"Offset Banking" - Why not in the US?
"Offset Banking" - Why not in the US?
I recently dropped by the local NatWest Bank branch office. NatWest (part of the RBS Group) is the second largest capitalized bank in Europe and had £196B in total assets at year-end 2004 (the parent RBS Group has a combined £757B in total assets...insane I say!).
While waiting in the branch I picked up a brochure for a product they call "Offset Banking." I had heard of this before from some research Callahan had done a year or two ago on the 'One Account' concept but I honestly didn't pay much attention at the time (sorry guys!).
The NatWest brochure begins with the following pitch:
"Just think how clever it would be if all your different bank accounts began to 'talk to each other' in order to achieve one common goal - to save you time and money when paying back your mortgage."
Okay, You've got my interest but how does it work and where's the catch?
Basically, in the simplest scenario, checking and savings account balances are combined to 'offset' the current mortgage loan balance (for mortgage interest payment calculation purposes only). The interest payments on your mortgage are based on the reduced offset value, not based on the actual higher mortgage balance. For example, if my mortgage is $100K and my combined savings/checking are $10K then I only pay interest on $90K of the mortgage.
As a customer I would have to give up the interest I would be earning on my savings/checking accounts but since mortgage loan rates are typically higher and I've eliminated taxes on interest earned on these accounts this also seems to be a benefit. Since the mortgage monthly payments themselves are fixed, any surplus (interest saved) in a given month is used to pay down the mortgage principal. As a result, in theory, I should be able to pay off the mortgage faster.
The product has also been opened up to small business owner accounts allowing them to offset their personal mortgage with their business accounts. Pretty clever.
This seems brilliant (note: this word is used entirely too much here in the UK but I'm adapting) and I guess I don't really see a catch unless you feel you can do better yourself by choosing other higher yielding investment vehicles for your checking/savings or if the offset mortgage rates are significantly higher than your other options. However, at the end of the day, most of us do have checking and savings account balances and it seems this would be a far better return on that money than it would otherwise have been.
For NatWest this innovative product makes a compelling case for why I would choose their mortgage/savings/checking over other comparable options. Heck, even if the mortgage rate wasn't quite as good I'd still likely consider this after doing some number crunching. Plus, this also would seem to encourage increased share balances.
So, in theory for NatWest, this should mean:
+ new mortgage loans
+ increased savings
+ new business accounts
+ stickiness to Natwest’s relevant products and services
I guess they just need to be sure they're maximizing these new relationships beyond these three products and not giving up more interest than otherwise is gained in new product adoption?
It is a fascinating proposition and I don't really understand why this model hasn't been picked up in the U.S.? Or has it? Am I missing something here?
Comments
I agree Scott. We are working on a new innovation at FORUM Solutions that has a bit of this flavor to it. I too have been thinking - why isn't this more main stream? Stay tuned.
Posted by: Doug True | February 26, 2007 10:16 PM