Last Updated August 8, 2020
Dateline: Tbilisi, Georgia
A few years ago, my team received an email from someone asking about bank fees. This person was paying higher bank fees than they were expecting and wanted some advice on how to reduce them.
Bank fees can be confusing both offshore and in your home country. This is especially true if you live in places like the United States, Australia, or Europe, where bank fees tend to increase continuously. But it’s when people travel offshore that high bank fees can become really confusing.
The person who wrote in had been paying 20 EUR a month in bank fees. For someone from a country like the United States, this probably seems like a lot to pay just for having an account.
What is this money going toward?
Generally, it is to cover local regulations that make it difficult for the bank to turn a profit. To continue operating, the bank needs to look after its own bottom line, and so it passes those fees on to the customer.
It is not all bad news though.
There are some benefits to using banks that charge higher fees, just as there are downsides to banks that offer low-cost accounts.
In this article, we’ll look at both the downsides and the benefits, address the main questions we get from clients about why offshore banks charge higher fees, and then give you a few strategies for how to avoid high offshore bank fees that don’t give you any benefits.
The Downsides of Low Fees
Here’s the deal: the value model offshore is different. Most banks outside the United States and other western countries are not out lending 102% percent of your money. This means that they are safer and more solvent, but it also means that they have to charge fees to cover their bottom line.
You can find ways to pay less in fees offshore, but other aspects of your banking experience will definitely suffer for it.
Banks with fewer or lower fees tend to offer fewer benefits and less robust customer service and have the potential to cause you more problems down the road.
In countries like the United States, for example, issues can arise when using banks with the lowest fees. First, these accounts will typically not generate any interest. Your money will simply sit there, which is useful for the bank, but a missed opportunity for you.
You should also bear in mind that these banks are often not well capitalized and tend to not have great liquid assets.
In addition, you’ll find that when you are paying less in fees, service suffers. Contacting the bank becomes a difficult chore, if not outright impossible at times. As a general rule, trying to resolve any banking issues that come up will be frustrating due to poor or inattentive service.
I have personally found this to be the case with HSBC, a bank popular with people who have companies located in Hong Kong. Though there is no monthly fee and outgoing wire fees are relatively cheap, you pay for that savings with subpar services.
The other downside of going with a bank that does not charge fees is that you may be exposing yourself to dangerous levels of risk.
In Montenegro, for example, most banks charge a fraction of a percent on your incoming funds, but there is one bank that doesn’t charge anything.
The locals don’t trust it and wonder how the bank can make any money. Some even avoid it altogether.
They would rather pay a small fee at another bank that they know is solvent than risk putting their money in a bank that isn’t safe.
The Benefits of Higher Fees
Paying a bit more will give you more freedom in your banking, as well as assurance that whatever problem arises, it will be solved quickly and efficiently.
By the same token, paying higher bank fees can usually guarantee you some benefits.
For example, I pay a $40 fee per month for my bank account. This fee is constant; there is no running balance that I can maintain that will waive this fee, though some banks offer such a feature.
However, in return for my $40, I receive some notable benefits. First, I have a direct email to my account manager, which allows me greater access should a problem arise.
This increased service also comes in handy when dealing with smaller issues. For instance, should I need to have my password reset for some reason, I am not required to call into the bank and go through endless prompts in order to get my issue fixed.
This level of service is well worth the fee I pay each month as it benefits me, my business, and my team, who are able to contact my bank to ask questions, sometimes without even needing my direct involvement.
Why Can’t I Keep My Local Bank?
Generally, the people who come to us wondering about high offshore bank fees, like our friend paying 20 EUR a month, fall into one of two different camps.
The first camp is those who don’t want to leave their local bank behind because the exact benefit of having an offshore bank account isn’t perfectly clear. Why go through all the trouble of getting an offshore account when you could just keep your local bank and use something like TransferWise?
FinTechs have their place, but we usually suggest more robust options to the people we work with.
While you could just rely on a FinTech, the better option is to create a transactional account and a wealth storage account for your offshore lifestyle for both yourself and your business. They will come with higher bank fees, but the benefits are worth the price.
And for citizens of residence-based taxation countries like Australia, Canada, and most EU states, giving up your local bank account is often a requirement to prove that you have left your home country to qualify for non-resident status.
US citizens have an advantage in this regard when going overseas because they don’t have to worry about proving a new tax residence to get the available tax incentives for expats and can keep their US bank accounts. Americans don’t usually get advantages when it comes to banking overseas, so this is a nice break for them.
If you are a US citizen, you should still find a local bank that will refund your ATM fees while traveling overseas. It is also good to have a bank account with otherwise lower fees, which will allow you to keep more of your money.
If you aren’t a US citizen, you aren’t going to be able to keep your bank account open while you go overseas – not if you want to save on taxes. It just won’t be an option.
What Are The Fees For, Anyway?
The other camp is caught up on why offshore bank fees are so high and where that money is going.
First of all, not all offshore banks have high bank fees.
For your personal banking needs, there are plenty of banking options with low bank fees, but they aren’t going to offer the kind of service that you need compared to banks with higher fees.
The banks with more robust options are going to have you deposit something like 500 EUR to open the account and a 30 EUR payment every quarter to maintain it.
Some people find that very frustrating, but personal banking won’t be the worst when it comes to fees. The highest bank fees you’re going to see will be for the commercial account you set up for your business.
If you have decided to take your business offshore to explore other markets and reduce your taxes, you’ve likely worked out how your business structure is going to function overseas and now need to open a bank account for that business.
What’s common in these situations is to pay roughly $40/month for a basic business bank account. You likely won’t earn any interest on that account, but you will have robust banking options with quality service.
How To Avoid High Offshore Bank Fees
If you are saving thousands of dollars a month in taxes by going offshore, $40/month to have quality banking services is a pretty good trade-off.
But there are banks that you will want to avoid, either because the service is poor or the fees are unnecessarily high. Or both.
Some banks will charge you a similar $40-$50 management fee each month but will not back up those fees with quality service. It’s one thing to swallow a high offshore bank fee and get something in return; it’s a whole other issue to pay those same fees and get poor service.
But that is nothing compared to the truly astronomical offshore fees that you will run into when you go to the financial institutions on tiny islands in the Caribbean and other traditional offshore jurisdictions like Belize or Vanuatu in the South Pacific.
These banks will often charge ridiculous fees on money coming in and out of the account, such as $100 for every incoming wire or a percentage of an outgoing wire up to $250.
Part of the reason for this is that these “banks” are not true banks, but are actually trust accounts for other banks located in different countries. Since these “banks” are small, they are inefficient and lack the proper infrastructure to offer great service, which means you pay more for less.
And since they are really extensions of banks in other countries, they have little control over what they can do. I have seen many of these banks in the Caribbean unable to even accept U.S. dollars.
Obviously, this isn’t the best situation for your business.
So, how do you avoid these high offshore bank fees?
Have a Good Offshore Business Structure
That’s right, the best way to get access to quality offshore banks with lower fees and higher service is to set up a business structure that allows you to go to good banks.
If you incorporate your company in Belize, very few good banks will be willing to set up an account for your business unless you have an established, long-term relationship with them.
And if they won’t take you, you’re going to be stuck with the traditional offshore banks in countries that are on the watch lists for aiding tax evasion and other criminal activity. And those banks don’t make money the way most banks do, lending it out and earning interest. Instead, they survive by charging fees.
So, if you incorporate in a traditional “offshore” jurisdiction, only the traditional “offshore” banks will set up an account for you, and they’re going to charge you a lot of fees: account opening fees, annual fees, monthly fees, quarterly fees, wire feeds, distribution fees, online banking fees, card fees, pin reset fees.
All kinds of fees.
As I’ve said before, onshore is the new offshore. You can incorporate your business in onshore jurisdictions in a very tax-friendly way. And if you do, you’re going to be well ahead of the curve and save yourself from the highest offshore bank fees.
Don’t Miss the Forest for the Trees
Fees, to a certain extent, are a necessary evil.
What you pay is what you get basically anywhere you go, so it’s important to consider how much you’re willing to invest to be sure that your money is in good hands.
You may not be used to spending upwards of $40 on monthly bank fees or having to pay for wire transfers, but if spent wisely, the benefits of paying those fees can outweigh the cost and you will find that the quality of the service is well worth it.
Better service means easier operations and less time spent dealing with the bank. And because they will know who you are, there will be fewer questions and they will bother you less because they know that you are a legitimate operator.
If paying a few fees reduces the amount of time that you need to spend managing your money and allows you to pursue what is important to you, it is worth it.
Don’t miss the forest for the trees.
If you’re paying as much as 45% in tax and you can reduce that to single digits or even zero by going offshore, a $40 bank fee every month is crumbs compared to what you are saving.
And this is true for your personal situation as well as for your business. If you are running a business abroad, you are saving a considerable amount of money that you can reinvest in your company.
Budgeting a little bit of extra money for your bank account is well worth the peace of mind.
Even if you have to pay a thousand dollars every year to have your company’s accounts audited in a highly respected jurisdiction that will give you access to better banks, it’s worth it in the end.
With a proper business structure, you will be able to avoid the ridiculous offshore fees that do exist while getting quality service in exchange for the high bank fees that you ultimately have to pay to operate offshore.
In the end, when you’re saving the kind of money that Nomad Capitalists save offshore, your definition of high bank fees may need to be adjusted.