<p>When you lend your money to a bank (by depositing it), they don't just make money off of lending out your money. They also make money out of charging you for banking services. If the bank makes more money off of offering you services then they can afford to pay you a higher rate of interest (all other things equal). Check out: How do banks make money? The fallacies of fee income (<a href="https://core.ac.uk/download/pdf/6793025.pdf" rel="nofollow noreferrer">Rice and DeYoung (2004)</a>) </p>

<blockquote>
  <p>But banks also earn substantial amounts of noninterest income by
  charging their customers fees in exchange for a variety of financial
  services. Many of these financial services are traditional banking
  services: transaction services like checking and cash management;
  safe-keeping services like insured deposit accounts and safety deposit
  boxes; investment services like trust accounts and long-run
  certificates of deposit (CDs); and insurance services like annuity
  contracts. In other traditional areas of banking-such as consumer
  lending and retail payments—the wide-spread application of new
  financial processes and pricing methods is generating increased
  amounts of fee income for many banks.... <strong>Remarkably, noninterest income now 
  accounts for nearly half of all operating income generated by U.S. commercial  banks.</strong></p>
</blockquote>

<p>If spending on banking services increases more slowly than account balances and the sums involved don't make it worth the trouble of having multiple accounts then banks will be willing to offer higher rates on smaller balances. But, empirically, my impression is that this is atypical. It is more common to see higher rates on higher balances, because the transaction costs on serving one \$100k account are smaller than those of 10 \$10k accounts, and so they can pass some of those economies along as higher rates. </p>

CC BY-SA 3.0
2018-04-12T19:01:53.380Z
2018-04-12T19:01:53.380Z
BKay
<p>You see that sometimes.  It isn't common, but it does happen.  A way to think about it is there being two different supply curves of deposits.  It is usually reversed and larger deposits earn more.  This is for two reasons.  First, wealthier investors have less tendency to let inertia determine where their accounts are and so are willing to more elastically supply funds and the variable costs of adding a single account are independent of the size of the account.</p>

<p>However, there are environments where banking accounts are the single best investment option possible.  In that case, those large deposits cannot flee into the bond or stock markets.  Furthermore, the banks may be desirous to reduce their deposit levels, but not lose their customer base.  This would encourage wealthier depositors to consume their money rather than deposit it. Banks may want to reach target funding levels that are slightly lower than their current level.</p>

<p>Finally, certain types of assets can imply certain preferred types of deposits.  For example, banks that offer a significant number of lines of credit, letters of credit or other forms of contingent funding usually carry a lot of demand deposits and fewer long term deposits.  Conversely, banks that carry longer term loans tend to carry longer term deposits.  The mix of banks assets may be changing.</p>

<p>Finally, Brexit will probably crush British commerce and if banking is preparing for this, they may be shortening their asset base and in doing so trying to shorten their deposit base to be flexible in the event that Brexit is as catastrophic as it could be.</p>

<p>The Port of London is huge because the Industrial Revolution began there and so outflowing trade required it, but as other nations joined the process it became natural to use London as the nexus of trade between the Old World and the New World.  When the European customs union came into existence this substantially reduced the competitive value of ports such as Antwerp.  If customs duties are now present, it is unimaginable that customers selling to Europe from North or South America would even consider shipping through London to Europe, if the principal European ports were large enough to handle the traffic.  Because of history, they are not  yet, but when they become so all the supporting commerce such as warehouses, banks, trucking companies and makers of intermediate goods for final shipment to Europe should get crushed.</p>

<p>Banks may be getting ready.</p>

CC BY-SA 3.0
2018-04-12T19:55:57.070Z
2018-04-12T19:55:57.070Z
Dave Harris
<p>This may be a UK only thing but...</p>

<p>I have noticed that it is very common to see current accounts that offer some interest on the first couple of thousand pounds deposited with them and then <em>less</em> interest on sums over that amount. Why is this so? Surely they should offer <em>more</em> interest due to economies of scale.</p>

<p>Examples: </p>

<p><a href="https://www.starlingbank.com/current-account/" rel="nofollow noreferrer">Starling bank</a> 0.5% up to 2,000 - 0.25% above</p>

<p><a href="https://www.nationwide.co.uk/products/current-accounts/flexdirect/rates-fees-overdrafts#tab:Ratesfeesandampoverdrafts" rel="nofollow noreferrer">Nationwide FlexDirect</a> 1% up to 2,500 - 0% over 2,500</p>

<p><a href="https://www.tescobank.com/current-accounts/" rel="nofollow noreferrer">Tesco current account</a> 3% up to 3,000 - 0% above</p>

CC BY-SA 3.0
2018-04-12T12:27:57.457Z
If you have more money you spend more time seeking out a better place to put it.   Their main interest is to get you "hooked", so you keep coming back with more deposits rather than taking the time to research it further.
Hot Licks
CC BY-SA 3.0
2018-04-12T12:49:23.010Z
Please back your claim up with some references. It does [not seem to be true](https://www.moneysupermarket.com/shop/savings/details/?productCode=SAV_NATWEST_4CD74939371E4C4B99A7E5BCAD94D5FA&baseCode=sav_natwest_79cf680a75174e538b230019b8cd536d&ResultsCount=5&PositionInResults=5&gid=SAV_CASHISA) generally.
Giskard
CC BY-SA 3.0
2018-04-12T13:43:51.207Z
@donesp: Even in the link you gave the interest goes down to 0.1% if you deposit over 1m UKP. But I will find other examples and edit my question shortly.
Mick
<interest-rate><banking><economies-of-scale>
Why do banks offer less interest on larger deposits?
Mick
# Why do banks offer less interest on larger deposits?

(Asked by: username_0 on 2018-04-12)

This may be a UK only thing but...

I have noticed that it is very common to see current accounts that offer some interest on the first couple of thousand pounds deposited with them and then *less* interest on sums over that amount. Why is this so? Surely they should offer *more* interest due to economies of scale.

Examples:

[Starling bank](https://www.starlingbank.com/current-account/) 0.5% up to 2,000 - 0.25% above

[Nationwide FlexDirect](https://www.nationwide.co.uk/products/current-accounts/flexdirect/rates-fees-overdrafts#tab:Ratesfeesandampoverdrafts) 1% up to 2,500 - 0% over 2,500

[Tesco current account](https://www.tescobank.com/current-accounts/) 3% up to 3,000 - 0% above

**Tags:** interest-rate, banking, economies-of-scale

> **Comments:**
> **username_1**: If you have more money you spend more time seeking out a better place to put it.   Their main interest is to get you "hooked", so you keep coming back with more deposits rather than taking the time to research it further.  
> **username_2**: Please back your claim up with some references. It does [not seem to be true](https://www.moneysupermarket.com/shop/savings/details/?productCode=SAV_NATWEST_4CD74939371E4C4B99A7E5BCAD94D5FA&baseCode=sav_natwest_79cf680a75174e538b230019b8cd536d&ResultsCount=5&PositionInResults=5&gid=SAV_CASHISA) generally.  
> **username_0**: @donesp: Even in the link you gave the interest goes down to 0.1% if you deposit over 1m UKP. But I will find other examples and edit my question shortly.  

---

## 2 answers

### Answer by username_3 on 2018-04-12. Score: 3

When you lend your money to a bank (by depositing it), they don't just make money off of lending out your money. They also make money out of charging you for banking services. If the bank makes more money off of offering you services then they can afford to pay you a higher rate of interest (all other things equal). Check out: How do banks make money? The fallacies of fee income ([Rice and DeYoung (2004)](https://core.ac.uk/download/pdf/6793025.pdf))

> But banks also earn substantial amounts of noninterest income by
> charging their customers fees in exchange for a variety of financial
> services. Many of these financial services are traditional banking
> services: transaction services like checking and cash management;
> safe-keeping services like insured deposit accounts and safety deposit
> boxes; investment services like trust accounts and long-run
> certificates of deposit (CDs); and insurance services like annuity
> contracts. In other traditional areas of banking-such as consumer
> lending and retail payments—the wide-spread application of new
> financial processes and pricing methods is generating increased
> amounts of fee income for many banks.... **Remarkably, noninterest income now
> accounts for nearly half of all operating income generated by U.S. commercial banks.**

If spending on banking services increases more slowly than account balances and the sums involved don't make it worth the trouble of having multiple accounts then banks will be willing to offer higher rates on smaller balances. But, empirically, my impression is that this is atypical. It is more common to see higher rates on higher balances, because the transaction costs on serving one \$100k account are smaller than those of 10 \$10k accounts, and so they can pass some of those economies along as higher rates.


---

### Answer by username_4 on 2018-04-12. Score: 0

You see that sometimes. It isn't common, but it does happen. A way to think about it is there being two different supply curves of deposits. It is usually reversed and larger deposits earn more. This is for two reasons. First, wealthier investors have less tendency to let inertia determine where their accounts are and so are willing to more elastically supply funds and the variable costs of adding a single account are independent of the size of the account.

However, there are environments where banking accounts are the single best investment option possible. In that case, those large deposits cannot flee into the bond or stock markets. Furthermore, the banks may be desirous to reduce their deposit levels, but not lose their customer base. This would encourage wealthier depositors to consume their money rather than deposit it. Banks may want to reach target funding levels that are slightly lower than their current level.

Finally, certain types of assets can imply certain preferred types of deposits. For example, banks that offer a significant number of lines of credit, letters of credit or other forms of contingent funding usually carry a lot of demand deposits and fewer long term deposits. Conversely, banks that carry longer term loans tend to carry longer term deposits. The mix of banks assets may be changing.

Finally, Brexit will probably crush British commerce and if banking is preparing for this, they may be shortening their asset base and in doing so trying to shorten their deposit base to be flexible in the event that Brexit is as catastrophic as it could be.

The Port of London is huge because the Industrial Revolution began there and so outflowing trade required it, but as other nations joined the process it became natural to use London as the nexus of trade between the Old World and the New World. When the European customs union came into existence this substantially reduced the competitive value of ports such as Antwerp. If customs duties are now present, it is unimaginable that customers selling to Europe from North or South America would even consider shipping through London to Europe, if the principal European ports were large enough to handle the traffic. Because of history, they are not yet, but when they become so all the supporting commerce such as warehouses, banks, trucking companies and makers of intermediate goods for final shipment to Europe should get crushed.

Banks may be getting ready.


---

