After Net neutrality, now how about bank neutrality

Most of us would have been avidly following the latest debate on Net neutrality. And some (like me) would also have signed the online petition supporting it and sent our responses to the Telecom Regulatory Authority of India on the discussion paper. Net neutrality is all about making sure that access to the Internet is non-discriminatory. We do not want to be guided—insidiously or otherwise—to make our choices, especially, if someone is profiting from it. Something similar has been happening in the banking domain for several years, but I haven’t heard anyone talk about it. Let me outline the phenomenon.

Typically when someone joins a company, among the various formalities that one has to complete is the inevitable pain of opening a new salary account with the bank of the employer’s choice. Some employers manage to provide a basket of banks for the employee to choose from. If you have an account with one of the banks, you can simply mention the account details and it will become the salary account and perhaps make you eligible for benefits such as no balance requirements. Most employers, however, would simply mandate that you open an account with a designated bank.

If you have found yourself opening a salary account, have you ever wondered why you are forced to do so? Most employees who join a company would like to keep things amicable and not ask uncomfortable questions at the beginning of their stint. Hence, they do not ask why they should be forced to open the account.

If some brave souls were to dig deeper, they would realize that the employees are part of the deal whereby the company gets certain benefits from the bank. In other words, the company has actually bartered the employees’ accounts and relationships with the bank for benefits such as higher interest rates on fixed deposits, better term loan rates or a higher overdraft limit. Another way of looking at this is that companies have been agents of the bank. Banks have been using companies to do mass acquisitions of accounts while incentivizing the companies with sweeteners on the corporate accounts.

The company line to the employee will be that opening the salary account makes it easier for the company and the bank to transfer salaries and benefits seamlessly to the employee’s account. And you may smell a rat but you will leave it at that.

With the advent of National Electronic Fund Transfer (NEFT), this is actually no longer an issue. Companies simply instruct their banks to transfer the money through NEFT to other bank accounts held by employees. All that is required is a list provided by the company to the bank. If there are bank charges involved, the company can charge the employee for this service.

Today every time someone changes a job (and this happens much more frequently now than before) the employee has to open an account. Who does this benefit?

According to the company, it is the employee who benefits. The company takes credit for having bargained a deal with the bank whereby the bank provides a salary account where there is no balance required and also certain other benefits such as better interest rates on fixed deposits and loans.

But there is a price to pay for the employee. Usually people do not close an account held earlier due to commitments such as equated monthly instalments (EMIs) of loans, which may be linked to it or for other reasons such as mutual fund or demat account linkages. The employee, thus, ends up splitting her savings balances across multiple accounts. And, therefore, may not be in a position to get benefits from consolidating balances at one bank. Also, employees have to remember to transfer money from their salary accounts to their main account. Many EMI misses are attributed to this, so banks actually mandate that their borrowers only link their electronic clearing service instructions for payment of their EMIs to their salary accounts.

From a systemic perspective, every salaried individual has multiple accounts in the banking system which artificially inflates the number of accounts and increases overload on most banking systems. This also leads to more transactions—most of them superfluous—which load our transaction heavy systems. Many of these salary accounts which are no longer in use have to be weeded out of banks’ systems. Several banks carry out an annual conversion and closure exercise. A lot of these accounts also fall dormant, and face the risk of fraud. All this amount to costs which may be difficult to estimate but are totally unnecessary. So, getting the same person to open multiple accounts across banks is a highly inefficient practice.

It is high time the Reserve Bank of India and other authorities (including perhaps the ministry of corporate affairs) clamped down on this practice and allow for bank neutrality.

And what would bank neutrality mean to me? Companies should give new employees a choice between opening a new salary account or to have their salaries directly transferred to their existing accounts through NEFT. Even if the latter is at a charge, many salaried people would be glad to bear it. A quick poll that I did on Facebook seemed to suggest that most people would love to have the choice, and 50% would be okay with a 25 charge per month for this service. Further, banks should be forbidden from using companies or institutions as agents directly or indirectly in this fashion, especially, where the employee is forced to open the account.

Sreeram Sivaramakrishnan is associate professor at School of Business Management, Narsee Monjee Institute of Management Studies.