You will be able to explain why fixed deposits, bonus interest accounts and savings accounts pay different rates.
Three accounts at the same bank can pay you three different rates on the same S$20,000. The everyday savings account pays almost nothing. A twelve-month fixed deposit pays noticeably more. The account advertised on the MRT platform promises a rate higher than both, with a line of small print underneath. Same bank, same money, same day.
The rates make sense once you look at them from the bank's side. In lesson 1.1, Your bank deposit is a loan you made to the bank, you saw that the bank lends your deposit out and earns the gap between what its loans pay and what its deposits cost. Each rate is the bank's price for a different kind of loan from you, and some kinds are worth more to it than others.
Money in a savings account can leave at any moment. You can send it to another bank with PayNow tonight. So the bank cannot lend all of it out as a 25-year home loan. It has to keep enough on hand for the withdrawals that arrive every day, and that cash earns it little.
A fixed deposit works differently. You agree to leave the money for a set term, say six or twelve months, and you give up some or all of the interest if you take it out early. The bank now knows when the money will leave, so it can lend or invest it for that period without holding as much aside. That certainty is worth something to the bank, and it passes part of the value to you as a higher rate. This is why a fixed deposit usually pays more than a savings account. Longer terms often pay more than shorter ones too, though that pattern can flip when banks expect rates to fall.
Bonus interest accounts look generous, and they are designed with care. The bank pays extra if you credit your salary, spend a minimum amount on its credit card, buy an insurance policy or an investment through it, or pay bills from the account. Each condition gives the bank something it wants.
A salary that lands every month is a steady deposit, and people rarely move their salary account, so the bank can expect to keep that money for years. Card spending earns the bank fees from merchants. Insurance and investment sales earn it commission. The bonus is the price the bank pays to get those habits from you. For the bank, paying extra to customers who bring all of that is cheaper than raising the rate for every depositor.
The headline rate on a bonus account is usually the most you can earn with every condition met, and often only on part of your balance. Banks set tiers: one rate on the first slice of your money, another on the next slice, and the base rate on anything above a cap.
Here is an example with made-up figures. An account advertises up to 2.05% a year. The small print says the base rate is 0.05% on the whole balance, and a bonus of 2% applies only to the first S$50,000, and only in months when your salary is credited. You keep S$80,000 there all year and every salary arrives on time. You earn S$40 of base interest on the S$80,000 and S$1,000 of bonus on the first S$50,000, which comes to S$1,040. On your balance that is 1.3%, not 2.05%. If you change jobs and the salary credit stops, the bonus stops with it, and a full year without it would leave you with S$40.
So when you compare accounts, look past the headline to the base rate, each condition and the balance each rate covers.
The whole arrangement has a weak point. The bank has lent out most of the deposits, so it can pay back only a portion at once. If enough depositors ask for their cash at the same time, it runs out. That is a bank run, and it can bring down a bank whose loans were sound, because worried depositors can withdraw in a day while loans take years to repay.
In Singapore, MAS sets rules on how much capital a bank must hold, so it can absorb losses on loans that go bad, and how much cash and easily sold assets it must keep, so it can meet withdrawals. MAS also supervises banks to check they follow those rules. You do not need to know the ratios to use a bank. It helps to know that the interest you earn comes from your money being lent out, and that the rules exist because lending carries risk. Lesson 1.3, What SDIC deposit insurance covers and what it does not, adds the second safety net.
Most people have never read the terms of the account their pay lands in. They remember the rate from the advertisement and assume they earn it. Your bank's product page and its terms and conditions set out how your rate is worked out, usually in a table near the bottom. Find that table for your main savings account before you go on.
Read the terms of your main savings account and write down the base rate, each bonus condition, and the balance tier each rate applies to.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).