There is no end to the techniques used to evaluate stocks and portfolios, but when it comes to banks, the general consensus is that you are stuck with what you get. What you get, in most cases, is a low interest rate, fees for trying to access your money and the security of knowing your deposits are insured.
However, there have been a number of changes in the banking industry in recent years. Internet based banks have arisen to join co-op banks as competition for traditional banks. Now, in the face of increasing selection, you have the power to choose the one that is right for you. Here, we'll cover what factors you should weigh in making your choice.
We All Have Needs
If you and your bank were dating, chances are good that it would be classified as an abusive relationship. Banks protect your money and provide many of the services you need, but they charge you for them as well as charging you for services you don't need.
The first step is to figure out what services are essential to you and then make a list of them. For example, this may be services like online bill payments, ATMs and telephone banking, or high-interest and money market accounts. The easiest way to find out what services you need is to keep a notebook and track your banking behavior. Do you use the ATM or do you go into the branch? Do you pay your bills online or at an ATM? How many withdrawals are you making a month? How many deposits? Finding out which services you actually use will help you to determine what kind of plan will work best for you. (For related reading, see What are the advantages and disadvantages to dealing with internet-only banks?)
Along with this list, you will want to check your bank statements to see precisely how much these services are costing you and what services you are over or under using. Many people pay service fees for unlimited use of ATMs affiliated with their own banks and then use other machines and ring up $10 to $20 in charges every month. On the most basic level of selection, you want to find a bank that gives you the services you need at the lowest possible cost. (For more insight, check out The Ins And Outs Of Bank Fees.)
Putting your money in a savings account is not going to make you rich. Assuming you are looking for a bank to provide a checking account, the interest rates are even more nominal than those of a savings account. Sadly, many checking accounts pay no interest at all. Some banks offer money market accounts for people who want to save money with them, but these often (but not always) have a high minimum deposit. As far as saving money for the long term rather than just using an account to pay bills and cash checks, even the best bank will not match an investment.
Banking on Options
Now that we know what we are and aren't expecting, we can look at the alternatives. (For more on these options, read Money Market Vs. Savings Accounts and Your First Checking Account.)
Credit Unions and Co-operative Banking
Higher interest accounts, lower interest loans and the possibility of sharing the profits at the end of the year make credit unions a little too good for most people to believe. If this is so, it is only because traditional banks have engaged in public relations campaigns and other costly actions to convince customers that there is only one way to bank. Credit unions are nonprofit banks that make no distinction between clients and shareholders. By opening an account at a credit union, you are becoming a member of the collective. This means that you may be able to get part of the bank's profits in the form of a dividend at year's end, or it may just mean higher interest rates and more favorable loan terms.
How is this possible when a particular credit union may only have the one branch and the big banks have thousands more and customers galore? It is simply a matter of size and connections. Credit unions don't have to support thousands of branches, CEOs, fund managers, salespeople, clerks and public relations specialists. The fact that a credit union may only have one branch helps the company pass the savings on to its customers in the form of higher interest and other benefits.
The downside of credit unions is access. Even though they issue debit cards, they generally don't have ATMs outside of their branch buildings, meaning you will pay fees for foreign ATM withdrawals. Additionally, not all of them are accessible online aside from checking account balances or sending customer service questions (although the number with online services is always increasing). If you are considering a credit union, you have to think about what you are willing to sacrifice in exchange for lower cost accounts and loans. To make the most of credit unions, you have to be adept at knowing how much cash you need because you may find yourself unable to access your account at short notice without incurring fees.
Online Banking and Internet Banks
Although internet banks probably won't wipe brick-and-mortar banks off the face of the earth, they do offer a good alternative. Online banking and internet banks are two very different beasts. Online banking, including paying bills and making transfers, is available through your average bank. Online banking simply means having some level of access to your bank through the internet. Internet banks, on the other hand, do everything online and do not have a physical location.
An internet bank provides neither locations that you can visit, nor face-to-face interactions with clerks. As with credit unions, this translates into better interest rates and savings for the customer. The short history of internet banks has been hit-or-miss. Many internet banks have folded for a variety of reasons, but most shared a problem of offering more services than they could handle. Offering too many services increases the need for intensive customer support (usually by phone) and costs a lot in employee wages. The successful internet banks started off by offering bare bones services: online bill payments, high interest savings and checking accounts, and debit cards. When these services were established, they slowly expanded to certificates of deposit, credit cards, and so on.
There are wrinkles in the fabric of internet banking that have yet to be smoothed out, although some banks are ahead of others. One common problem is that it is often easier and faster to get money out of your account than it is to put money in. Some internet banks refund your ATM surcharges and your debit card works with any machine, but you still have to mail your checks in or set up direct deposit to get the money to the bank in the first place. If you need the money quickly, mailing a check can be excruciatingly slow. That said, more and more deposit options are becoming available as the industry matures.
The area where internet banks falter is in range of services. They are not yet complete banks where you could hold your savings, a car loan, your mortgage, and some fixed-term investments all in an accessible web account. Internet banks work as a replacement for checking and savings accounts, but they can't provide the credit that traditional banks and co-ops can. Once again, this is already changing as the industry ages, but customers will have to deal with different banks for different services until that time. If you aren't intimidated by having to deal with different accounts and banks, then an internet bank account can be a powerful tool for getting more interest out of your money.
Looking at it from a purely financial perspective, most people would be best served by splitting their banking activities: i.e. find an internet bank for checking/bill payment and using a credit union for loans and fixed-interest investments. The psychological factor - the convenience of having all your finances at one institution and being able to go there and see a customer service representative - often trumps the financial benefits. Whether it is not having confidence in the internet or wanting to use ATMs at all hours, these hang-ups cost people money and prop up traditional banks. However, if you are brave enough to change your banking habits, what you forfeit in convenience you could gain in cash.
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