Cross-Border Banking Options Post Citi & HSBC Exits
With financialisation of savings, investors are moving parts of their portfolio to US equities
When Citi announced it was exiting from consumer banking in 13 developing markets, it was both a surprise as well as a bellwether for the global banking industry. The poster child of the large traditional banking system was pulling back from international retail banking! The news grabbed headlines across the world laying out the obligatory rationale that the decision was made because the bank lacked the “scale to compete,” and wanted to focus on “higher returning opportunities in wealth management.” The same, but in reverse, happened with HSBC, which pulled out of the US focusing only on wealth management customers with minimum balances of $75,000
As a result, Indian customers who relied on Citi and HSBC for their cross-border banking, particularly between India and the US, are now looking for other alternatives — not many in the market currently, since Citi and HSBC were the premier global banks that catered to these needs.
How Indian Customers are Affected
Consumer banking in its traditional avatar continues to be a “local”, i.e. in-country business. For Indian residents to access seamless cross-border banking is practically impossible with the pull-back by Citi and HSBC. By some estimates, around 10 million Indian households have cross-border banking needs between the US and India. While some of them have an account in the US as a legacy of living there for a while, most do not. In a limited way, Citi and HSBC were providing a measure of support for cross-border banking needs but that door is also now shut.
The demand for cross-border banking services from India is, however, growing at 36 per cent annually as evidenced by the growth in the Liberalised Remittance Scheme where outbound remittances have crossed an estimated $19 billion from a base of $500 million just five years ago. This is just the tip of the iceberg because most Indians just cannot open a US bank account. Under the LRS, the three main categories of remittances to the US are — support of family members, student education, and travel. The other two are an investment in financial assets and real estate.
All of these are legitimate-use cases driven by the strong personal linkages that a majority of affluent Indians have with the US. Almost every upper-middle-class family has close friends, family, or children in the US.
In addition, with financialisation of savings due to the plateauing of real estate markets in India, a broader base of investors are seeking to move parts of their portfolio to US equities and other investment opportunities. The awareness of the US markets and stocks like Uber, Airbnb, and Tesla is now widespread in India, and investors want to invest in them at low costs.
Without the ability to open a US bank account, Indian customers are forced to use expensive, inconvenient, and less safe methods to fulfil their financial needs overseas. Prepaid cards, local credit cards, money transfer services, etc., involve non-transparent foreign transaction fees, foreign exchange mark-ups, and other fees that can amount to as much as 15 per cent of spending. Cash of course is inconvenient and even far less safe.
A US bank account comes with Federal Deposit Insurance Corporation (FDIC)-insurance, which means that customer funds are in accounts backed by the US Federal Government and the money is secure. A linked debit card provides ease of transacting with no fees to be paid by the customer (the fin-tech, bank, and network earn interchange fees from merchants). Essentially spending using a US bank account with a debit card is free, as it should be.
Options for Indian Customers
Unfortunately, Indian customers have few options from traditional banks for overseas spending, investing, and financial management. For an overseas professional or student, a simple thing like opening a bank account in the US presents its own set of challenges. It is non-digital, they are treated as exceptions and asked for various US documents, and it can take up to three weeks after the first time they walk into a branch to get a funded US bank account with a debit card. The situation is even worse on the credit card and lending side without a FICO score. Opening a US account for Indian residents, whether for travel, future needs, diversification of investment, is nigh impossible except for High Net Worth Private Banking clients.
Globalisation 2.0 is being driven with enormous momentum by people and not trade. It is a socio-economic phenomenon driven by the large pool of successful, educated, and optimistic citizens of high-growth countries like India. These customers have benefited from 20 years of growth, feel confident about the future, and think of themselves as global citizens. Everyone sees it – regulators, employers, educational institutions, Governments – but unfortunately traditional banks don’t. This offers a massive opportunity for fin-techs to navigate through the regulatory frameworks in multiple markets and develop cross-border products that address customers' specific global banking needs.
The fin-techs serving this space fall into three categories. First, the money transfer services like Transferwise (now Wise), Remitly, etc. Second, the relatively new U.S. brokerage platforms like Interactive Brokers, that open accounts for Indian residents. Finally, challenger banks, of which Aeldra is the only one opening accounts for Indian residents without needing a Social Security Number, US address, or US visa. All three categories provide digital platforms for account opening and money transfers with a smooth user experience. However, for secure, low-cost banking, what customers need is an FDIC-insured US bank account, which is currently offered only by Aeldra, a pioneer in the space.
The author is Founder and CEO, Aeldra
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.