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Why Traditional Banking Might Go the Way of the Piggy Bank

This article is more than 10 years old.

Have you heard the saying "you get what you pay for?" Well, when it comes to your finances, you often get what you don't pay for. For example, in this blog post, my colleague Michael Smith writes about how he once spent $10 on a piggy bank that he only saved $30 in. As a result, his savings vehicle ended up costing him 1/3 of his savings!

While $10 isn't going to make or break anyone's financial future, your own "piggy bank" may be costing you quite a bit more. Between maintenance fees, minimum balance fees, paper statement fees, debit card fees, overdraft fees, ATM fees, and numerous other miscellaneous fees for everything from using a teller to closing an account, bank charges can really add up, especially when we're getting paid next to nothing in interest.  A recent Consumer Reports article predicts that these fees will only keep increasing due to declining loan and investment income for banks and new banking regulations.

When it comes to fees, ignorance isn't bliss

The first step is to know what your bank might charge you for by looking at a copy of their fee schedule. It's always better to know in advance rather than wait for a nasty surprise on your statement. You can then take steps like making sure you have the minimum balance in your account(s), replacing paper statements with electronic ones, and avoiding the use of high cost ATM and debit cards. In addition to regularly monitoring your checking account, try to keep a buffer of cash in there to help prevent overdraft charges or even cancel the overdraft feature altogether (although you may run the risk of late fees from billers if you miss a payment due to insufficient funds).

Understanding the bank's fee policies can even uncover opportunities to save money in other ways. For example, if you keep at least $25k in a Wells Fargo checking account, you not only have your maintenance fees waived, but you also get 100 free trades a year through a WellsTrade brokerage account. This can be valuable since a brokerage account can be an even more expensive "piggy bank." Speaking of brokerage firms...

Bank with Chuck?

If you're not happy with the fees your bank is charging, there are alternatives. Just as banks like Wells Fargo and Bank of America (which now owns Merrill Lynch) are getting into the brokerage business, brokerage firms like Charles Schwab, Fidelity, and Scottrade are now providing banking services like FDIC-insured checking accounts. These accounts usually charge less in fees and offer more perks like ATM fee reimbursements and higher interest rates than traditional banks (although they don't tend to work well with physical cash). Just be sure to stick to discount brokers like the ones above so you don't lose more on the brokerage side than you gain on the banking side.

Size matters

We're used to getting better deals at large retailers like Walmart and Costco due to their size efficiency but Mike Moebs, an economist and CEO of an economic research firm, believes that banks are most cost-efficient with just $500 million to $5 billion of assets. He estimates that it costs a megabank  $350 to $450 a year to maintain a checking account but only $175 to $240 for a small community bank or credit union. After all, someone has to pay for all those feel good ads you see on tv.

Credit unions have the additional advantage of being non-profit. According to a study performed by Informa Research Services for Consumer Reports, the average monthly fee for non-interest checking was $10.27 at the 10 largest banks, $7.45 at banks with less than $4 billion in assets, and $6 at the 10 biggest credit unions. Since online-only banks don't have to maintain brick-and-mortar branches,  their fees are generally even lower.

Which way you go depends on how important in-person customer service is to you. In my experience, community banks and credit unions have better customer service than the brand-name megabanks. They're smaller so they're more likely to know you personally and in the case of credit unions, you're an owner.

If seeing a bank employee face-to-face isn't important to you and you're comfortable doing all your banking over the phone, Internet, and mail, you might want to go with an online-only bank. On sites like Bankrate and DepositAccounts, you can find plenty of online-only banks that charge no maintenance or minimum balance fees, pay interest on checking account balances, and even refund the fees another bank may charge for using its ATM.

Rewards checking accounts can be particularly rewarding

For the greatest benefits,  you may want to consider one of a particular handful of small community banks and credit unions that offer rewards checking accounts with no maintenance or minimum balance fees, reimburse ATM fees and pay as much as 3% in interest. What's the catch? To get the ATM reimbursements and high interest rates, you need to meet certain requirements like using direct deposit, signing up for electronic statements, and making 10-15 debit transactions per month. But they don't generally charge you a fee if you miss the requirements. Since there are only a few local institutions offering these levels of rewards, it's unlikely you'll find one near you so as with an online-only bank, you'll also have to be comfortable banking remotely. You can search for one that fits your needs on sites like MoneyRates.com and Deposit Accounts.

There's no one right banking solution for everyone. Some people like having their investment and banks accounts in the same place, others prefer the more intimate feel of a local institution, while some are willing to forego teller lines completely to get a higher interest rate. Find the banking solution that provides the best value for your needs and let the rest go the way of the piggy bank.

Erik Carter, JD, CFP® is a resident financial planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.