Under a standard scheme, interest is paid separately and does not affect further accrual. With capitalization, interest is added to the principal, and the next accrual occurs on the increased balance — creating compound interest.
The effect depends on frequency. Monthly capitalization yields greater returns than quarterly, which yields more than annual, at the same nominal rate. The difference between the stated rate and actual annual return is called effective yield, and this is what should be compared when choosing between bank offers.
Over time, the effect strengthens: over short periods, the difference between simple and compound interest is small, but over several years it becomes significant. This property also works against borrowers when interest accrues on increased debt.
Practical note: capitalization is usually incompatible with regular interest withdrawals. A deposit with monthly card payouts and a capitalization deposit serve different purposes — the former provides current income, the latter builds capital.