Making 18 Cents on the Dollar

Key Takeaways

• UK credit‑card APRs stayed high while BoE rates fell
• Banks earned abnormal profits by not passing rate cuts to borrowers
• US study finds banks gain 18¢ per deposited dollar
• Customer attention level predicts deposit‑rate generosity
• Media silence lets banks “mint” money unchecked

Pulse Analysis

The United Kingdom’s credit‑card market illustrates a striking disconnect between central‑bank policy and retail pricing. While the Bank of England has trimmed its official rate by several percentage points, average credit‑card APRs have barely moved, leaving borrowers paying rates that far exceed the cost of funds. This static pricing strategy has allowed banks to capture a sizable share of the interest‑rate spread, effectively “minting” money in an environment where consumers expect lower borrowing costs after rate cuts.

Across the Atlantic, a recent paper by Xu Lu and Lingxuan Wu sheds light on a complementary mechanism on the deposit side. By measuring how quickly customers react to higher rates—either by switching banks after a Fed hike or by altering spending after a windfall—the authors construct an “attention index.” Banks with highly attentive customers tend to offer higher deposit rates to retain funds, while those with indifferent clientele can afford to pay less. The authors estimate this attention gap translates into roughly 18 cents of extra income per dollar deposited, a subtle yet powerful source of profitability.

Together, these findings suggest that banks exploit information asymmetries on both ends of the balance sheet. When borrowers are unaware of falling policy rates, lenders keep loan rates high; when depositors are disengaged, lenders suppress deposit yields. This dual advantage amplifies net interest margins and raises questions for regulators and consumer advocates. Greater media scrutiny and financial‑literacy initiatives could pressure banks to align rates more closely with market conditions, ultimately fostering a healthier credit environment for both borrowers and savers.