Thursday 21 May 2015

Interest-ing.

What puzzles me is that banks are adopting two diametrically opposed strategies regarding how much interest they pay on deposit balances.

See e.g. This Is Money.

In the red corner

- Nationwide pays 5% on first £2,500; no further interest on larger balances.

- Tesco Bank pays 3% on the first £3,000; no further interest on larger balances.

in the middle

- Lloyd's pays 1% on the first £2,000; 2% on balances between £2,000 and £4,000 and 4% on balances between £4,000 and £5,000, no further interest on higher balances.

In the blue corner

- Santander pays zero % on the first £1,000; 1% on balances between £1,000 and £2,000; 2% on balances between £2,000 and £3,000 and 3% on balances between £3,000 and £20,000.

Clearly, having lots of small balances gives you a more stable overall figure but is more actual work/hassle; having a few large balances is a riskier business model but is less actual work/hassle.

But why do the different banks place such different values on these things? It's like one supermarket offering "3 for the price of 2" and another one offering "2 for the price of 3".

16 comments:

Random said...

Maybe it is IBM?

Mark Wadsworth said...

R, well no, the banks are pitching for slightly different market segments and offering slightly different 'products'.

The first two are going for lower earners with little spare cash; the latter two are going for higher earners with more spare cash.

Dinero said...

First thing to take into consideation is that individually banks dont functionally need to take deposits to form loan contracts. But deposit are a low interest source of reserves for use in clearing transactions with other banks. Then if what they want to acheive by taking deposits is a customers base, then I guess they are pitching a product to attract different types of customer profile. Or it might be some complicated modelling of cash flows that suit the different banks on an individual basis.

Mark Wadsworth said...

Din: "banks dont functionally need to take deposits to form loan contracts."

We've done this one to death and I'm getting a bit bored.

Yes, loans create deposits, not the other way round.

But the banks have to accept their own bits of paper back (the ones they gave the mortgage borrower to give to the vendor to buy the house) - or else the vendor would not accept the bit of paper.

View from the Solent said...

Mark,
You omitted mentioning that above £5000 Lloyds pays bugger-all. So might belong in the red corner.
(Which is a pain cos' 4% is good to have)

Dinero said...

Yes, that why I included the stipulation individually .

Dinero said...

Actually they dont need to accept them back ,as deposits, for the vendor to accept them. The vendor will accept them if they can be used in commerce. They do need to accept them back in the process of the loan contract being honoured, and also the borrower needs to obtain them to do that.

Bayard said...

AFAIK, the Santander account is a current account. I had assumed that the idea of the 3% interest is to tempt people into switching their current account to Santander. It worked for me, anyway.

Mark Wadsworth said...

VFTS, well spotted, I will amend.

Din, individually no, but apart from that, yes they do, c'mon man.

B, it is a current account and I when I did my last every-ten-years-or-so bank switchover I signed up to them. The irony is that I used to have my main bank accounts with Abbey National years ago...

Random said...

Does this take into account fees, etc?

Dinero said...

Once the Vendor has been paid the deposits have allready changed hands. There is nothing to accept back into the banking system as nothing left it.

The question under consideration is what is the motivation for commercial banks offering conditions to attract depositors.

Mark Wadsworth said...

Din, I'm not sure what level of reality you are operating on.

The vendor is only prepared to accept a cheque with a £ amount and the name of a bank on it in exchange for his house because he knows that he can deposit that back into the banking system, and then draw from that account and spend it.

The vendor could in theory frame the cheque and hang it on the wall until the six month use-by date has passed, but that's unlikely to happen.

Obvs, nowadays, it's not cheques, the vendor's solicitor waits until the magic numbers pop up in his deposit account before title changes hands.

So no, nothing left the banking system. A zero was split into a mortgage and a deposit. Nobody ever said that anything left the banking system because there was nothing there to start with!!!!!!!!

We have done this time and time and time again, it is all very simple.

And this has nothing whatsoever to do with the actual post.

Dinero said...

You have just repeated what I put in my comment.

If you want to scrutinise your question

"What puzzles me is that banks are adopting two diametrically opposed strategies regarding how much interest they pay on deposit balances."

Then its sensible to start with identifying what are and are what not, the possible reasons that individual banks want to attract deposits.

Thats a respnse to your blog post .

my first comment was simillar to yours

ie "if what they want to acheive by taking deposits is a customers base, then I guess they are pitching a product to attract different types of customer profile. Or it might be some complicated modelling of cash flows that suit the different banks on an individual basis.

TheFatBigot said...

I doubt there is anything more to the different rates than different judgments about how to make customers feel good about each bank in the hope they will feel loyal to that bank when it comes to borrowing money, taking out insurance or setting-up a pension.

As I understand it, most if not all of the deals that give above-inflation rates on the first few thousand in an account come with strings - a need to deposit a minimum sum each month or to have salary paid into the account.

It seems unlikely to me that a desire to attract either high or low-earning customers can be at the heart of it because there are too many imponderables to allow a bank to calculate how many customers they are likely to attract or what either the short or long term effect will be.

They have to offer different products in the hope it will attract custom from their competitors but I doubt it is much more scientific than that.

Curtis said...

I have 2 of each of these accounts and more, earning an average of 3.5% on £60,000.

Also, because the "cut-off" time for a day's total balance to earn interest is different between banks, the same balance can earn interest from multiple accounts on the same day. So my actual rate is around 5%.

Mark Wadsworth said...

TFB: "I doubt it is much more scientific than that."

That appears to be the most likely explanation, which is a bit disappointing.

C, do you have direct debits between accounts to make them look active? I used to have 2 Santander accounts, it was a right faff.