Dateline: Cape Town, South Africa

Back in 2008, Nemea Bank was established in Malta as an online-only bank. In their own words, they were the “dawn of a new era in banking.” They targeted a new generation of savers — specifically the growing population of global citizens known as digital nomads.

Through a streamlined process, they allowed people from EU countries to easily open an account online and begin saving, investing and transferring money all over the world. Even today, without any bank branches, costs are reduced meaning customers can still make international transfers with Nemea Bank without fees.

In the beginning, their typical marketing was of a successful young businessman sitting on a chaise lounge by the pool with his incredibly stylish sunglasses and something about earning more interest. Now, quite frankly, I don’t know too many young people in the Bernie Sanders and Justin Trudeau generation who spend all their time thinking about how much they love term deposits and the amount of interest they can make off them.

I obviously use term deposits as part of a diversified strategy, but the average young person doesn’t. Nevertheless, Nemea Bank’s big push into the new era of banking involved their one, three and five-year term deposits. Even now, their website is offering 4% on a term deposit in euros.

That’s an attractive rate.

There are a number of banks who have embraced this new era in banking and have chosen to target the digital nomad group as well, including the bank Number 26. Based out of Germany, Number 26 — now officially known as N26 — just received its banking license from both the European Central Bank and the German regulator only a year and a half after the startup launched. N26’s services are now available in six different countries and new features are on their way.

Now, I like the idea of these types of banks. They’re cool. They’re online. They’re easy. Online banks have been around in the United States for some time now. From CapitalOne 360 to American Express’ Personal Savings to Barclays in the UK, these online banks are some of the best places to get interest.

In the US, online banking is used to give you a little bit more interest. Banks like Nemea and N26, on the other hand, have a very specific audience and targeted approach. In a sense, they’re looking to make the banking industry sexy and target a younger audience that finds online access more appealing.

Of course, these banks are also designed for citizens and (in some cases) residents of the EU. And Nemea Bank is particularly designed with the nomad lifestyle in mind — debit card and everything.

The Problem with Nemea Bank

So, yes, I like the idea of these new, innovative banks. There’s just one problem… Take a look at this letter Nemea Bank wrote to its clients in April of this year:

Notice to depositors

27 April 2016

To our esteemed clients,

Following a recent onsite inspection held jointly by the Malta Financial Services Authority and the European Central Bank in April 2016, a number of serious regulatory shortcomings were identified in the Bank’s operations.

These regulatory findings have been communicated to the Bank, together with a directive that restricts the Bank from opening any new accounts or from accepting new client deposits into accounts. Withdrawals by existing clients are being limited to EUR250 per day for each client until further notice.

The regulator has appointed PricewaterhouseCoopers Malta as a competent person to: [i] take charge of the assets of the Bank for the purpose of safeguarding the interests of depositors and its other clients; and [ii] to assume control of the Bank’s business and to carry on that business and such other functions as the MFSA may direct. This appointment has been effected in terms of Article 29 of the Banking Act and Article 15A of the Investment Services Act.

The regulator has taken these measures to safeguard the interests of depositors and the Bank’s other clients.

These precautionary measures will remain in place until such time as the MFSA may direct otherwise.

Obvious shortcomings

So here we are in Malta — a country that I like as an offshore banking jurisdiction — faced with a regulatory crackdown on an innovative bank. Normally, unless you’re going to go through the difficult and expensive process of becoming a citizen or company in Malta, it’s becoming an increasingly inaccessible jurisdiction. Namea Bank seemed to have bypassed those challenges for a time, but they’ve run into their own set of problems.

As the letter points out, people were limited to taking out €250 a day for some time. While the limit was later changed to €2,500 per day in late June as a first step toward normalization, such regulations are a concern.

High tax countries have always said that Malta is not well regulated and have worried that it could be the next Cyprus. As an EU member, Malta guarantees €100,000 deposit insurance per account, but — just like in Cyprus — all amounts over this could be waived. Both Cyprus and Greece limited withdrawals as well, so the similarities are concerning.

Now, I’m not an expert on the situation, but I tend to think that Malta is not a bad place. Still, this online system had some obvious shortcomings. When you follow the digital nomad herd (not to be confused with Nomad Capitalists), you risk the chance of running into these types of problems. I understand it’s cool and sexy and you’ll get a little bit higher end interest, but what’s the stability?

In all fairness, it’s important to see that Nemea said that they had plenty of cash liquidity on hand and they protested that it was an arbitrary act without valid legal grounds. This situation is still unfolding and it’s possible that it could be resolved.

In the meantime, however, no new accounts will be opened and all incoming funds to client accounts will be returned to the sender.

My Caution

So this is my caution: I’m all for new options, but you need to do your due diligence and consciously recognize why you are choosing any given option. Are you doing it for your benefit, or are you doing it to give the system the middle finger?

I personally don’t want to be limited to €250 or even €2,500 a day. I don’t want to bank somewhere that’s run by an administration and where I never know what’s going on. I want to go where I’m treated best. If Malta is where I’ll be treated best then I’ll go to Malta, but if not I’ll go somewhere else, even the United States if it’s the right option, or Georgia where it’s incredibly easy to open a bank account.

New ideas are great, but just because it’s new and innovative doesn’t remove the need to be cautious. For instance, although I have skepticism for Bitcoin from a regulatory point of view, I wish it could work. However, the people who’ve adopted it and the regulatory uncertainty of Bitcoin makes me a little concerned, despite my longing for more advanced payment options.

I’m all for these new systems. They’re easy, online and even kind of cool. But they have their challenges that are a different set of problems than those that come with going into a branch. As much as I want them to succeed, you can see some of the issues. When you build a foundation on being sexy and targeting young people who may not really care about liquidity or what’s going on, you may have problems.

The practical response

Now, you can call it political posturing and say that the government wants to shut down these kinds of easy online banks. And maybe you’re right. But here’s the thing, we could spend all our time arguing about whether the government wants to make things more difficult, or we could just go where we’re treated best.

I tend to look at these banks as a place that’s convenient for holding some cash so you can pay yourself and use it as a transactional account. It’s not an account that I would trust for storing my wealth. Increasingly, as I’ve told people before, now is the time to get off your tuchus and go and open an account in person.

If you can get an account online because you’re in the EU, that’s fine. But again, I’d keep it at €5,000, or whatever you spend in a month. Put in a whole paycheck and if you spend the whole paycheck, great. If you don’t spend the whole paycheck, then figure out some other place to send the money, whether that’s buying gold or investing in foreign real estate.

Get your money out.

These accounts are best used as transactional accounts because, for whatever the reason, you never know when there will be a problem.

Andrew Henderson
Last updated: Dec 26, 2019 at 8:10PM