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A recent movement known as Bank Transfer Day called for consumers to transfer their funds from large national banks that raised banking fees to smaller community banks or credit unions that did not, leaving many to wonder—what are the best banking options?
Story: John Sotomayor
The words were simple, the message powerful: “One Nation Under Greed.” Held high and prominently above the crowd, over the cheers and jeers, one protester’s sign at the Occupy Ocala rally held at the Downtown Square in November captured the frustration felt by countless others around the world.
The Occupy Wall Street movement, whereby fed-up protesters laid a symbolic siege on corporate greed that caught on like wildfire, has manifested into another form. The people who once turned to the streets to voice their frustrations now turn their attention to the bank teller windows and empty their bank accounts to act on their outrage.
A Facebook-led protest, organized by a Los Angeles-based gallery owner named Kristen Christian, urged Americans to close their accounts at the nation’s biggest national banks on November 5, 2011, requesting them to “move your money” to a local bank or credit union. Nearly 86,000 Facebook users had RSVP’ed to participate. Did it work?
It’s too soon to tell. At the time of this writing, trade associations for community banks and credit unions had not yet assembled data on the number of new accounts opened over the November 5th weekend. However, the movement has had a notable impact. Credit unions used the movement as a marketing tool, advertising special weekend hours (November 5th was a Saturday), giving away Bank Transfer Day stickers and offering special promotions to those who said they opened new accounts on Bank Transfer Day. Some credit unions reported overrun parking lots due to the high traffic to transfer funds, while others reported setting records on new accounts.
Regardless of Bank Transfer Day, Americans were already lining up to avoid banking fees by transferring their accounts to credit unions. The Credit Union National Association reports that since Bank of America announced a monthly $5 debit card fee at the end of September 2011 (a response to the Durbin Amendment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which set price controls for banks with assets of $10 billion or more), credit unions across the nation obtained 650,000 new members and $4.5 billion in savings account assets. So while Bank Transfer Day served as a “take control” event that inspired thousands, the act of charging more for banking services, especially debit cards, was itself enough to move cash en mass.
In response to customer outcry and bad press, Bank of America eventually rescinded its debit card fee, but the episode made consumers more aware of banking fees and charges in general. While thousands learned more about their banking options and the benefits of moving their money from national banks to community banks and credit unions, many more did not, and as a result are asking themselves, “What are my banking options, and what’s the difference between a credit union, community bank and national bank? We set out to explore the topic. Here are our findings.
Credit Unions
Credit unions are designed to serve a certain group or area. The people who use credit union services are members, not customers, and democratically control the union. Thus, members have a say in how the credit union is run and hold decision-making power. Since credit unions are non-profit organizations, the profits incurred by the credit union directly benefit members once overhead costs are covered. The National Credit Union Administration insures credit unions.
Large national banks have other channels of income such as securities or investments. The amount of revenues created from those channels is substantial, and as a consequence the consumer can sometimes become the cliché “only a number,” compared to a credit union or community bank, were the consumer is a person. A bank’s primary purpose is to make money for the investors and stockholders.
The intimate atmosphere at a credit union or small bank means the staff will know the customer, his or her credit history and what type of person the customer is, so when it comes time to seek a loan on a car, home or personal matter, or to launch a business with a small business loan, the credit union or small bank would be more willing to make loans at lower rates. Service will also be better. At a large bank, if the numbers aren’t there, the customer is not likely to secure a loan.
Paid boards of directors make all the decisions for national bank, which are profit-driven. Customers have no voting privileges or decision-making power with the bank.
There are other clear advantages to using credit unions, such as the use of credit cards by with lower APR rates, commonly set at 6.99 percent for those with direct deposit and 8.99 percent for everyone else. National banks typically set the APR rates for their credit cards at 18.9 percent post-recession. For convenience, most credit unions belong to networks such as the Credit Union Service Centers expanding their reach with accessible branches and free ATMs.
National Banks
There are a number of advantages to having a bank account at a national bank over a credit union membership. For one, they are easier to join. Anyone can open a bank account anywhere, anytime. In addition, national banks offer a wider selection of services than credit unions, such as stock investment programs and retirement plans. In addition, access to accounts and services is available in different regions. For example, snowbirds who live part time in Florida and part time somewhere else can access their accounts in either Florida or their home state.
National banks also have better online banking services than credit unions. Banks offer superior easy-to-use services, enabling customers to view current balances, transfer funds, apply for credit cards or loans, or pay bills, while credit union online services are less extensive.
There are drawbacks to transferring money into a smaller bank from a larger one. There is a legitimate concern of liquidity, and a number of smaller banks have been closed this year, especially if they got involved with sub-prime lending or alternative investments, raising concerns among consumers.
Community Banks
Community banks appear more attractive than national banks due to larger banks’ additional fees, even though many have rescinded their debit card fees. For instance, large banks charge maintenance fees unless you have direct deposit. But more so, community banks seem more attractive primarily because of how consumers feel they are viewed as account holders by their banks and how large banks are seeking means to make more money when they cannot cover “losses.”
The U.S. Congress has authorized large banks to issue an optional $5 debit card fee. Large banks did not have to institute it, and it was not mandatory. When large and community banks initially instituted debit cards, they were offered as a convenience for their customers, providing an alternative to paper checks. Large banks were using the new regulation as a means to capitalize on the debit card service to make up for “losses” elsewhere. Three years ago, large banks received billions in bailout money. Today, not only have they not repaid the money, several have had record-making profits. Some say it constitutes a slap in the face of their customers to charge them this additional $5 debit card fee every month, and suddenly community banks look more attractive.
Community banks live up to their name. They focus attention on the needs of local families, businesses and farmers as opposed to “megabanks” which place priority on serving large corporations. They do so because they are small businesses themselves and so understand the needs of small-business owners. Rather than take large deposits in one state and lend to others like many larger banks do, community banks channel the bulk of their loans to the neighborhoods where their depositors live and work.
Like credit unions, community banks consider the character, family history and discretionary spending of their account holders when making loans. Conversely, large banks apply impersonal qualification criteria such as credit scoring to all loan decisions regardless of individual circumstances.
It also makes far more sense to go to a credit union or local bank that’s paying a better interest rate than the national banks. Even if you receive a tenth of a percent higher interest rate on your money, it’s still beneficial to do business with the local bank.
Perhaps the best bet is to enjoy the best of both worlds and hold bank accounts with traditional banks, either large or small or both, and an IRA account with a credit union. That way, one could obtain the benefits of a credit union will still retaining access to the diversity of services offered by a national bank.
Whichever option you choose—a bank, credit union or both—make smart decisions. Make sure you get the most from your banking institution, and make a move that is best for you. The choice is yours.
Expert Advice: Short-Term Treasury Funds
Right now, it’s a lose-lose situation to leave large amounts of money in money markets, says George Mathis, First Vice President at Raymond James. There are safer alternatives such as short-term treasury funds, where you can have liquidity and still get better interest rates. A treasury fund is a bond from the U.S. government, and a short-term one is preferable over a long-term, given we are entering a rising interest-rate cycle, as reported by U.S. Federal Reserve Chairman Ben Bernanke, who says that that by this time next year the Federal Reserve will raise interest rates. When they do, you do not want to have long-term debt items such as bonds, because a rising interest rate typically has an adverse affect on them. You can get a short-term treasury fund right now with anywhere from 2 to 4 percent interest that would have liquidity and safety (as it has nothing to do with the stock market), which can keep pace with inflation and provide a better interest rate on your money.
Occupy Capitol Hill
Perhaps the Occupy Wall Street protestors should refocus their efforts and start with Congress first. It is argued that those who work behind-the-scenes in federal government are the ones allowing the current situation to occur, so those charging the movement should turn their attention to the actual orchestrators—the lobbyists.
A CEO of a bank who takes the company from needing $25 billion to earning that same amount is either doing a wonderful job or had tremendous help—and that assistance comes off the backs of the American people, thanks to lobbyists working on the behalf of big banks. In the same respect, the federal reserve dropped interest rates down to zero in December 2008, which hasn’t changed since, thanks again to lobbyists.
Granted, many financial experts agree it was a necessary evil to help out the housing market, but it also camouflaged the ability for the banking system to make tremendous profits off yield spreads. A bank makes money by paying the customer 1 percent on a CD, then loans the same money to another consumer for a new car and charges that person 8 percent interest, keeping the yield spread differences on those monies for themselves. The federal reserve and lobbyists working for the banking industry on Capitol Hill make these types of transactions allowable.
One banker points out that retail lobbyist groups are the real culprits of the current economic situation, working Capitol Hill and setting off the imbalance by creating price-fixing of large banks. Retail lobbyists argue they pushed for the price fixing on banks in order to protect merchant accounts, insisting they needed this to lower their prices to help consumers. Bankers argue there has been no evidence retailers transferred lower costs to the consumers, but rather kept their prices the same and reaped a financial surplus for themselves.
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