Alt_Bank

Your Big Bank Sucks. It’s Time to Bail Yourself Out.

Small, alternative, online banks are offering more attractive options than ever, kicking traditional brick-and-mortar dicks in the dirt

It’s a question I don’t think I’ve ever asked, nor has anyone ever asked me, but here goes: How much interest does your savings account earn? I’ll wait. If you’re at a traditional bank, it’s probably somewhere between 0.01 percent and 0.09 at the most, with a minimum balance required and probably some fees to boot.

Funny thing is, there are lots of banks that will pay you closer to 2.5 percent on your savings, with no minimum balance and no fees. It’s bewildering that most of us park our money in big, traditional banks, even though they have stiffed us over and over and over again, mostly bilking the poor and unsophisticated for overdraft fees, and when better options are right there hiding in plain sight that pay us far more for the privilege of taking our cash.

Of course, the bigger issue is that many of us don’t even have savings in the first place. Roughly four out of 10 Americans admitted recently that they can’t cough up $400 in an emergency. Those of us who can sock something away these days only put, on average, about $6 out of every $100 we earn in a pile somewhere.

But the real question is — which is an increasingly more complex, ideological one that reflects changing values, ultra-modern practicalities and a deep, deep distrust of big banks — why are we still keeping our pile in a brick-and-mortar? Because there are virtually no good reasons to do so anymore.

Millennials have started to peel off from the teat of the big banks in large numbers. You can’t blame them. Given that most of them came of age when the 2008 recession hit, watching their parents and elders lose their homes and 401ks, only to see the banks bailed out as a reward for their predatory lending, they took away a clear message: Don’t trust the big banks. It’s now more than a decade later, but that’s a sentiment that’s hard to shake, even if we’re not talking about big, evil corporate greed, but just finding where the hell the fine print is about how much banks are really going to nickel and dime you.

“They want ease and transparency, and they don’t want to pay for the service,” says Ashley Dixon, associate planner and certified financial planner at Gen Y Planning, which focuses largely on millennial clients, who are on average, in their 30s. “With online banking, a lot of it is very clear-cut and straightforward. They tell you up front that there are no fees and no minimum balances. If it’s hard to find the fees or costs associated with a traditional bank, they’re going to quickly move on and not even give them a chance.”

Increasingly then, still using a traditional bank is largely out of habit, fear or convenience. Maybe our parents set up an account for us as teens. Maybe we’ve just had the same account we set up for ourselves as young adults and haven’t bothered to change it. Maybe the big bank has an ATM on every corner. Maybe it’s too much hassle to move all the accounts and change all our information. Maybe for as much as we don’t trust big banks, we’re skeptical of online operations too.

But big banking usually means bigger headaches, whether it’s waiting an hour to get someone on the phone in customer service, being charged for a paper statement, all the fees or something much more unethical: finding out your bank set up millions of secret, phony accounts in customer names (ahem, Wells Fargo) and then stole fees and funds from them, all to hit sales targets. Or maybe it’s a systemwide outage that leaves you stranded without online, ATM or customer service access for days or as much as a week (ahem, Wells Fargo).

Or maybe it’s a weird tone from a big bank’s Twitter account trying to insinuate that if we just cut back on our absurd frivolity, we wouldn’t be broke all the time, like when Chase made the egregious mistake of finger-wagging at its customers on social media, thinking it was being cute.

The response? Largely outrage and vitriol that a bank that made more than $109 billion the previous year, received a multibillion-dollar bailout in 2008 after fraudulently foreclosing on homes and has one of the highest overdraft fees of all the big players ($34), had the nerve to suggest buying too much coffee is why people are poor.

Then there’s just the fact that big banks are cheap bastards, not when it comes to how they pay themselves, of course — the CEO of Chase made over $30 million in 2018 — but when it comes to how they squeeze every drop out of our dough and never make it up to us: The national Federal interest rate was just raised to 2.5 percent, but if you’re banking at Chase? You’re earning a measly 0.01 percent. Wells Fargo? 0.01 percent. Bank of America? 0.03. That’s typically for a balance of $1,000, and you can get a higher interest rate the more money you fork over to them, up to around 0.09 percent.

But the national average interest rate for a savings account is more like 0.10 percent, which means that banks could pay you more for your money than they do — after all, they set their own rates. But they don’t. Why? Because they don’t have to. They have loads of cash right now, and they typically only raise interest rates on savings when they need to lure cash. Why would they need to give you more money for the money you already gave them for nothing?

“Depositors have to be choosy about where they put their money,” Greg McBride, Bankrate’s chief financial analyst, told the Washington Post. “Many banks — the biggest banks in particular — continue to be stingy with their payouts. You can easily grow your interest earnings tenfold just by moving your money to a bank with a more attractive rate.”

Or more like 22.5-fold. Currently, a number of online banks — CIT, HSBC, Barclays, Ally, SoFi, State Farm, Vio, Chime and more offer high-yield savings accounts with no fees and no minimums that pay a 2.5 percent interest rate. Just like traditional banks, they’re still FDIC insured up to $250,000 a person. They just don’t have the same overhead, so they don’t have to charge you out the wazoo for the services. Some of them, like SoFi, even offer products that will help you refinance your student loans, something that doesn’t even seem to have occurred to traditional banks at all.

The old guard of banks may have caught up with the technology that allows you to bank via an app or upload a photo of a check for deposit, but they still won’t budge on the associated costs. “Traditional banks are just not lowering their fees,” Dixon at Gen Y Planning says. “They aren’t reimbursing you for ATM fees. They’re not allowing you to use other ATMs besides their own, they’re charging you for keeping a minimum balance. They’re charging you if you don’t have direct deposit. They don’t have the best high-yield savings account interest rates. So they just don’t have these other offerings the online banks do.”

Dixon says some 90 percent of their clients at Gen Y Planning, who range in age from 25 to 43, use online banking. For them, it’s a practical decision that usually begins with moving, either to take a new job, or after getting married. One client moved from Chicago to L.A. for work, and suddenly realized there were no Fifth Third Banks on every corner like he was used to at home. Rather than go through the whole new traditional bank process, he just decided online banking would be much easier than going inside some new big bank and talking to a teller. Or worse, getting on the actual telephone. And when he found out it was a win-win on zero fees, and a lot more on interest for his savings, not to mention a streamlined, mobile-first experience, no one had to twist his arm.

“Online banks are now offering mortgages and loans, too,” Dixon explains. “Something you’d normally get from a bigger bank.” There are sites like Betterment that offer investments as well, or even interest-bearing checking accounts at places like Charles Schwab. Gen Y Planning strongly recommends Ally to their clients, an online bank that has no monthly fees and no minimum balances. They also offer interest-bearing checking accounts, and the ability to set up limitless savings accounts for different goals, all without fees or minimums.

Traditional banks used to have to do more to win us over, but since the competition hasn’t been there, they can exploit our hesitancy to move our money at a time when things feel tenuous. One survey found that most of us keep a checking account as long as 16 years in the same bank out of hesitation. In fact, just 11 percent of people switched banks in 2016.

But notably, closer to 20 percent of millennials switched. Surveys have found that millennials, some 92 percent of whom do not trust big banks, are two to three times more likely to migrate toward online banking, mostly because of fees, and while that reasoning may prove they aren’t rolling in the dough (ahem, student loans), they do use more financial products than any other generation.

Basically, younger generations want to bank the way they do everything else: extremely online. Millennials prefer mobile banking — that’s how 47 percent do their financial business. They want to be able to use a bank that lets them transfer money to other people or incorporate peer-to-peer payment services like Venmo, and also transfer money easily between accounts. They want easy-to-use tracking functions so they can see how they spend their money, and they want to be able to get attractive interest rates on loans, and easy access to no-fee savings accounts and no-fee investment accounts. They’re also far more likely to keep some cash on hand rather than invest, mostly out of fear.

They’ve had bad experiences with traditional banks for all the aforementioned reasons, particularly surrounding those fees — overdraft fees, ATM fees, minimum-balance fees, fees for not having a direct deposit, fees for getting a paper statement, fees for even just thinking about their accounts. Many surveyed cite negative experiences with traditional banks dealing with instances of fraud, too.

What’s more, they do want investment options, too, and unlike many Olds, they’re willing to do all this even using a robo advisor to guide them through risk and investment options instead of waiting an hour to speak someone on the godforsaken phone. That said, an in-person or more homegrown experience isn’t a bad thing if it feels authentic or local, which is why smaller community banks or credit unions are also an in-demand option and have seen their memberships increase 3 percent with millennial customers. Their memberships are easier to come by than they used to be, their fees are lower and their interest rates are better. You can find a free checking account, for example, at 82 percent of credit unions. National banks? Just 38 percent.

In an era where a more personalized experience is in demand, just not on the phone, most millennials can’t distinguish the big national banks from one another, or they just have no interest in listening to what a big bank would tell them.

For a generation so allegedly bad with their money, that’s a smart conclusion. Big banking no longer offers anything an online bank can’t, unless you’re in a position where your history with that bank would amount to some kind of preferential treatment. “If they’ve seen your money grow with them, if they’ve seen you take out your first auto loan with them, if they’ve seen that you’ve had an account with them since high school and then you go to get your first mortgage or your first personal loan, that’s when history would be beneficial with a traditional bank,” Dixon explains. “An online bank can see your credit score just like a traditional one, but they can’t pull the strings for you like your legacy banker would, because they know who you are and your history.”

Aside from that, they’re just pushing products that benefit the bank, whether they’re the products you need or not. “Bankers are still trying to reach a commission or rate by opening a certain number of accounts,” Dixon says. “People don’t want to feel like they’re being pushed into something they don’t understand. The only reason it’s happening is that person on the other side of the desk or phone is going to make money off them. Also, no one is educating them at these banks.”

In other words, big banks aren’t doing much banking for the average person, they’re doing sales. Of course, you can still use a traditional bank for certain products — it’s just that nowadays, that should be based on your needs, not their persuasion.

Case in point: Dixon, herself a financial planner, still keeps a single credit card through a brick-and-mortar bank that she’s had for 15 years.

Out of loyalty? I ask her.

“No,” she responds. “It’s just the card with the best interest rate.”