b&b 214: Back to Basics – How to Choose the Best Bank
In this week’s Back to Basics episode Pamela and Dyalekt discuss how to choose the best bank for you. Pamela and Dyalekt remind us that we are customers and banks should treat us as such. Learn more about your options and optimizing your financial resilience.
Music Featured in this Episode
Big Banking by King Mas
Great Banking Collapse by Buddy Nuggets
Big Banking by TRIPS
Pamela: I think we tend to forget that banks are also businesses and they make money and they need to treat you like a customer because it feels like this huge institution or entity that you just can’t get away from. You’re choosing from a pool of the worst and who is the least worse?
Pamela: Banks are a privately-owned entity that for some reason are also too big to fail. Banks are in a lot of ways the middlemen between us and our money and access to other resources and other capital.
Pamela: Let’s talk about how banks generate revenue: fees. Let’s start with bank fees: ATM fees, overdraft fees, monthly fees, wire fees, monthly maintenance fees. In 2017 banks made over $34 billion in overdraft fees alone. Overdraft fees are when your bank account goes below zero a lot of banks offer overdraft protection where they will let the transaction go through so the merchant still gets their money and then they will charge you an overdraft fee of $25-35 for every transaction that goes past the $0 mark into the negative.
Pamela: Banks also make money from loans. They lend out money and charge interest rates for the loan. What they do is they take the money that you keep in your checking and savings and they turn around and lend it to people who need to borrow money from them. They usually give you a small amount of interest, charge more interest for letting other borrowers use the money to buy a house, consolidate credit card debt, to buy a car, etc.
Pamela: The last way banks make money is through interchange fees. Every time you swipe your credit card (merchant fees) or debit card (interchange fees) the bank charges the store or merchant a fee. You will also notice that some bank accounts will give you “free” checking if you swipe your debit card at least 10-15 times because they know they will make that money back through the interchange fees.
Pamela: Understand what their monthly fees are and how the fees do or don’t get charged depending on how you use your bank account. Usually it costs about $5-25/month to have a bank account unless the fee is waived for specific reasons. The most common reason is having direct deposit going into the checking account. Another thing that banks do is have a minimum balance requirement and if it dips below that amount then they will charge you a monthly fee. Savings accounts also tend to get charged monthly maintenance fees unless you have an automatic transfer happening on a regular basis.
Dyalekt: When we talk about money personalities, we have to think about the things that set us up for the most success. I have found that a lot of folks are really into the idea of having a minimum balance because that will give them an incentive to save money.
Pamela: The thing about having a minimum balance in a checking account is that you are most likely not earning interest on that balance, so that is something to think about. The reason why there is a minimum balance requirement is because banks make money from loans or from fees. They always want to know that you have that money in the account so they can lend it to someone else or they want to charge you a fee because they are missing out on lending that money to someone else.
Pamela: Another thing to check for is their savings account interest rate. We’re big believers that you do not have to have your checking and savings account at the same institution. One of the main reasons why is because a lot of the big banks are paying you 0.1% interest on your money. You want to have a savings account that is paying you a decent amount of money.
Pamela: The other thing is ATM fees. A lot of banks have been doing things like waiving or reimbursing ATM fees. The ATM fee situation depends on your spending habits and how you spend your money. Are you mostly spending with your debit card? How big of a deal are ATM fees to you?
Pamela: Overdraft fees vary by institution. Most banks will allow you to not take overdraft protection. Overdraft protection is optional; you can choose to not have it and just have your debit card decline if you try to swipe it. The caveat is that banks will sometimes let bill payments go through that are not tied to your debit card. So, you may still get charged an insufficient funds fee if your account goes below zero based on a transaction that is not a debit card swipe.
Pamela: The other thing to consider with banks is what is their technology like. What is their online banking and bill pay situation? Is it easy to send money to someone else? Is it easy to deposit a check or check your bank account balance? Is it easy to chat with a customer service person? In the last several years, being able to conveniently bank on the go is something that a lot more people are looking for and needing. They are choosing bigger banks over smaller banks because it is so much more difficult in some situations to deal with a smaller bank’s bad technology.
Dyalekt: One of the things that we should think about with our money personalities is what is going to make you pay attention? A lot of banks are happy to get over on you if you are not paying attention.
Pamela: We really like Capital One 360’s checking account because it is generally free, there’s nothing weird or hidden about it. No minimum balance requirement or no monthly fee. The way they do overdraft protection is they have an option for you to take out a line of credit attached to your bank account. Instead of getting charged a fee every time your overdraft a transaction you are essentially borrowing money from them.
Pamela: We also like Simple Bank. Simple Bank is an online only bank that has no fees whatsoever. They have a very clear stance on the fact that they don’t charge fees. The only fee I have seen them charge is a wire transfer fee for international wires, and you are not going to find anyone to do that for free anywhere. One of the downsides of being an online only bank is that you won’t be able to walk into a branch and talk to a teller. In a situation where you need things like a cashier’s check or a money order, that’s where having a branch tends to come in handy. Also, with online only banks you are not able to deposit cash.
Pamela: Another checking account that we like is Charles Schwab. Charles Schwab has an investor checking account. The thing that we like about Charles Schwab, again, no hidden fees, no monthly fees, and no minimum balance requirement on the account. The other thing that is intriguing is that they do not charge ATM fees worldwide. The downside is that they will check your credit score. Also, they are primarily an investment company, so they want to encourage their customers to invest with them. They have you open a brokerage account with the checking account hoping that you will also buy stock or bonds with them.
Pamela: Usually the services at a bank and a credit union are very similar but a credit union is a nonprofit. If they do make revenue from their banking products, they have to return it to their members in the form of higher interest rates for savings accounts and lower interest rates for loan products. You will probably find the lowest rates at a local credit unit because that is their model. Their model is that they are here to serve the community. Credit unions are based on a specialized type of membership like location, occupation, or some other distinguishing factor that ties all of the members together. The challenge again will be their technology. You trade off the technology for the customer service.
Pamela: What is important about having a savings account is that you have a place to put savings. I have found that when clients have a savings account for the first time, they finally are able to save because they have a separate place to put it. The thing about keeping all of your money in a checking account is that when you keep all of your money in a checking account its money in your head that you think you can spend. And then it just kind of disappears for one reason or another. By setting aside money in a savings account you are actively telling yourself “I am setting this aside for later’.
Pamela: You don’t have to optimize your finances. It is about finding a system that works for you. It goes back to what makes sense for you.
Pamela: There are two savings apps that we like. Digit is one of them. They charge $3.99/month. They way that they work is that you link your checking account to them, they learn your spending habits and when your income comes in. They then automatically take out a small amount of money every day and accumulate a secret savings account for you. It is not something you have to think about at all. Quapital is another one that we like. They also charge a fee between 99 cents and $6. Generally, their savings account is interesting because they pull money out of your checking account into this savings account based on this habit.
Dyalekt: It (Quapital) is a great way to give yourself an active role. I prefer Quapital because I like the idea that I can set and create some conditions for me to save some money.
Pamela: Both of these accumulate savings pretty quickly and do it in a way that you don’t notice. It is meant to be a micro savings process. It is so small that you don’t even miss, so that is one way to ease yourself into it.
Pamela: There are savings accounts out there that are paying more interest on your money. One of the reasons why that is important is banks make money from lending out your money to people and charging them interest. They should incentivize you to keep your savings with them and the way to do that is to pay you an interest rate. There are savings account out there that are paying 2% plus interest on your money. If you leave the savings in there, then you are also earning interest on that interest. It is a low key, safe way to have your money start making you money.
Pamela: Ally Bank has a high yield savings account. Well Front and Betterment and both investment companies. They set up their own high yield savings accounts also paying 2% plus interest. Marcus by Goldman Sach is paying 2% plus interest. In general, these are the institutions and banks that will be paying you significantly more interest than your traditional banks. They can do this because they don’t have branches, overhead, tellers, bankers, etc. They pass these savings on to their customers in the form of higher interest rates.
Pamela: If it becomes too complicated for you, figure out what system works, try a couple things and just know you can always go back to what you were doing before. We do recommend that you give these a shot. Especially having your savings account at a separate institution than your checking account. We have found that it gives clients the ability to forget that the money is there and don’t think of it as part of their daily spending.
Pamela: The great recession was over 10 years ago now and it was devastating to the banking industry. If some of these banks and large institutions did file for bankruptcy and go down, it would destroy a huge part of the economy. The banking institutions have only gotten bigger. They have acquired a lot of these banks that did fail and did go bankrupt. So, it can feel really difficult to advocate for yourself. We want you all to feel confident and feel empowered to advocate for yourself and your finances.
Pamela: When it comes to deciding whether or not to switch your bank is that one, you don’t have to and two, you actually can. We tend to get stuck with what we are used to and the routines that we are in. So, we don’t question how our money is being utilized. I think that is an important thing to take some time to consider on a regular basis and really ask yourself if this really where you want your money to be held.
Dyalekt: A lot of these services and industries wear you down to the point where you will just accept anything.
Pamela: This is why we encourage financial resilience vs financial literacy. It’s one thing to know all of this stuff and understand that these institutions are designed to wear you down and take advantage of you. Part of it is knowing that progress with your finances is not a straight line. If you can be resilient and come back and understand and learn a little bit more than you will really be in a good place to make financial progress.
Dyalekt: We defeat the systems every day with simple personal actions. Do this today, advocate for yourself today. And then tomorrow, we will deal with tomorrow when we get to tomorrow. But today, we can keep the beast at bay and sometimes that’s all you can do. Sometimes it gives you enough room and bandwidth to gather together and band together with people and figure out ways to create new systems that will supplant those. But until then, we have to keep our heads above water before we can finally climb out and walk on it.