Big bank fees are at an all-time high while the interest they pay is at an all-time low. Worse yet, evidence recently has come to light of the criminal abuse of a practice common among large banks since the fall of Glass-Steagall: cross-selling.
Cross-selling is rooted in consumer research that large financial institutions tend to salivate over. It shows that customers are more profitable for longer when they own more products. How else could they get us to settle for deposit products for which we pay them? Does this absurdity leave you wanting to bolt the big banks?
Fortunately, you have alternatives. Here are the top four:
1) A good option for most is to flee the big brick-and-mortar bank for its younger virtual sibling: the online bank. Online banks, which lack the overhead of their more traditional rivals, can offer higher interest rates, lower fees, free ATM withdrawals and low or no minimum balance requirements. And they do.
I’ve been using an online bank for several years now and haven’t paid a single ATM fee for that entire time—and I can go to any ATM in the known universe (seriously). In the past year alone, I’ve received more than $200 in ATM fee rebates!
I recommend that you choose an online bank that best serves your needs and lifestyle. Mine, for example, offers unlimited ATM reimbursement, but others will cap the reimbursement amount or restrict you to a (typically large) number of “free” ATMs. Those banks, however, may pay a higher level of interest than my bank. Nerdwallet did an excellent job summarizing the best online checking accounts of 2016.
2) But for consumers who still want or need a physical bank, consider a community or association bank or a credit union. There’s really only one reason I can imagine “needing” a physical bank, and that’s to deposit cash. (For our family, even that is a rarity because if we get a wad of cash, we’ll just use it for expenses anticipated in our budget, like groceries.)
Beyond daily banking, however, it can still be good to have a relationship with a local bank or credit union, because they also tend to offer higher rates on deposit products and lower rates on loans. You may also want use them for a financial planning tool that I value very highly for unexpected opportunities or emergencies: an unused home equity line of credit (preferably with a rate no higher than Prime plus one, no origination fees, no annual fees and no pre-payment penalties).
Regardless of whether you use an online or physical bank, the only options you should consider are those with FDIC protection.
3) What if you’re blessed to have cash in excess of the FDIC limits? In that case, you might consider warehousing your short-term cash through a U.S. Treasury Money Market fund located in your taxable brokerage account. As we learned in the financial crisis of 2008-2009, it is indeed possible for a traditional money market account to lose money. Therefore, if safety is your priority, you should find it (and slightly lower interest rates) in a money market instrument holding only vehicles backed by the full faith and credit of the U.S. government.
4) If you want to maximize the earning potential of your short-term cash management strategy without putting that money at risk, you may consider good ol’ CDs (Certificates of Deposit) with FDIC protection. You might even create a “CD ladder,” positioning multiple instruments at varying maturities and rates. It means more work and complexity, but it would likely result in higher returns, too.
You can create your CD ladder through traditional, big banks, but it’s likely easier to purchase “brokered CDs” in your taxable accounts, although this strategy certainly requires more skill.
Given these readily available alternatives, are there any good reasons to stay with a big, traditional bank?
Not really, unless you’re interested in strengthening the bottom line of banks deemed “too big to fail.”