Starling Bank will pay 3.25% interest on current account balances up to £5,000 from October 1.
The move will mean that personal and joint account customers of the digital challenger bank can earn interest on their balance without having to move their money into a separate account or dedicated pot.
The new variable rate of 3.25% AER (annual equivalent rate) will be available to new and existing customers.
The previous rate paid by Starling was 0.05%. Many providers do not pay any interest on current accounts.
Some banks will offer savings accounts with attractive rates which are linked to their current account.
John Mountain, interim chief executive of Starling Bank said: “Most banks with competitive interest rates require customers to move money into a separate account or pay a subscription fee.
“This friction means that many people won’t get around to taking action and so miss out on the interest on their main balance.
“We wanted to change this and ensure that everybody benefits by paying interest on the first £5,000 in their current account.
“This is something that all big banks should consider doing.”
Interest rates apply to the first £5,000 in a customer’s account, inclusive of money held in “spaces”, which are separate money pots kept by Starling’s customers for p`articular goals, and children’s Kite cards connected to an adult account.
Customers with joint accounts will earn interest on joint balances of up to £5,000, as well as on balances of up to £5,000 in their personal current account.
Starling said that most of its retail customers will benefit from the interest on the entirety of their current account balance, with 94% holding £5,000 or less.
A new consumer duty for financial firms was introduced by the Financial Conduct Authority (FCA) in July meaning that firms should be putting customers at the heart of what they do, including when designing products and offering customer service.
The FCA has been keeping a close eye on the savings market in recent months as the Bank of England base rate has increased.
It has set out a 14-point action plan to make sure banks and building societies are passing on interest rate rises appropriately to savers, communicating with customers effectively and offering them better deals.
For savers, Starling also also offers a one-year fixed saver account, paying 5.53% AER interest (fixed) on deposits between £2,000 to £1,000,000 that are held for a year.
Starling Bank does not have physical branches on UK high streets.
But, like many other banks generally, balances up to £85,000 held with the digital bank are protected by the Financial Services Compensation Scheme (FSCS).