The Basics
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Hannah Beecham
05.10.2018

Banking Offshore (Part 2)

Offshore banks - fees and charges

Expats will find that by and large there are no standing charges for using an offshore bank account. (Local bank accounts tend to have a tariff for everything after the welcome handshake!) You will, however, incur costs for what’s termed ‘additional services’, for example bank drafts, stopped cheques or foreign currency payments.

The offshore banking sector is a competitive market place and banks set out their stalls in a variety of eye-catching ways. As a result, there is little uniformity between them in terms of which services incur charges and what those charges might be. An acceptable fee to one segment of their customer base might seem like a rip-off to another. They justify their charges on the basis that they regularly deal in cross-border transactions utilising different currencies. Many of the charges imposed are, they protest, a reflection of the fees they have to pay other banks in the chain of command.

Of course, the usual problem with smallish one-off fees is their nasty habit of adding up to a hefty monthly bill. The three charges most commonly complained about by expatriates are those made for cross-border transfers, credit card use and cheques issued in one country to be deposited in another.

Your job is to investigate the tariffs affecting you directly and compare like-for-like between a handful of competitors. Do this before you commit yourself to opening an account. Familiarise yourself at the outset with the tariffs levied for every type of instruction or request you are likely to make - remember these might include quite minor items, such as sending a fax or even an email confirming a payment has gone through.

Some offshore banks package their services within a club-style account - you open an account, they make you a member of their ‘club’. These accounts will have an annual standing charge. The only way to judge the worth of the product is to carefully assess the bells and whistles it offers (for example, details on tax liabilities, advice on savings schemes and investments, discounts on health and travel insurance, information about language tuition and local schools, and travel discounts) and calculate whether these offset other costs the account might incur. Be aware that the bank will make additional charges on top of the annual standing fee depending on the services you use.

Debit, credit and charge cards

The plastic revolution has provided a vital tool for expatriates as they travel the globe. Raising cash in local currencies, shopping and generally managing money can all be achieved with consummate ease by waving a slither of plastic. These days it's a case of ‘have cards, will travel’.

There are three types of cards - debit, credit and charge. With a debit card attached to an offshore bank account, money spent or withdrawn is deducted instantly. A debit card is your key to accessing money in any currency anywhere in the world 24 hours a day, seven days a week. There are hundreds of thousands of cashpoint machines around the world, and the number is increasing year on year.

A credit card gives you a grace period, usually one month, before payment is due. However, once the due date for settling bills has passed, interest on any outstanding balance will be charged. And remember, credit card interest rates are high. This is absolutely not the way to 'borrow' money.

Charge cards operate in a similar way to credit cards but the debt owing must be paid off in full on a monthly basis.

Plastic charges

Offshore banks differ widely in what they charge for their cards. It pays to shop around. Before you take on any card be sure you understand at the outset the precise details of the payback arrangement. There are no regularly updated independent comparisons between offshore card deals. You'll have to do your own research using the guidance below.

With both credit and charge cards, where the balances are reconciled at a later date, it is important to be aware of inherent fees. These will usually include an annual fee for the issue of the card. In some cases, expat customers can expect a fee waiver, but don't count on it. Most banks charge a joining fee and make an annual charge thereafter. Take time to compare offers. Note any interest free period, the rate of interest charged, the foreign exchange loading (that's the percentage added on by the bank for arranging an exchange from one currency into another), and any penalties likely to be incurred for late payment or exceeding the credit limit.

The annual percentage rate, APR, takes into account the interest on the card and all the other charges. Banks must inform cardholders of the APR and this information can be used to compare offers - the lower the APR, the better the deal. Some card providers offer deals according to the proportion of payback you make each month. If you want to take advantage of these offers, be realistic about payback. The penalties for borrowing beyond your credit limit are severe. This is a buyer's market, but remember to shop around - never assume you won't find a better deal than the one you're being offered.

Fantastic plastic - but at what price?

Accessing your money or making any kind of purchase overseas using a debit, credit or charge card is delightfully easy, but be careful; it’s an expensive business. As well as the annual fee, banks and credit card companies will charge you for every card transaction.

• Exchange-rate loading fees, sometimes called exchange rate administration fees or exchange rate adjustment charges, are likely to be added to all your overseas credit and debit card transactions.

• Credit card cash withdrawal fees will be charged by most companies.

• Some banks will also charge a 'transaction fee' every time a debit card purchase is made.

Expatriates who can predict their spending in a particular currency for a defined period of time should arrange for their chosen plastic to be denominated in the spending currency. For example, if you are an expat in the Eurozone, shop around for providers offering euro-denominated accounts complete with plastic.

Expats should also be aware of what's called dynamic currency conversion, a system used in many European countries and the US whereby a retailer converts purchases into sterling instead of using the local currency and then charges you a fee of up to 4% on top of the purchase price. Insist on paying in the local currency or use cash.

The other charge looming over credit card users is the rate of interest levied by the provider. Many card users do not understand that when they fail to clear the statement balance in full, future purchases don’t benefit from interest-free periods. Likewise, cash withdrawals from foreign ATMs may not benefit from an interest-free period, regardless of whether the full balance has been paid or not. In these cases, interest will be charged immediately on withdrawal.

There is one particular advantage to paying by credit card. Purchases are covered by Section 75 of the UK’s Consumer Credit Act both in the UK and overseas. This means that if any goods or services costing more than £100 and less than £30,000 are faulty, or not as they were described, you will be able to recover the cost, in full, from either the retailer or your credit card provider.

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Prepaid cards

Prepaid cards are catching on and suit those expatriates travelling from one country to another who, for whatever reason, prefer not to use their bank cards to make cash withdrawals or payments. Think of them as little bundles of cash compressed into a sliver of plastic. You will be charged a small fee each time you use your prepaid card in an ATM. There are no other fees, however, even for store purchases. While the prepaid card only incurs a fee when used to make cash withdrawals, you need to factor in the cost of purchasing one. As with all financial products, it pays to shop around. Key ‘prepaid cards’ into your search engine for a list of providers.

Travellers’ cheques

Travellers’ cheques are a secure way to carry your money around provided you have signed them once and kept a note of the uncashed cheque numbers. When these safe-guards have been taken, if you lose them or have them stolen they can be replaced. However, travellers’ cheques are not always the cheapest way to carry your money abroad. If you travel with sterling-denominated travellers’ cheques you will need to have them converted into the local currency. There will be a charge for this service. Alternatively, you can do the conversion in your home country and carry your cheques in the local currency. Either way, you should keep a weather eye on the exchange rate offered when you do the conversion. Shop around to make sure you’ve got a good deal.

The commission charged will be based either on a percentage of the amount exchanged or taken as a flat fee. Some deals are offered commission-free but be careful as they may offer the worst exchange rates. Flat fee deals are more expensive if you are exchanging small amounts.

Check it out!

If I’m giving an offshore bank my valuable business, what will it give me in return? As well as a bank account, multi-currency account, deposit/savings account, and the requisite slithers of plastic, will it:

• Help me clarify my expatriate status with my tax authority?

• Advise me about local taxation liabilities in my country of residence?

• Facilitate moving my existing mortgage offshore or, if seeking a mortgage, will it offer me competitive borrowing facilities?

• Advise me about life assurance and other forms of protection? • Inform me about investment opportunities?

Private banking

Private banking brings together the four principal areas of wealth management: banking, investment, trusts and taxation. It is distinguished by the fact that it combines all round wealth management with an exceptionally high degree of personal service. The banker must understand the client's wealth aspirations and be able to offer appropriate and detailed financial advice in all areas, notably investment.

As for minimum entry levels, there are no hard and fast rules. Private banks - who in times gone by, were content to reserve their services for the pecuniary elite - are nowadays happy enough to see a bit of 'new' money crossing their thresholds. But they may still expect a six or seven digit opening balance. This is a Rolls Royce banking service for the seriously wealthy.

What happens if my bank goes bust?

A gloomy thought: the worst can happen (and did, notably in 2008) - even supposedly rock solid financial institutions occasionally go bust.

Let's just suppose you wake up one morning to headlines declaring that your bank or building society has imploded and its coffers are bare. What are you going to do?

If you’re banking offshore, the answer rather depends on the jurisdiction into which you've entrusted your money in the first place. As far as Britain's three offshore centres, Jersey, Guernsey and the Isle of Man, are concerned, there are significant elements of depositor protection already in place. And, all three offshore centres have a depositor compensation scheme in place.

The current level of deposit protection for regulated banks across the EU is €100,000. Deposits are covered per depositor per bank. You can find out more about the EU Deposit Guarantee Scheme at http://ec.europa.eu/finance/index_en.htm

 


 

Internaxx Bank S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Internaxx Bank and Internaxx Bank accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Internaxx Bank.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

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