Banking

It’s very important for your financial well being to choose a bank that fits your needs and can offer the services you need both now and in the future. Choosing a bank, though, is a personal choice. Some like the convenience of going to a physical location to bank and would be most comfortable banking at an established firm like Bank of America. Other people prefer using a mobile app and would rather not bank at branches at all. The majority of Americans end up banking with just one firm, so you should take the time to research your options and pick the right one for you.

Traditional Banks

Traditional Banks like Bank of America and Wells Fargo, serve a large part of the American population, and have thousands of branch locations and a large ATM footprint. Typically, these large banks are a kind of one-stop-shop for a retail customer’s needs. They offer services like mortgage lending and checking and savings accounts, as well as equity advising and credit cards. But banking with these giants isn’t free, and it’s important to understand the true cost of banking with a traditional bank. That means taking their fees into account, as well as the interest rates they pay customers that save with them. A traditional bank may offer savings account rates that are currently around .01% a year but may also charge fees on checking or savings accounts. These fees could offset any gains that a saver would get from parking their money at a big bank.

For example, Bank of America has recently been charging $12 per month for their standard checking accounts and so the yearly fee– just for having a checking account– is $144 ($12 * 12 months). However, they only pay a miniscule .01% in their savings accounts. This rock-bottom rate is on par with standard savings account rates paid out by some of the biggest banks in the nation, like Chase and Wells Fargo. Considering the yearly fee of $144, a saver would need to deposit approximately $1.5 million in their savings account, just to offset the yearly fee in the checking account! This is an extreme example, but one which is repeated throughout the investing landscape every day. Fees matter, and in the final analysis, there really isn’t a compelling reason to have a savings account at one of the traditional banks while they pay negligible interest. However, there are many other firms, like internet-only banks and Fintech firms, that offer far better returns for savers with lower fees.

Fintech

Fintech is a broad term to describe financial companies that seek to utilize technological innovations to change how people bank, save, and invest. Notable firms in the space like acorns.com and betterment.com typically partner with an FDIC member bank to provide the banking services we expect from traditional banks. A Fintech firm will not usually offer a savings account with interest, though they may offer similar products to help customers save without paying them interest. They also usually have an ATM network just like traditional banks, so access to transfer and deposits are largely the same as with banks with branches.

Fintech firms also have fees that are much lower than traditional banks. To take one example, acorns.com charges $60 per year for their premium service. As our above example from Bank of America shows, their fee to have a checking account is more than twice as costly as premium membership at acorns.com!

Similarly, internet-only banks are also serious competitors to traditional banks. Unlike Fintech firms that focus on automated investing, internet-only banks typically focus just on delivering free checking and better savings account yields. Since they don’t have a large branch footprint, internet-only banks also can pay far more to saving accounts. Chime.com is one recent entrance into the internet only banking space. Though their services are quite basic, nonetheless with their current annual yield of .5% and no checking fees, they are a much better value for savers than a traditional bank.

There is no steadfast rule on what type of bank to use in what situation however. Traditional banks have convenience and size on their side, however you will pay for this convenience in the form of fees and lower interest rates on saving. Fintech and internet-only banks may have lower fees and higher rates of return for savers, but interest rates are so low that the difference between what a traditional bank and online bank will pay to savers is almost negligible unless you have a significant amount of savings.

If you prefer branch banking, extra fees and small interest rate differences may be worth it. But if you’d rather bank online, Fintech and internet-only banks may give you all the convenience you need at a fraction of the cost. In the end, where you bank is an individual decision. Be informed and weigh the pros and cons of each bank you consider.

Certificates of deposit

Seems like internet-only banks and Fintech firms are the wave of the future, and traditional banks have no way to compete. However, banks also issue certificates of deposit, which can have average yields comparable or higher than the savings account interest rates of internet banks. CDs, however, do require you to hold them for specific length of time, unlike a savings account where interest is paid for each day you have the money in your savings account. There may also be fees if you want to exit a CD early, and of course if interest rates rise, you could get locked in at a low rate. These may be acceptable disadvantages for higher yield, and again is up to the individual’s own risk tolerance and goals.

Final Analysis

Remember there are many banks to choose from, both online and brick and mortar. Typically a traditional bank or fintech firm may excel only in a few aspects of banking. One bank may have free checking, but a low savings rate. Another bank may have a high savings rate, but also have a monthly fee Sometimes it’s advantageous to have several bank accounts with several different institutions to minimize fees and maximize yield. Indeed, though the majority of Americans bank only with one firm, a healthy minority of Americans, over 40%, already have multiple bank accounts with different institutions to shop around for the best deals. If you do the same, you’ll have built a healthy foundation for saving and investing and be more prepared for financial challenges in the future.