Banks across Sri Lanka have leaned on flashy “cash-back” or “cash-backed” loan and deposit promotions — offering customers upfront cash incentives or higher nominal payouts tied to fixed-deposit (FD) balances while pricing the facility at 3–4 percentage points above prevailing FD rates. At first glance these offers look like a win for retail customers: an immediate reward or the ability to tap funds without breaking an FD. But a deeper look shows the economics overwhelmingly favour banks, and that both depositors and monetary authorities have reason to scrutinise these products.
How the mechanics stack the odds in the bank’s favour. Many “cash-back” structures are marketing wrappers around standard lending and liquidity management. A bank will allow a customer to draw funds against their FD (or to open a linked product) while charging the borrower a lending margin that sits a few percentage points above the FD yield; fees, processing charges, and conditions (tenor limits, partial encashment penalties, or insurance bundling) further raise the effective cost. Meanwhile the bank continues to carry the deposit on its books, using it to fund lending or short-term assets; the net interest margin — the difference between what the bank earns by re-deploying the deposit and what it pays the depositor — remains positive in almost all rate environments because the bank sets the lending spread to preserve profitability. In short: the customer gets a headline cash amount or convenience; the bank keeps the spread.
Why rising or falling market rates don’t change that math. Proponents argue that when market rates fall, the bank’s generous cash-back becomes more valuable to customers. But banks deliberately price the lending leg to be resilient to interest-rate cycles: the spread above FD rates (3–4%) builds in cushion against both rising funding costs and one-off promotional payouts. If policy rates fall, banks typically reduce new FD rates and may pause promotions; if policy rates rise, the spread protects the bank’s return on re-investment of deposits. Empirical studies of bank funding and lending behaviour show that banks actively manage deposit rates and product design to stabilise margins, meaning the headline “extra” won’t necessarily translate into better economic outcomes for customers over time.
Hidden costs and behavioral traps for depositors and borrowers. Customers who accept these deals often underestimate implicit costs: earlier encashment penalties, ceiling caps on payable cash-back, or restrictive eligibility that shifts benefit to customers who keep large balances (thus concentrating bank funding). For borrowers, an apparent “cash back” can be offset by higher effective APR when fees and staggered interest are included. For depositors, perceived convenience (access without breaking FDs) can erode the discipline of longer-term savings and leave them exposed to higher overall borrowing costs if they switch frequently between promotional offers. Consumer education materials from regulators repeatedly remind the public to read T&Cs closely — a sign that regulators view these behavioral effects as significant.
Why central banks should pay attention. Central banks have two related concerns. First, product designs that allow banks to hold stable deposit balances while simultaneously granting credit against them can obscure true funding conditions and liquidity risks — particularly in stressed markets where encashment demand or counterparty confidence matters. Second, if promotions shift deposit pricing dynamics (for example, concentrating higher rates on linked products or on selected cohorts), they can fragment the transmission of monetary policy and complicate supervision of fair customer treatment. Central banks and supervisors therefore monitor such products both for consumer protection issues (mis-selling, opaque fees) and for systemic risks (liquidity mismatch, runway of promoted rates). Past central-bank advisories and public notices — including repeated warnings about deceptive loan advertising and the need for careful reading of product terms — signal regulatory sensitivity to these dynamics.
Real-world signals: marketing wins, complaints follow. Market coverage and customer forums show a pattern: banks deploy cash-back offers to gain retail share and transaction flow; initial uptake is strong, but consumer complaints sometimes follow around access, unexpected charges, or app-based execution failures. That pattern underlines the asymmetric incentives: banks can scale promotions nationally at limited marginal cost, while individual customers bear frictional costs and information disadvantages. Independent analyses of how reward programs affect loyalty suggest short-term behavioural wins for banks but raise questions about sustainability if macro conditions shift.
What depositors and borrowers should do now. Read every contract line: compare the effective APR (including fees and penalties), not just the headline cash amount. Ask how quickly the bank can break or re-price the FD, whether the cash-back is taxable, and whether the offer expires or is conditional on transaction volumes. Use FD calculators and simple scenario analysis (what happens if rates rise 200 bps?) to assess real value. Consider diversification: if the goal is liquidity, a laddered set of short-term instruments or a transparent overdraft secured by collateral may be cleaner than repeatedly taking promotional products.
What regulators and central banks should consider. Supervisors ought to require clearer standardized disclosure of effective costs (APR equivalents), mandatory examples of “typical” customer outcomes, and clearer statements about encashment and portability. Macroprudential teams should watch for concentration of promotional liabilities and for any rapid growth in cash-backed lending that hides true leverage or maturity mismatches. Where necessary, consumer protection notices and public advisories — similar to prior warnings about misleading advertising and scams — should be issued promptly to reduce information asymmetry.
Bottom line: marketing optics don’t change the economics. Cash-back at a margin of 3–4% above FD rates is a powerful customer acquisition and liquidity tool — but it doesn’t magically transfer economic upside to the customer. Unless the full, all-in cost and liquidity implications are transparent, these products will continue to be a net win for banks. That asymmetry makes them worth careful scrutiny by depositors, consumer advocates and central banks alike — especially in jurisdictions where deposit funding stability and consumer protection are priorities.
