Saving
Cashback And Interest Reward Different Behaviour
An account paying for transactions and one paying for balances are rewarding opposite things, which is why the better option depends on how the account is used.
Current and savings accounts offer rewards in two distinct forms. One pays for holding money and the other pays for moving it, and they suit different patterns of use.
Interest pays for the balance being present
An institution paying interest is compensating the depositor for the use of funds, which it lends or otherwise deploys. The payment scales with the amount and the time it stays.
Because the return depends on the balance, the relevant question is the average balance held rather than the number of transactions passing through.
An account with a high rate and a low balance cap pays well on a small amount, which is a different proposition from a lower rate with no limit.
Cashback pays for transactions the merchant funds
Rewards on spending are largely funded from interchange, the fee merchants pay for accepting card payments, which the card issuer shares back with the customer.
The payment therefore scales with spending, not with balances, and an account with a large balance and little activity generates almost nothing from it.
Interchange levels are regulated in many places, and the caps applying vary by jurisdiction and change over time, which is why reward levels differ so much between markets.
Conditions attached to rewards do the selecting
Reward accounts commonly require minimum monthly deposits, a number of direct debits, or a monthly fee, all of which filter for customers who behave a particular way.
Those conditions are the mechanism by which the account is profitable. A customer meeting them is providing the institution with the activity that funds the reward.
Failing a condition in a given month typically removes the reward for that month entirely rather than reducing it, which makes the value volatile if the conditions are marginal.
Fixed fees invert the arithmetic at small scale
Where an account charges a monthly fee in exchange for rewards, the fee is certain and the reward is not, so the outcome depends on volume.
Below a certain level of spending or balance, the fee exceeds the reward, and the account is a net cost while appearing to pay the customer.
The break-even point is calculable from the published terms, and it is the figure that determines whether the structure suits a particular pattern of use.
Rewards on spending do not reduce the spending
A rebate on purchases returns a small fraction of the amount spent, which lowers the effective cost of spending that was going to happen anyway.
Where the reward structure encourages additional transactions, the arithmetic reverses, since the additional spending exceeds the rebate by a wide margin.
Which is the mechanism worth understanding: the reward is a share of a fee on a transaction, and the transaction always costs more than the share returned.
Questions readers ask
So is the advertised rate misleading?
It is accurate as a rate and misleading as an expectation. The rate is applied properly; the balance it applies to is small for most of the year.
Should I max out a regular saver every month?
Only if the money is genuinely surplus. Committing an amount you then have to withdraw usually triggers the conditions that remove the interest.
