Why pay for a bank account?

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Why pay for a bank account?
Narayan Krishnamurthy - 03 August 2017

Last week, the country’s biggest bank, the State Bank of India announced its move to reduce the savings bank interest from 4 to 3.5 per cent for deposits up to Rs 1 crore. I am sure other banks will soon follow in this line and a basic savings bank account will return this rate. Yes, there will be the 6 per cent returns and higher which will be aggressively advertised, with the rider that such returns are on a much higher minimum balance held in the account, which happens even today. Gullible account holders will always treat this as their fate and live with it, blaming it on past karma.

The writing on the wall is clear – you should keep very little money of yours in the bank account, for soon there will come a time when the bank will charge you for parking money with it. At the moment, those who do understand the concept of inflation will acknowledge that they actually earn no real returns by parking their money in the savings bank account once it is adjusted for inflation. And, for those who depend on interest income in any form, this move will make them more poor, debunking all logic of safety of keeping money in the bank.

Conventional wisdom is that interest rates earned from savings in the bank account can never be less than zero because, if that becomes the case, people would rather hold on to cash, maybe even fill it in their pillow and sleep over it. However, there is a cost of holding on to cash – it is subject to risk of theft and damage due to wear and tear. These days, you cannot cash beyond Rs 2 lakh, because you cannot transact in such sums by cash. The shift to digital money is anyway blurring the line between real money and digital money.

Alternate to banks

There are a slew of small and payment banks that are being set up, which are looking to attract new account holders. They do have limitations on the kind of banking services they can offer, because they do not have the license to operate as a full-fledged bank. This limitation is also the reason for their innovative ways of approaching banking. To some extent Aadhaar has helped them too, because they are able to use the Aadhaar database to get the basic account opening process done in one go and from the drawing room of your house.

They are also offering you a higher rate of return than the traditional banks, making it very tempting for one to have an account with them. You can eke out a bit more by moving money to smaller banks that offer the new breed of high-interest savings accounts that require you to use your debit card a lot and to sign for purchases. This may require giving up access to a branch, however, which some people are unwilling or unable to do. But, for those who are fine with using their phones to transact, this is a wonderful innovation.

As for those who are savvy, the advantage of putting money into a liquid fund is obvious. And, those who feel the process of transferring money into liquid funds, there are apps now that let you connect your bank account to the liquid fund and all you need is to swipe-in and swipe-out, each time you wish to invest or redeem your investment. One such app is the Active Account app from Birla Sun Life Mutual fund. The way the app’s interface is designed, it is so convenient that you will intuitively know what to do with it.

So, before more banks get into the act of cutting interest rates on savings account, look around for alternate ways to make more from the money that you have in the bank, before the banks start charging you a cess for keeping money with them.


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