Starling Bank cuts in-credit interest rates for current account customers

Smartphone challenger bank Starling has told customers it will cut the interest it pays on balances, in response to last week’s emergency base rate cut by the Bank of England.

From 18 May 2020, those with up to £2,000 in their account will see their rate cut by nine-tenths, from 0.5 per cent to 0.05 per cent, while those with between £2,000 and £85,000 will see it cut by four-fifths.

It previously paid 0.25 per cent on balances between those two sums, but customers will receive just 0.05 per cent from May.

The bank said in an email: ‘We’re one of the few banks that pays interest on credit balances; however, given that the Bank of England has dropped the base rate in response to the coronavirus outbreak, we’re having to lower our own rates.’

While top savings deals started disappearing just days after last Wednesday’s base rate cut of half a percentage point, Starling is the first bank to slash current account in-credit interest.

Andrew Hagger, founder of personal finance site Moneycomms, said: ‘The Starling move won’t go down well with its customers.

‘Cutting to 0.05 per cent seems pretty pointless; I suppose it would rather do that than say it’s scrapping in credit altogether, but if you keep £2,000 for a whole year at 0.05 per cent you’ll earn £1.’

The move also suggests an increasing number of Starling customers use the bank as their primary current account and hold large balances in it, making the accounts more expensive to run for the bank.

Starling told This is Money in January that the almost 28,000 accounts which have been switched to it using the Current Account Switch Service held deposits more than double its £1,450 average, and made twice as many monthly transactions.

A customer who held £2,900 in their Starling account would earn around £7.25 a year in interest under the current rates. Come 18 May, this would fall to £1.45.

However, a Starling spokesperson denied it was a money saving move, and pointed out the interest rate cuts were smaller in absolute terms than the Bank of England’s base rate cut from 0.75 per cent to 0.25 per cent.

Bank account benefits have increasingly disappeared or been cut back over the last 12 months as banks grapple with low interest rates and lower profit margins.

This year both Santander and TSB have already announced cuts to the in-credit interest rate they pay certain current account customers, while more banks could make the move following last Wednesday’s announcement from the Bank of England.

Hagger added: ‘There are hardly any other in credit deals left now. Santander 123 has already announced a rate cut recently, while Tesco Bank still pays 1 per cent, maybe there could be a move there.

‘Nationwide Building Society pays 5 per cent for one year only on its FlexDirect account, so it’s possible that may also be under threat.’

Nationwide last week said it was reviewing its savings rates in the aftermath of the decision to cut the base rate to its joint-lowest rate ever.

This is Money asked it if its FlexDirect 5 per cent offer was part of this review, while we also asked TSB if it was reviewing the rate paid on its Classic Plus account. 

The bank is already due to cut the rate on balances of up to £1,500 from 3 per cent to 1.5 per cent on 2 May.

At the time of publication, Nationwide and TSB have yet to respond.