How beneficial are premium banking services for HNIs?

When do banks roll out the red carpet for you? As soon as you become a high net worth individual (HNI). High income gets you exclusivity, and banks target HNIs with tailored services, and preferential rates on deposits and loans. These exclusive privileges, in the form of premium banking programmes, are extended to HNIs for maintaining high value assets with the bank. So, Axis Bank has its Burgundy Private, Kotak Mahindra Bank has its Kotak Private Banking and ICICI bank has the ICICI Global Private Banking.

Banks have set a threshold for such programmes that is based on TRV, or total relationship value (see graphic), which runs into crores of rupees. Customers have to maintain this minimum threshold value to be able to qualify for the exalted status. TRV is made up of the balance in one’s savings accounts and current accounts, term and recurring deposits, and investments through the wealth management arm, among other things. Failure to meet the TRV requirement could result in a downgrade.

Yet, what do banks really offer in the name of exclusivity? Mint breaks down the world of premium banking and the privileges it offers to millionaires.

What’s on offer

For starters, basic banking transactions are offered free to members, including unlimited withdrawals from any ATM of any bank, discounted locker facilities and free cheque collection. Beyond these, customers get premium debit and credit cards that offer superior rewards. Then, there is also zero to low forex mark-up on international transactions, lower interest rates on loans and slightly higher FD rates. Customers are also assigned relationship managers (RMs) who act as their personal banker and assist in all banking procedures.

Banks also have a wealth management arm that offers customised investment solutions to HNI customers. From portfolio management to tax advisory, customers have access to all types of financial planning services as part of wealth management service.

Premium banking also gives access to luxury lifestyle services, such as access to business lounges at airports, free movie tickets and free dining and hotel memberships. Concierge services for assistance with travel bookings, restaurant reservations and event tickets are also part of premium programs.

Currently, Kotak Bank has the most expensive premium banking programme—with a TRV mandate of ₹7.5 crore. Among the many perks, Kotak Visa Card charges lower forex markup of just 1.5% and unlimited visits to domestic airport lounges. Next in line is ICICI Global Private Banking program that requires a TRV of ₹5 crore. The privileges include the ICICI Visa Infinite debit card, four complimentary domestic lounge visits every quarter and rewards that get you 2 points for every ₹200 spent.

IndusInd Bank’s IndusInd Pioneer is the cheapest, with TRV of only ₹30 lakh. The IndusInd Pioneer Infinite debit card comes loaded with zero forex markup, and offers buy one get one (Bogo) on movie tickets up to ₹1,000 that one can use four times in a quarter.

Value for money missing?

The TRV requirement of premium banking programmes is prohibitively high, ranging from ₹2 crore to ₹7.5 crore. Induslnd is an exception with a lower TRV of ₹30 lakh. In meeting such high TRV, the customer would inevitably be taking wealth management and investment advisory services from the bank, which, however, are not free. Wealth managers charge a commission of about 1% for their services.

Mint’s calculation shows that the money that customers save on the free or low cost privileges pale in comparison to the commissions they end up paying towards wealth management.

For example, Axis Bank mandates a TRV of ₹5 crore. Assume that a customer, X, has the minimum required TRV. Of this amount, ₹4.5 crore is in various investments and ₹50 lakh is deposited in a savings account. X’s annual domestic spending is about ₹15 lakh and foreign spending is ₹10 lakh.

So, X gets 30,000 welcome EDGE (Axis Bank’s reward programme) points, unlimited global lounge access, zero forex markup, EazyDiner membership, five Bogo offers every month and Club Marriott and Taj Epicure memberships. Mint’s calculations shows that X would have to shell out about ₹2.33 lakh annually (see graphic) for such perks without the membership. So, the premium programme helps X save ₹2.33 lakh every year. However, X will also need to pay ₹4.5 lakh in commissions for the ₹4.5 crore investment that is managed by the bank’s wealth management arm. While the benefits seem substantial, the commissions on wealth management could be a potential caveat to consider.

Similarly, IndusInd Bank’s programme with a TRV of ₹30 lakh offers benefits such as zero forex markup, Bogo movie tickets and airport lounge access. The total value of benefits amounts to ₹40,600. With 1% commission on wealth management services totalling ₹27,000, the costs are relatively lower compared to the other programmes. This could be good for someone starting out.

Note that lounge access is restricted due to high footfalls there. We have also not considered golf games and golf lessons in our calculations as a majority of the customers do not avail of these services.

“The experience under these programmes largely depends on the relationship manager assigned. An extremely high TRV is required to be part of these programmes, but you wouldn’t feel that you’re part of an exclusive club or group,” said Ankush Setia, co-founder at Multiply.

Moreover, it is important to note that the programmes primarily focus on specific features such as airport lounge access, forex markup savings, movie ticket offers, and membership perks. However, other factors such as personalized service, investment performance, customer support and overall banking experience should also be considered when determining the worth of premium banking services.

Mis-selling

Bank RMs are known for cross-selling products to unsuspecting customers. Since RM-customer relationships in premium banking are more pronounced, mis-selling could be rampant. RMs are heavily incentivised to cross-sell as it earns them hefty commissions. The most commonly sold products by banks are traditional insurance plans or unit-linked insurance plans (ULIPs). RMs often earn substantial commissions, ranging from 30% to 40%, on the premium paid upfront for these insurance products. Mutual funds, portfolio management services (PMS) and alternative investment funds (AIFs) are other instruments that earn high commissions.

“Banks extract value from customers in various ways, including through the sales of insurance policies or MFs, higher loan rates and lower FD rates,” said Lovaii Navlakhi, founder, International Money Matters Pvt Ltd.

Investing through your bank may not always earn you the best returns on your investments. On the contrary, investing in such instruments can result in significant losses for customers, particularly when considering large account sizes. For example, if a customer has a ₹2 crore account, a high total expense ratio (TER) and underperformance due to RM recommendations over a 3-year period, can potentially lose around ₹22 lakh in gains.