Making 18 cents on the dollar

Below is a chart that should be discussed much more in the media than it is. It shows the average interest charged by UK banks on credit card debt. I could have used consumer loan interest rates or any other short-term lending rate in the UK; they all show the same picture. While banks were eager to increase loan rates when central banks hiked rates, they have kept loan rates unchanged even though policy rates have declined significantly.

And no, this is not what ‘always happens’. In the past, banks lowered their loan rates after a while when interest rates declined. In this cycle, they didn’t do it and that allowed them to gain abnormal profits in recent years.

UK credit card interest and official policy rates

Source: Panmure Liberum, Bank of England

I think banks continue to keep short-term loan rates high because they can. Neither customers nor the media seem to pay any attention to this issue, and as a result, banks keep minting money. Once the public (or enough customers) paid attention to this disconnect, banks would likely reduce their loan rates. At least that is what banks in the US do.

Xu Lu and Lingxuan Wu performed a fascinating analysis on how banks in the United States set the interest rates on bank deposits. They measured how much attention bank customers paid to their accounts via two channels. First, they looked at the share of customers who moved money from one bank to another after the Fed hiked interest rates. The higher this share, the more fickle a bank’s customers are.

Then, they also checked how spending patterns changed if customers got an unexpected windfall from a tax refund or a government stimulus check during the pandemic. If you compare this spending to the regular spending pattern after customers get their salaries, etc., you can estimate how quickly customers realise that they have more money in their bank account.

Combine these two measures, and you get a measure of the average attention a bank’s customers pay to their deposits. If a bank has customers who pay more attention, it tends to pay higher interest on deposits because it knows that if it doesn’t, more of its depositors will leave the bank to get a better deal.

Depositor attention and bank deposit interest

Source: Lu and Wu (2026)

As you can see in the chart, the difference in deposit rates varies over the cycle and gets larger when interest rates are higher. But in the long run, the authors of the study estimate that the difference between banks with attentive and banks with inattentive customers is some 18 cents of extra income for the bank for every dollar deposited.