Hiya, this is a post especially for graduates. I’m writing a series Personal Finance 1.0 on personal finance topics that you should know when starting life on your own. If you’re an older reader: Maybe you know someone who could benefit from this information. So please feel free to share this post.
Ok, let’s get started!
In the first post of this series we took apart your salary. Or put differently, we looked at how to get from gross to take-home pay. To be able to make use of your take-home pay you have to set up a bank account in most western countries. Long gone are the days where workers received their salary cash in an envelope.
What I outline below refers to the situation in Germany. Systems in the other European countries are similar, but details differ, and traditions have led to country-specific preferences as well. So check out what’s applicable where you live if you’re not based in Germany.)
Checking account = Giro account
For starters, a checking account is the only account that’s really mandatory. That’s the account your net salary will be credited to. And you can use the account to make non-cash payments like bank transfers.
There are a lot of expenses like electricity, gas, insurances, but things like recurring car-registration taxes as well, where you can give your creditor (i.e. your business partner to whom you owe the expense) a standing order for a direct debit. This way the creditor takes care to get his payment on time and you won’t accidentally miss a payment.
But be careful: You have to make sure the balance in your account is sufficient when payments are due. If the direct debit doesn’t go through because of lack of funds, the creditor will normally charge you extra for the trouble of having to a second transaction.
Standing order for direct debit versus “Dauerauftrag”
Alternatively you can set up your own standing orders for recurring payments. This makes sense for rent transfers, for example, and might be mandatory by your landlord. In Germany theses standing orders are called “Dauerauftrag”.
An interesting information that you should know in this context: You might think at first glance that it’s more risky to issue a standing order for direct debit to your business partner than setting up your own standing order. This shouldn’t be the case, though. Here’s why: If a direct debit is incorrect you can instruct your bank to reverse it. There’s a statutory period of 8 weeks from debit if the amount is wrong. If the debit is unjustified altogether (the creditor doesn’t have a valid standing order for direct debit from you (anymore)) the period extends to 13 months. So it’s important to check your account on a regular basis.
If you inadvertently made an incorrect transfer or set-up a wrong standing order you can try to have your bank to reverse it as well. That might work, but there is no legal obligation. You can find more details here (in German, no affiliate link).
If you have regular income, you will automatically receive an “EC-card“ for drawing cash/making cashless payments with your checking account (at no extra charge for the card itself). In other countries credit or debit cards are used for this, sometimes in combination with traditional cheques. When we got speeding tickets in Hungary, we would be able to pay them in cash via the post office. Pretty interesting that the systems within Europe are still so different.
When looking for a checking account that suits you, I would make sure to get free access to ATMs in your vicinity. There are several models and cooperations. The “Sparkassen” have their own, very large, network of ATMs. Several commercial banks – Commerz-, Deutsche and Postbank pool their ATMs in the “Cash-Group”.
Drawing cash with your credit card?
Direct bank ING runs a model where you can use the EC-card (which is a debit card by definition) to draw from 1,200 ING-ATMs (which is not that much), but can use the ING-Visa-card to draw cash from more than 58,000 ATMS across Germany. For most of the other traditional banks, drawing cash with your credit card is quite expensive. So check the fees.
You can withdraw cash free of charge up to an amount of 200 EUR with a lot of bank credit cards in combination with your grocery shopping. There is a minimum amount of shopping bill involved. From the shops where I’ve used this myself, the REWE group set the minimum at 20 Euros, in my local EDEKA store 10 Euros were sufficient.
Branch-bank, direct bank or fin tech?
For opening a checking account you have a choice between traditional and direct banks. And there are some fin-techs like N26 and bunq who offer checking accounts in Germany as well. Since interest rates are so low these days, traditional banks are mostly back to charging fees for their checking accounts. Direct banks – which technically includes fin-techs in the banking sector) still offer checking accounts without monthly fees. There might be minimum requirements regarding incoming payments per month.
The new fin tech players offer online-banking via app and smart phone. Some don’t offer browser based banking as an alternative.. Which means that access to your account and doing transactions might only be possible via the app, and tied to the pre-identified smart phone.
To me fin techs are over-hyped at the moment – many old-school players offer app-based banking, but keep browser-based services as well. I find that a lot more convenient. “Real-time” and “push”-notices are a bit gimmicky, payments have to be credited within a day in Germany anyway. Transfers I make out of my account are shown as debited instantly. So all fine for me, but that’s subjective of course.
Old wine in new skins?
I thought it quite funny that hip finance unicorn N26 (if you’re not familiar with the expression: a “unicorn” is a start-up valued at more than 1 billion, there are very few of them in Germany) offers a 3-tiered selection of accounts that looks very similar to the HASPA Joker accounts. HASPA being a really old-school savings bank. Each of them offers a basic account – at HASPA, it does involve a fee, though. But this is combined with an unlimited number of cash-withdrawals. N26 charges a fee for this after 5 times at the latest. Both suppliers’ mid-range and premium variants offer insurance and cashback services – partially via their credit cards.
If you compare the premium accounts, I think that HASPA offers better value for money. On the other hand, N26’s terms for credit card payments outside the EURO-area seem to be more advantageous. According to their current price list there are no charges. I assume that N26 cooperates with Transferwise in this area as well, as they seem to be their partner for cross-currency transfers. More on Transferwise below.
There’s one thing you need to keep in mind when using the fin techs. Their models are still fairly young, and there still seem to be some teething troubles. N26’s customer service has been criticized for not coming up to expectations. Not neglectable if that’s the single point of contact with your bank.
And the photo ID system which can be used to open an account from outside Germany has been investigated by Bafin (German bank regulation). According to a current news from Manager Magazin, Volksbank Freiburg has blocked payments to N26 and Fidor, and Volksbank Rottweil checks transfers of this kind individually.
Cross-fire from the established players?
One might assume that traditional players are fast to find fault with the newcomers. But I think that explanation is too easy. My husband and I were beta testers for AOL – one of the biggest internet ventures worldwide at the turn of the millenium – when they started operations in Germany. An interesting experience we enjoyed. But I don’t have any appetite at all for becoming a guinea pig where access to my money is concerned.
I wouldn’t be happy with a single point of access either, i.e. complete dependency on the app. Pairing that with a chat-based only customer service would make an account a no-go for me. It’a all well as long as things go according to plan.
But not anymore, when you find money a significant amount of money has been booked from your account without your approval and customer service is unable to cope. What came across as strange for me with N26 is declaring their fees as “membership” rather than “banking” fees. I haven’t researched this in detail, but I would assume there are legal differences. As far as termination of contract is concerned, there don’t seem to be any disadvantages. So if my assumption is wrong, please let me know.
Services like Transferwise oder Revolut
Do you (temporarily) live outside of Germany or travel worldwide a lot? Do you receive payments in foreign currencies or have to transfer money in other countries on a regular basis? In that case it might make sense for you to open an account with Transferwise, Revolut or similar service providers.
These providers enable you to transfer money or pay in foreign currencies at significantly lower costs than traditional banks. On the one hand this refers to lower fees. On the other to more advantageous exchange rate.
I can only share my personal experience with setting up a Transferwise account. It’s extremely fast and convenient. At this point, you can get “real” banking details (like IBAN in Europe) for Europe, the UK, the US, Australia and New Zealand. Plus virtual currency accounts for a vast amount of currencies. If you want, you’ll be provided with a Mastercard debit card. One word of caution: As far as I know, credit in your Transferwise account is NOT guaranteed by any guarantee fund. So I would not “park” any larger amounts in this type of account.
How do I do it?
As mentioned above some fin techs cooperate with Transferwise for example. I prefer to use Transferwise as a complement. For my husband’s salary we have a checking account with a direct bank. This account is accessible via browser and app. Plus you can contact their customer service team on the telephone.
So you do have loads of options, and depending on your situation one will make more sense than the other: is having face-to-face-contact in a branch important to you? Do you want a fee-free account? Do you need a “real” credit card which is only balanced at the end of the month? Especially if your set to stay out of consumer debt, a debit-only card might be a smart choice.
If you want to open a call-money and/or depository account on top of the checking account, it would make sense to look at the “banking full-line distributors”. But you could also start researching your ideal checking account. And then move on the other accounts after you read the second part of this post :-).
To get you started on checking-account options you can use the Finanztip-Girokontorechner (no affiliate link).
Financial Independence Rocks!