One of the most important aspects of expat living is having access to meaningful bank accounts that afford us the greatest flexibility. As life moves on we tend to accumulate various accounts on our travels and neglect them as they become less important in our minds. A regular banking review is time well spent in streamlining your accounts and also stamping out unnecessary costs.
In previous "Net Worth" articles we have discussed annual banking reviews, the last one being "Review your banking arrangements" on April 15, 2012. Such reviews should be a matter of course. It is not just a question of whether you are happy with your current accounts but also whether they are necessary and if you are using them to your advantage rather than the bank's. There is also a growing concern among expats these days about the security of the banks they use.
While living as expats we sometimes forget about accounts we left behind. What we should do is close them or use them more sensibly.
When we live in a country we usually open an account there to receive salary, pension or other income. We also use it to pay our local bills. Some working expats find it useful to have more than one account, to hold local segregated savings. So, if you move to another country, do you close your accounts in the place you are leaving, or is it a case of "I'll do this sometime soon"?
Quite often the "sometime soon" never materialises. That almost-forgotten account falls below the minimum set balance and starts to attract monthly service fees. Soon you have unnecessarily lost money.
Similarly, we may think we are using one of these accounts to good advantage but have not really thought things through. Where it is valuable to leave an account open to receive specific income, this makes a great deal of sense. However, if you are not managing the account to your own benefit, your bank may be eating your money if you leave the balance too low to avoid monthly service charges. Sometimes you will also incur transfer fees and leave yourself open to currency exchange fluctuations.
Let's say you are a European living in Thailand, and own properties in Australia and Singapore that you rent out. You may have bank accounts in both locations to receive rental income and pay bills relating to your properties. That is a sensible idea. However, if you transfer the balances to a euro-denominated account each month you would likely be incurring unnecessary costs.
By rolling up the balance in each location you could make the transfer, say, once a quarter and reduce the transfer costs by two thirds while also keeping a healthier balance in the accounts to avoid service fees. This would also allow you to manage the timing when you make forex transactions so that you are not subject to the heavy market fluctuations that often occur.
There is also a growing concern among expats about the safety of the banks they use. This is not only specific to banks, but also to countries these days.
Banks now seem to exist as profit-making machines for shareholders rather than as service organisations for their customers. Banks are in the business of making money as well as providing service, but surely equilibrium is required between these two aspects?
Banks primarily make profits by accepting your cash on deposit, paying you interest, and lending money to someone else at a higher interest rate. In the fight for profit, banks have extended their business operations to far higher-risk transactions for potentially higher returns, using your deposits. Subsequently there is a higher risk of encountering financial difficulties.
We have also recently experienced the situation in Cyprus, where bank deposits were "taxed", when balances were over a specific threshold, by the government. This is not something the banks imposed and thus the question of the jurisdiction is raised as well as the safety of the specific banking organisation to which you trust your business. It seems that banks in Cyprus were paying above-average deposit rates to customers and this had attracted substantial deposits from overseas.
According to one source, it has recently been announced in Australia that any bank account that has been dormant for three years or more will be open for the balance to be transferred to the government. Banks are apparently now required to report to the Australian Securities and Investment Commission any account that has had not transactions for three years, excluding interest payments and bank fees. Apparently these deposits may be reclaimed.
So, in evaluating your banking arrangements you now need to look at both the bank you choose and the jurisdiction in which it is based. Large multinational banks are considered a safe bet for most expats. However, even with an account in Cyprus you would surely feel disappointed now.
With a multitude of regulations being imposed internationally these days, you may wish to restrict your banking activities to a minimum in keeping lower balances than in previous years. Currently interest rates payable are meagre to say the least. Investment vehicles can be far more lucrative.
Of course, many expats will say they feel a bank account is safer than an investment vehicle. This is not necessarily so. Many expats disassociate returns from banks with those of the investments in their minds. If a bank offers, say, 2% annual interest on a savings account, many expats say that an investment account generating 4% per year is unattractive. For double the return you will likely not encounter double the risk. When asked what a decent return rate on an investment vehicle would be, many expats believe that a conservative rate would be 7-8%. They also feel that the risks they encounter would not be much more than those in a bank deposit account. If you think about this carefully it is illogical.
Moving away from the substantial international giants, there are a number of different options for "safe" banking. This description of safe has to be taken in context, given the recent experience of giants such as Lehman Brothers, as well as some Icelandic and other US and UK banks.
When looking for a decent bank, you need to try and ensure that it has a good reputation and has been in existence for some time. Seek written assurances that the loan book and any potential delinquencies are not a massive strain on the balance sheet; try to choose the location carefully.
A sensible strategy is to have a bank in a jurisdiction that affords depositors some protection and also where expats make up the majority of customers. You are then assured that international transactions are not strange to your bank and you will be able to speak to an organisation that knows what you are talking about.
Review your arrangements today. See a professional adviser and discuss whether you are operating your banking in the most effective manner.
Andrew Wood has been an expat in Asia for 33 years and is executive director of PFS International. His financial planning articles are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or emailed to enquiriesthailand@fsplatinum.com.