Employees and Salary Accounts

by Steven van Groningen on 5 June, 2010

For years it was the employer in Romania who selected the bank where all its employees opened salary accounts. Employees were told at which banks to open an account  to receive their salaries and that was it.

Employees to decide where to open bank accounts

Of course it should be the employee’s own decision where to open his bank account. It is his account, registered in his name and he pays the fees and commissions. Fortunately this is now slowly changing and we see the relationship between individual and bank becoming more and more independent from the one with the employer.

However, we are not there yet and I see a lot of competition between banks in order to attract salary accounts through companies.  This is an efficient way for a bank to reach more individual potential clients and as long as this is a transparent process there is nothing wrong with it.

So, how transparent is this process ? Let’s have a look at two practices that are not in the interest of the employee, the client of the bank.

Transparency of Bank Selection

The first is the unethical practice of a limited number of banks to offer a significant benefit to the decision maker in case they choose the respective bank for their employees.

This can be the someone in HR or maybe a representative of the syndicate. The benefit can be a loan at special conditions or a nice trip, fully paid for. How much will such a person take the interest of their employee at hart when taking the decision ?

I am sure that this is not a problem in most cases, but have heard these stories now often enough in order to start looking into this.  We should do something about this on the level of the system.

12 Months Salary Overdraft is Not Good

Another practice that is in my opinion wrong is to offer more and more months of salary as overdraft limit on the salary account. Over time this has become one of the main factors in comparing offers from banks. If one bank offers 3 months an another 6 month, then the banks that is offering six month has the better offer seems to be the reasoning. There has been a lot of pressure to increase the number of months of overdraft in order to remain “competitive”. We moved reluctantly to 6 months overdraft in 2007/2008. Now there are cases where 12 months of overdraft are offered. Let’s look at this for a moment. An overdraft limit on a current account should be used in order to accommodate a temporary shortage of money. Something has happened, you need money and expect to repay it relatively soon. It is an expensive form of credit. If you use more than 3 months of salary worth of overdraft, you don’t have a temporary need but a structural one. A simple calculation will show that it can take many, many years (even 20)  to fully repay a 12 months overdraft.

Someone who needs financing of such a large amount and long duration should seek proper advice. You would be much better off taking a regular loan with fixed monthly installments. It will be cheaper, because rates are lower and you know where you stand with a regular monthly repayment. So, offering 12 months overdrafts on salary accounts in not a good idea. We are now actively offering regular loans to clients in order to repay the structural part of their overdrafts.

Employees to decide for themselves

If  one bank has a better offer and more employees decide for that bank than for another, so be it. But they should be properly informed about the offers in a transparent way. The best way is to achieve this is to let employees decide for themselves where to open banks accounts. If a company tries to convince its employees to go for a certain bank, there is nothing wrong in asking for an explanation. Some companies negotiate excellent packages for their staff.  Don’t go blindly for the bank that offers the largest overdraft limits.

Again, I am not saying this is widespread but it happens. There are only a few banks doing this. These practices are bad for employees and bad for the reputation of the banking system and we need to oppose them.

{ 23 comments… read them below or add one }

Robert Zanescu June 5, 2010 at 13:48

Great objective, however, employees to decide where to open bank accounts will not happen any time soon on a decent enough scale.
In my oppinion there are two reasons for this:
1. Reccession.
As long as the economy does’t not go back on a growth track the Romanian employees (and the employer, and the bank, ultimately) will have other priorities on their agenda.
2. Consumers’s banking relationship experience.
The relationship of Romanians with a bank jumped in the past 20 years way ahead of the normal way of doing it: get a current account, a debit card, a student loan, an internet based access tool to the current account, a term deposit, a mortgage and so on.
We were so hungry for more, that we blindfolded thrown ourselves into bringing the future earlier by the means of loans, top-ups, overdrafts and credit cards. And indeed, the mother of all evil was the overdraft.
Your vision expressed in the blog post will happen if and only when we will all dare to re-educate the consumer (sounds patronizing toward the consumer, appologies, but my belief is that in this particular industry, like in health care, for example, one cannot afford to let the consumer fantasize too much about needs and desires).
If we dedicate ourselves to tell them in every touch-point with the bank (being that the branch, the internet-banking, the credit card statement, or merely the ATM screen) that the banking relationship begins and ends with her or him, regardless of who is the employer, then we might move up a thing or two.
The industry pays now the consequence of “bulk acquisitions”.
And, to add insult to the injury, as you say, there are players that continue this in more subtle ways.
It migh be a short run win, but in a 12-18 months time it will be a different ball game.
I am wondering who will pick up the glove and start really working with the consumer towards building a true, unconditional 1-to-1 banking relationhip, without the Employer as a match-maker.
It is time for a fresh start all over again, isn’t it?

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SvG June 5, 2010 at 23:04

You are right Robert, a fresh start is needed, in which banks understand that the relationship with a client is a long term one. Not a transactional one based on a product. The current account is the basis in this relationship. You need this in order to make payments and receive money (salary). This is the core. If on top of this you need saving products or loan products, that is fine. Banks should not disguise the current account product into a credit product and a new start, based on customer focus rather than product focus is needed.

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Yndy June 5, 2010 at 17:46

As usual in Romania financial institutions focus on one similar product all at the same time. It was “credit cu buletinul”, then mortgage credit, then term deposits, now it’s salary accounts. Always in the end some institutions and/or some client ended up in trouble. The same will happen with salary accounts, maybe your bank should focus on other products for a while, take a loss in number of salary accounts and wait for the late movers to burn themselves or their clients.

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SvG June 5, 2010 at 22:58

The main product in a relationship with a banks is the current account. Without this it is difficult to have other products. So a client should pick a bank for how good current account services are: Payments, withdrawals, reporting, ATM fees, electronic banking etc, Not for how many months of overdraft a bank gives on current account. We focus on the current account as main product in the relationship with the client. If within that relationship the client wants to save, we offer solutions for this, if she wants to borrow, we also offer solutions for that. We see clients coming back to use for the relationship and that is great. The salary account is the product, not the overdraft or the card attached to it.

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Alexandera June 11, 2010 at 07:07

This should happen in a normal society, which has customers with a degree of normality and there when banking policies are not putting pressure on the employee to promote aggressive. But when you put pressure (and I mean Target) to establish as many links to get overdraft in this case the consumer ( which can be let say ignorant or may be nobody explain the difference between this and that) have no option that to accept this type of loan. The bank employee can not say that this product is more expensive, or can not fulfill the needs of the one who is requesting , he must do the target. How Robert said , we are hungry for loans, doesn’t matter what kind of loan, loan to be.
best regards and keep on !!!!!

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SvG June 11, 2010 at 12:57

Indeed banks are hungry for loans and the practice I described shows that. What we should understand is that, if we take good care of customers and give them the type of loan that is best for them, we will have customers for life. If not, we will lose them, although we might be successful in the short term. Of course this is a big change that also impacts the way performance is measured and that is what we are doing.

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Stefan June 6, 2010 at 13:45

Interesting topic.

In Romania the employer typically obliges the employee to choose for a certain bank, but this can also have benefits in certain situations whereas a bank can make a group offer which leads to lower banking costs for all employees

Nevertheless you’re right that it choosing a current account should be decided upon by the employee as it otherwise could be considered as “forced selling” by the employer (who on other levels will profit from choosing one single bank for its employees).

Having a 3 month salary overdraft is in my opinion the maximum a bank should offer (and only 6 months based on an income treshhold), as if the client would need more money he should apply for a standard loan. But standard loans in Romania need to be drawn right away (for the full sum) e.g. personal loan, while a revolving credit line where the monthly installment represents a percentage of the loan limit, would be preferrable as one would only have to call upon the loan when this is actually needed (instead of using the overdraft). Unfortunately such a revolving loan where a percentage of the loan represents the monthly installment, does not yet excist in Romania.

What I did notice here is that in Romania many people have multiple current accounts. I can only assume that the majority of these accounts were needed to be opened as the customer has a loan with this/these other bank(s). And this is something that I personally never really understood. If you contract a loan at Bank X, why should a custumer need to have a current account with this same bank? Isn’t there a possibility for banks to have a general “loan cashing account” which is an internal account of the bank itself, which registers a loan payment based on the name/CNP or reference/contract number. In this way, a client with loan at Bank X , uses his current account at Bank Y to pay the installment of the earlier mentioned loan.

If then direct debit between banks (!) would be more simple to setup, it would really make paying your loans much easier in Romania

Of course one can encourage a client to open a bank account with the bank that has offered the loan (like Raiffeisen already does on mortgage loans), but if a person has 4 loans with 4 banks, he/she should not have to open 4 current accounts ….

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cloud June 6, 2010 at 17:38

Cateva banci ca si alte insitutii financiare practica aceasta metoda de inrobire a salariatului(12 salarii la overdraft), profitand de slabiciunile societatii romanesti, adica:
1. de lipsa de educatie financiara (faptul ca overdraftul este un produs ce are ca reper dimensiunea unui salariu fiind destinat unor sume ce pot fi cheltuite pentru nevoi imediate, de mici dimensiuni si care sa fie ulterior usor de restituit…din acelasi salariu!!)
2. de faptul ca o parte considerabila a populatiei are salarii mici insa preturile din piata sunt demne de vestul Europei
3. nu in ultimul, toate acestea conjugate(paradoxal) cu un apetit exagerat pentru consum ce isi are radacinile in perioada de lipsuri de dinainte de ’89.
Contul de salariu nu ar trebui sa reprezinte o obligativitate din partea angajatorului de a te aronda unei banci pentru te miri ce motive meschine ale unui manager, ci o modalitate eleganta de a-ti gestiona veniturile, de a-ti plati furnizorii, de a controla, proteja si economisi banii, o extensie a vietii financiare a individului ce incepe cu salariul.
Ne mai confruntam cu o cutuma, placerea multor romani de a avea cash, bani care sa existe fizic nu virtual in buzunar, bani pe care sa-i scoti din portofel nu “din perete”. Este senzatia ca pot fi controlati mai usor pentru diverse plati coroborat cu dependenta platitorului de chitante(stampile) ce fac dovada acelor reglari financiare vs extras de cont.
Este o “lupta” continua intre institutiile finaciare ce au obiective pe termen lung in relatia cu clientul si care joaca un rol important in educarea financiara a pietei si cele care au obiective pe termen scurt, vanzarea cu orice pret, in orice conditii, oricui, pentru atingerea unor obiective de corporatie. Victimele acestei “lupte” sunt insa…clientii!

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Vlad June 6, 2010 at 22:30

Here are some ideas if you want to help employees decide for themselves at what bank they should open a salary account:

1. Make it easy (cheap) for them to choose any bank: shorter transfer time between banks (this is a major issue, so many people tend to stay with the employer’s main bank to be sure their salaries gets transferred quickly), lower charges/commissions, regulated overdraft limits (2-3 salaries max – if you need more you should apply for a loan. Really!). You (as bankers) can make a decent living off selling them other (better) products.

2. Offer a good package: a combined salary/savings account might do the trick better than 12 salaries overdraft. Maybe even throw in some sort of insurance for account owner. This way maybe they’ll stop lining up at the ATMs on salary day to withdraw everything off their debit cards.

3. Teach them to save before taking a(ny kind of) loan. It might reduce consumption but will also reduce bad debt and negative equity.

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bizzar June 6, 2010 at 23:00

Yes, I agree with the bottom line – employees should have the right to choose where their
salary is best administered (which bank “gets it”) and where he receives the right advantages
(for me “how good current account services are: Payments, withdrawals, reporting, ATM fees, electronic banking”
are not important if the client service is poor, almost all the banks offer similar account services
and I don’t mind paying a little extra if I get good services in return).
There are some issues here (which go both ways – employers & banks), in the end the EU made it simpler (Directive 2007/64/EC
& see reference IP/09/1667) for the customer.

And yes, I agree with what you&cloud said – 12 salaries can become a monthly burden if the person who gets it
is…”financially illiterate” and spends all his money away. In the end I ask myself if a bank really wants as clients
the ones who want 12 salaries as overdraft…there must be something not right in this request (even if I don’t see it).

More and more banks in Romania start information campaigns in order to educate the clients (mostly their own customers).
I saw Raiffeisen has “ABCdar bancar” – no information about salary accounts there, but nice other information), BCR appealed to the Romania…
feelings with “Scoala de Bani”, BRD seems ignoring all this…I personally like ING because they communicate in a way which
makes me feel like a human being and the learning process is fun.
I might not understand all the “banking terms”, but I like to think about myself that I
am a person of almost normal intelligence and I don’t like to be “lectured” – maybe I am in their target… :)

On this personal note – the first bank who helps me (informs me about their offer + takes care of all the documents involved in moving my
salary account + other products I have with my current bank) and offers me a better deal than I have now gets me as their client.

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kate mcgrath June 7, 2010 at 19:09

agree completely, Steven. The customer should choose. AND not be tempted by the overdraft limits.
We’ll get there. Kate

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boldfrank June 17, 2010 at 14:54

Steven,
I was curious how are the employees of Raiffeisen Bank Romania paid? Is any of them paid in an account with a bank other than Raiffeisen Bank Romania?

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SvG June 18, 2010 at 10:38

Hi Boldfrank,
The vast majority has accounts with Raiffeisen, maybe also explained by the fact that they benefit from staff conditions (besides the excellent service, of course ;-)). If someone likes to get his salary transferred into an account at another bank, that is not problem and I know for sure that at least some have opted for this.

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Andrei Nicoara June 20, 2010 at 13:52

There is yet another reason for companies to aggregate salary payments: to protect the secret. An employee with an account at a certain bank would be paid with a nominal payment order thus he’s salary would became open among accounting department.
It would be nice to have a solution for this!

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Alex Manea June 21, 2010 at 12:32

Hi Steven,
Last friday i received a call from somebody at your bank, offering several benefits if i keep my salary account (my company recently moved to another bank). She told me to get to the nearest branch to accept the offer.
Today i went to the local branch and after waiting 30 minutes in line, suprise, they didn’t knew about the offer.
Good thing, now i’m decided to move to another bank.

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SvG June 21, 2010 at 14:45

Well, Alex, the good thing is you had a choice and you made a decision that you believe is best for you. Shouldn’t it be like this ? Banks competing for customers can only be good for the market. I am sorry about your experience, but thank you for pointing this out. Now I know about it I can look into it and make sure that whatever went wrong will be fixed.

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adrian June 21, 2010 at 18:29

What it is interesting is why would a bank risk to get exposed to a 3 months salary worth in overdraft? As you pointed out, it would take more than 1year to pay it off. Overdraft is overdraft, which means pretty much an accidental withdrawal of more than you have in your checking account.
It seems more reasonable to provide the equivalent of a 1 month if not just 2 weeks worth of monthly salary.
The more means a loan and basically the bank signals that it is willing to buy that customer with a loan as big as 3-6-12 month worth of a salary. The reason might be the bank is short on cash and the salary accounts are good since they provide a rather predictable cash flow.

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SvG June 21, 2010 at 21:20

Indeed you amy argue that a bank is “buying” a relationship by offering something that will bind the customer to the bank for a long time. Unfortunately the market has become such that it is perceived as a benefit. You don’t buy a relationship, you get into one and need to maintain for it to be long lasting and mutually beneficial. Salary accounts can be both sources of cash and generators of loans, this depends on many things. As pointed out in my post on lending restart there are very few people interested in taking out loans now and a lot of them are repaying.

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adrian June 21, 2010 at 23:34

I understand very well the need for the banks to develop and strengthen their relationship with the customer. It is arguable though what the nature of the message should be. I doubt that a rather technical discussion over the number of months coverage in overdraft is what will reach the customer. This is rather better suited to a discussion among banker friends in order to sync their approach to the market.
The client needs to know that the bank is stable and ready to loan in reasonable terms.

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Cristian June 22, 2010 at 13:18

On your company’s website I read there still is a 4.5% loan repay commision, witch is against the recent government decision.

When will this commision be set according to law?

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SvG June 22, 2010 at 22:27

Early repayment commissions are waived for existing loans as imposed by law. New loans will also not have early repayment commissions, but it will take a few days to update all the products.

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Cristian June 23, 2010 at 13:45

Thanks for your answer.

You have a verry nice blog, you take time to respond to readers comments, maybe some of this attitude should be ported to your corporate website. It’s not ( shouldn’t be ) that dificult to update the products specifications and to put a news article on front page to show some transparency.

Regarding your post subject, I just want to say that the majority of the people I know that have overdraft cards used the maximum allowed sum and after some time they are repaying the overdraft with money from a regular loan.
Why? I think they needed money fast to finance their plans and they were afraid that a regular loan will take much time to obtain.

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Corina July 4, 2010 at 14:28

Hi to all,
What it is interresting for me is that while in west european countries this is an old practice (the employee choosing the bank where to receive his salary), in Romania we’re still investigating and raising a lot of issues instead of focusing on solutions and actions.
In Spain, for example, banks offer a lot of benefits to the employees that choose to open a salary account: no commision for transactions inside or outside the country, no commissions for withdrawls from ATMs or banks offices, credit cards after few months with the bank, etc.

My point is that we should learn from them, use their experience and get to work, instead of reinventing the wheel.
All the best,
Corina

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