This article by Ed Baginskis was originally published in Top5 magazine July 2019 edition page 24.

Lately, many have begun to face problems in relationships with their banks, whether personal or company accounts, in the country of residence or abroad.

Previously the main criteria, when choosing and working with the bank, was its reliability (will it shut down or not) and rates on deposits/loans or tariffs. From now on we do not choose the bank, the bank decides whether to choose us as their client.

If previously, to open an account, it was necessary only to present a passport and to sign a contract on one or two pages, now you are required to provide a pile of documents, as well as to sign 20-50 pages of contract and wait for “the blessing” to open an account from 3-5 departments of the bank for months, and more often receive refusal …

And even if you are lucky to open an account, it is not a fact that you won’t not be asked additional info and supporting documents on each payment.

Moreover, banks around the world have already begun to take an interest in our tax affairs, ask for tax ID numbers and automatically report about your accounts and payments to the tax authorities where you live… I’m not even talking about automatic debits from your accounts of any tax and fines that you may not even know about (especially relevant in Spain).

It seems that banks were forcibly made to be the tools to control the world’s finances and tax liabilities. Risks of bank closure have not gone anywhere, only now they have started to close not only for usual reasons (lack of capital, not performing loans), but even if the bank is fine with financial indicators, it can be closed at the behest of the regulator if there are suspicions of money laundering (AB.LV in Latvia, Satabank in Malta and so on).

Why is this happening, and how to deal with it?

The main reasons for the above problems are:

  • Strengthening oversight of supervisory bodies and the state, as well as the bank’s huge spending on “compliance” with a huge number of new rules and regulations. And if previously this function was mainly aimed at monitoring the credit activities of banks and operations in the capital markets, then after the famous events of 2001 in New York, particular attention was focused on checking payment chains and customers themselves. Previously bank had to prove you are suspicious, now you have to prove you are not someone potentially posing a risk to the bank.
  • Automatic Exchange – More than 80 countries have signed an agreement on automatic exchange of information among themselves about non-resident account holders and have obliged banks to confirm the tax residence and tax ID number of all customers, so that then these banks could send information about these accounts to the tax authorities of their country, which then exchanges this information with  the tax authorities of other countries with whom the agreement is signed. For example, if the Spanish tax resident has a personal account in Switzerland, information about it will reach Spain automatically. And so on. As for offshore companies, bank identifies the beneficiary and exchanges information about the accounts of the company, which beneficiary may be using for storage personal funds. As a result banks began to refuse service to non-resident customers, and focus on the local market.

My main conclusion – banks do not fight for additional profits and customers as before – they are busy fighting for survival and compliance. As a result their customers do suffer, their interests are no longer a priority. The banking system has become too heavy. It has become a tool of state oversight and tax collection. Having an account has become a privilege to fight for and cherish. Bank secrecy has remained far in the past… this is a little weird and seems all wrong, but this is new reality. Very few banks are trying to become “modern” and “online”, but they are still too slow and their hands are tied with rules and regulations.

What are alternative solutions?

I would not recommend going against the system and fighting it, or trying to cheat. Nowadays all information is digitally recorded. Any concealed information sooner or later comes to light, and account, which you worked so hard to open, can get closed, and “suspicious” transactions get frozen and reported.

I would go with the flow and see what alternative solutions are offered in the market and who occupies a niche previously owned by international banks.

At the moment it is the so-called sector of Fintech, financial technology, where progressive companies make it a bridge between banks and people, with the help of modern technologies removing everything unnecessary – paper and bureaucratic obstacles, and focus on the basic financial services – ordinary checking accounts, cards and currency exchange. They do not need to maintain heavy structure and network of branches – everything happens online and this reduces the cost and time to process information – fees for customers are reduced and service is accelerated. Such companies popularly referred to as “payment companies” and in Europe they have licenses for dealing with electronic money (electronic money institutions or “EMI”) and suppliers of payment services (payment service providers or “PSP”). They have oversight from same regulators that oversee the banks, therefore they have to “comply” as well.

The main differences from the banks:

  • These companies are not credit institutions like banks – they do not issue loans and do not pay interest on deposits. Accordingly, the risk of default is virtually non-existent. They don’t use your money to issue questionable loans and don’t play with your money on the stock exchange.
  • There is no need to visit payment institution to open an account and perform the transactions – everything happens Online and more often via mobile phone “wallet” for mobile payments instead of cards.
  • Services are cheaper and faster – through optimization, focus, simplicity and information technology.
  • Payment companies use accounts in ordinary banks, they usually hold client funds in one “client” account in the right jurisdictions.
  • Online platform and service support is available 24/7 – you don’t have to wait for when the bank is open or wait for the operator while listening to holding music or advertising.
  • Payment companies are mostly not participants in the deposit guarantee program, but again they do not need it – the organization is closely monitored by the regulator and the central bank, and client money can not be used in any way.
  • Banks mostly make money on credit activities and operations in the capital market, as well as the management of client assets. Payment companies mainly focus on facilitating payments, converting currencies and payment cards (every time you make a purchase,  payment company receives a commission from the seller). The tariffs are much lower than those of traditional banks.
  • Payment companies are not currently members of automatic information exchange… but maybe it’s temporary.
  • And, most importantly – Payment companies are interested in new customers and keeping old ones, as well as in servicing transactions, because it is their main source of profit, unlike banks.

Opening a personal account in such companies is quite simple, you will just need to download their mobile application, register and upload a photo of your identification document and document confirming residential address.

It’s not easy to open a corporate account, but it’s easier than with a bank. Here we help our clients to correctly fill the forms and submit relevant documentation. Some payment companies are still willing to accept companies registered outside of Europe, as well as those associated with CIS countries.

Free Business Accounts

What if…?

If there is still a desire to open a bank account in Europe for the international structure, then there are solutions in such jurisdictions as Hungary, Macedonia, Croatia and Serbia.

A new notable trend is the refusal of banks to service companies, which have no physical presence and activity in the country of registration, therefore solutions with resident companies in the low-tax jurisdictions are becoming more popular. Such solutions are more expensive, but they are more reliable and durable.

Wealthy individuals, given the exchange of information, should think about the jurisdiction where they are or can be tax residents. If you travel a lot and don’t spend anywhere else than 183 days a year, then there is a possibility of becoming a tax resident in the jurisdiction with lower taxation and more relaxed presence requirements.

Minding all of the above you can make a conclusion that everything flows and everything changes. You will certainly benefit from consultation with experts who monitor the situation and can offer individual solutions.

We invite you to discuss your situation with the author of the article Ed Baginskis, who has more than 15 years of banking experience and his consulting company in Gibraltar.