Offshore Banking and Financial Services - Bahamas Business Guide


There is nothing new about offshore to banks, investment funds and other types of financial institution; most of them long ago set up offshore branches in order to service multinational corporations, to facilitate trade, and to provide investment management for high-net-worth individual customers.

Some offshore jurisidictions have developed as centres for particular types of offshore financial service: thus, there are 700 banks in the Caymans, and several thousand investment funds in Luxembourg.

In recent years, growing financial awareness has created strong demand for offshore financial services among a wider community of customers; this is especially true of offshore investment funds. Even so, offshore financial services have tended to remain the preserve of larger companies or of relatively wealthy and sophisticated individuals - transaction costs are high and information not always easy to come by.

The Internet however opens the way to a far broader market for the providers of offshore financial services, by reducing transaction costs and by making information about offshore available instantly to anyone who is interested. This last point is important: until now, the marketing media used by offshore financial service providers have been subject to strong local regulation which controlled and limited the advertising of financial products. Thus, at present, a financial magazine based in, say, EU country X, is obliged by the regulators of country X not to accept advertisements for retail financial services unless the providers have conformed to local regulations (and have joined the appropriate trade body and have paid their dues!). No such pressures exist on the Internet, and it is difficult to see how they could be brought into play. An investment fund may say firmly (and does) on the Internet that its products are not offered to citizens of country X; but the citizens can still read about them, download the offers, and get Uncle Joe living in Spain to make the purchase for them using money in an Isle of Man bank account.

Offshore providers of financial services have strong competitive advantages and the unclogging of marketing channels may unleash a tidal wave of demand for their products. Here are some of the competitive advantages of offshore:

Profits are less highly-taxed, or untaxed, allowing cheaper products
Offshore jurisdictions are usually less highly regulated than high-tax countries, so that an offshore financial institution has more flexibility in planning, marketing and delivering products
Financial products themselves can take advantage of a low-tax environment in order to deliver greater returns to customers
The cost base of an offshore location is often more favourable than that of a high-tax location

These competitive pressures on the financial services market will be so great that institutions will be forced to use the Internet, and forced to do so from offshore, at least when they are not prevented by regulatory bodies from marketing offshore products. They often are, of course, and it will be interesting to see how far the Internet breaks down many of those regulatory barriers.

The whole range of retail financial services can be provided from offshore using the Internet. Services and products can include:

Electronic banking including current and deposit account maintenance, paying bills, direct debits etc
Offer and sale of stocks and shares, investment and mutual fund units, equity derivatives etc
Foreign exchange services
Offer, sale and maintenance of savings products including pension schemes
Offer and sale of insurance products
Of the 28 jurisdictions covered in lowtax.net, 8 have stock exchanges, 15 have significant banking sectors, 12 have large mutual fund sectors, and 7 have insurance industries. What is noticeable is that growth rates in terms of numbers of institutions and volume of assets are far higher than the equivalent rates onshore, and that a high proportion of the institutions concerned are actively making use of e-commerce. Offshore financial services may be starting from a low base, and the volume of e-commerce transactions is not yet great, but if current trends are maintained then offshore electronic financial services will present a major challenge to their onshore brethren in a small number of years.

 

 
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