Editor’s note: This article was first published in September 2010, during the Spanish banks’ deposit war. The 4.5% APY deposits and the banks praised for offering them without tie-ins (ActivoBank and Banco Popular) reflect 2010; Banco Popular was later taken over by Santander (2017). The rates and offers are long out of date.
The deposit war goes on, and banks are using unprecedented high returns to lure customers as part of their new strategy of attracting outside capital. Even so, with the most basic, safe investment product we have (the fixed-term deposit), we need to look at a few conditions before investing. Otherwise we may end up in an investment that earns the customer nothing at all.
Steps to take before opening a bank deposit
1. Understand the product
First and foremost, understand the product. I know it sounds basic, but someone without a minimum of financial education can easily fall for “bank-speak”.
Make sure you are taking out a fixed-term deposit, a pure deposit, and watch out for the “trimmings” deposits sometimes come with (combined, structured, guaranteed and so on), because then it would no longer be a “pure” fixed-term deposit.
Some people put part of their money in the stock market thinking they are opening a fixed-term deposit, and unpleasant surprises can follow.
2. Always read the fine print
When a simple investment product comes with three pages of fine print, those are precisely the three pages you should read. I’m sorry to say it, but more and more banks staff their branches with managers, supervisors and tellers who are purely salespeople, and some salespeople lie under the pressure of meeting their targets. (I’m not generalizing: I know there are banking professionals who would never lie to a customer.)
In short, reading the fine print costs you 15 minutes at most, and it spares you unpleasant surprises.
3. Be clear about the term
They won’t lie to you about this part, although you should be careful with “auto-renewing” deposits. The most important thing is to be sure that the money you put into a 12-month (one-year) deposit is money you know you won’t need during that period.
They’ll tell you that you can take the money out whenever you like, but… at what price? Find out in advance what the penalty for early withdrawal is, because depending on the interest charged for it, you could end up with… you guessed it, an unpleasant surprise.
4. Tie-ins
This is the part you should study most carefully and calmly. Tie-ins are where, if we’re not paying attention, we can lose the entire return on a deposit. We would go from a profitable, safe investment to no investment at all, with our money sitting idle and earning nothing.
As far as possible, make sure the bank doesn’t require you to take any other products in return. Put simply: if you walk into a bank with €1,000, it’s so that those €1,000 earn you a return with peace of mind, not to buy other products.
Some banks require you, in order to get the deposit, to take out a credit card, transfer your pension plan, have your salary paid into the account, or sign up for who knows what (car insurance, home insurance, or cover against falls on the surface of the moon). In those cases the fixed-term deposit stops being a profitable investment.
Let’s run the numbers:
€1,000 at 4.5% APY earns about €45. If we’re required to take out a credit card that charges us €15 a year, plus a linked account with a €3 annual maintenance fee, we obviously no longer have a 4.5% return. Our return would be 2.7%, which isn’t so attractive anymore. And if on top of that we’ve moved our salary over or bought insurance, it’s even less so.
So look for a deposit with no tie-ins and, if possible, negotiate the fees on the linked account. Better still, don’t negotiate them: make it a condition that they waive them, or you’ll take your money to another bank, since right now there are plenty of offers and plenty of competition for this product.
Never lose sight of what this transaction is about. The bank isn’t doing you a favor; you are doing them one by handing over money that they will invest to earn a strong return.
5. Shop around
This goes without saying. Even if one bank offers you 23-carat gold, keep looking in case you find another offering 24 carats.
Congratulations to the banks that have launched deposits with no tie-ins and a 4.5% APY (ActivoBank and Banco Popular). They have no doubt done better at attracting outside capital.
Follow these simple steps and you’ll avoid those unpleasant surprises.
Further reading
Featured image: Francisco Gonzalez, CC BY 2.0, via Flickr.
