also received a fair amount of criticism for the suggestions from his Portadown Chamber of Commerce speech.

How would a system of negative interest rates work for example? What would it mean for the general public and the cash in their high street bank?

Certainly some, if not most, of Haldane’s comments were blue-sky thinking, peering out of the box to see if things could be done better.

That should be applauded. Interest rates are a vital cog of the economic system both for consumers, businesses and savers. Are we really committed to staying on the decades long rollercoaster of interest rates up and interest rates down?

At this time of record low rates and the intense debate over whether the economy is strong enough to take its first hike in years, it seems a good opportunity to take stock and perhaps think of a different way.

Jonathan Crook of the University of Edinburgh Business School recently unveiled an innovation in risk modelling at the Credit Risk and Credit Control conference.

The so-called new intensity model, he said, used a new application of “statistical modelling to enable lenders to more accurately predict likely defaults on loans”. He said it could potentially reduce the £13.2bn annual “black hole” that currently exists due to unpaid loans.

He said banks using the new system would be able to more accurately predict which borrowers would miss loan repayments and thus enabling them to offer “tailor-made” interest rates based on specific past borrowing behaviour and credit risk.

“Borrowers with poor credit scores and histories will pay higher interest while those with a good credit profile will increasingly benefit from lower interest rates, as lending institutions begin to compete more vigorously on lending rates,” he said.

It is an intriguing idea. The buzz word in so much of business today is personalisation – ensuring that customers get exactly the right offer and products for their needs.

Read more about personalisation:

So to see that idea of personalisation and targeting moving over to the world of interest rates is a fascinating one.

A Welsh-based SME boss recently told me that he felt powerless when he heard or read news stories about the debate over a potential rise in interest rates.

“It is all fine for people in London to be thinking of raising rates because the economy is improving,” he said. “It is getting better in London but it isn’t so great in this part of Wales or in other parts of the country.” 

“A rise in interest rates would hurt us. I have an idea, and I know it will never happen, to have separate interest rates for different parts of the country. So one per cent in London and perhaps 0.5 per cent here to make things fairer.”

Regional interest rates? Personalised interest rates? Negative interest rates? It is all part of what should be a flourishing debate and now is the best time to have it.