You might not realize that selecting a bank is one of the most important financial decisions you’ll ever make. Banks can avail you of financial opportunities like high interest savings accounts and free checks, or they can cost you money and inconvenience you in a myriad of ways from monthly maintenance fees to limited ATM availability.
Picking the right one can help your life run smoothly, while picking the wrong one can be frustrating and take time away from the things that are most important to you.
4 Types of Banks – Pros & Cons
There are four main types of bank to choose from. Consider the strengths and weaknesses of each type to find the bank that best suits your needs.
1. Large National, Multi-National, and International Banks
These are the big names you have heard of, such as Chase Bank, Bank of America, and Citigroup, and they run national marketing campaigns on television and radio to attract large customer bases. These banks have physical branch locations and ATMs across the country for customer convenience.
- Pros: Just about anywhere you travel in the United States, these banks will have a physical location or ATM. If you travel a lot, this type of bank gives you the easiest access to cash wherever you are without charging you ATM withdrawal fees.
- Cons: Large banks with millions of customers have little incentive to offer the best financial products. Your checking account may charge fees and pay no interest, and your savings account will pay minimal interest at best. The national average for saving account rates at these banks currently hovers around 0.20%.
2. Online-Only Banks
Online banks are very different from multi-national banks for a reason. These banks drastically cut overhead costs by not having to build, lease, and staff brick-and-mortar locations. They pass some of this cost savings on to their customers in the form of higher interest rates on checking and saving accounts, and better customer service. Popular online banks include ING Direct and Ally Bank.
- Pros: If you do not need constant access to ATMs or to be able to speak with a teller, there is no reason not to consider this type of institution. These banks offer similar products as other banks – checks, debit cards, and online bill pay – but offer better interest rates, which means more interest income for you every month.
- Cons: Fee-free ATMs are often available, but only in or near urban locations. In other words, if you live in a rural area, you may have to drive miles to find one. Also, you simply don’t have the option to visit a local branch as they don’t exist for online banks. So, if you have an issue you’d like to speak to someone in-person about, you’ll have to settle with telephone customer service.
3. Community Banks
If you are a fan of localized customer service and an institution that is invested in your area, a community bank is for you. These banks are usually much smaller than their national brethren, but are not necessarily limited to just having a handful of branches. Some community banks have grown to have a significant presence in their local region.
Interest rates and products vary from bank to bank, but all community banks offer basic accounts, such as checking and savings, and attach a “we know your name” factor to their brand of service.
- Pros: You can find similar services to a big bank with a smaller, hometown feel. Plus, community banks are generally more willing to work with you based on the relationship you have with them. For example, if you’ve been with the bank for a number of years, they may be willing to cut you some slack regarding overdraft fees, or give you a better interest rate when negotiating your car loan. These banks pride themselves on their relationships with their customers.
- Cons: Rates and products are not as varied as what large organizations offer. In other words, if you need an unconventional mortgage or account type, a community bank is unlikely to offer it. Also, online banking may be less sophisticated at community banks than online and multi-national banks. Further, while there are physical branch locations, there are fewer than what you might find with a large bank, and you’re unlikely to find any while traveling.
4. Credit Unions
Credit unions are similar to community banks. They are invested in their communities and, generally, do not have locations in multiple states. However, the structure of a credit union is different, which is what gives this type of bank unique advantages over the previous three options.
Credit unions are owned and operated by their members. In other words, if you become a member, you actually have some say in management decisions. In fact, this is why they have membership requirements in order to open an account. Requirements can be as stringent as having to work for a specific employer or as lenient as living, working, or shopping in the area the credit union serves.
- Pros: Because members and owners are one and the same, you can often find lower account fees and better interest rates on loans and savings and checking accounts. Otherwise, credit unions are very similar to community banks. They are member-focused institutions that offer a personalized banking experience, which, aside from “knowing your name,” can mean better customer service and greater flexibility when it comes to loan terms or qualification and fee forgiveness.
- Cons: You need to meet the requirements of any specific credit union to open an account and you probably won’t find any branches if you travel out of your credit union’s direct area. Product types are not as varied and online banking typically isn’t as sophisticated or user-friendly as that of larger banks.
Factors to Consider When Choosing a Bank
There are many factors to consider when selecting a bank and the array of options can be confusing. Here’s a checklist to guide you through the process.
1. Deposit Insurance
Never do business with a bank or credit union that does not offer deposit insurance, or carry the FDIC or NCUA symbol. This insurance covers your deposits up to a total of $250,000 should the institution fail. There are two types of deposit insurance: Bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC) while credit union deposits are insured by the National Credit Union Association (NCUA).
If a bank fails, the deposit insurance organization steps in and takes over. This normally happens on a Friday to give regulators the weekend to make sure everything runs smoothly the following week. The institution opens as normal the next week and customers are allowed to withdraw funds up to the deposit insurance limit.
Banking without deposit insurance is financial folly. It costs customers nothing and going without it can result in the loss of every dollar you have deposited. The best bank is one that has deposit insurance, but is healthy enough so that you will never need to use it. Unfortunately, bank failures happen, so be sure to read up on how to react when your bank fails or when your bank goes through a merger or acquisition.
Fees are a huge factor to consider. Since fees often depend on your banking habits, it pays to be aware of these habits in addition to static fees the bank charges. For example, know what balance you’re likely to maintain, how many ATM withdrawals you’ll make and where you’re likely to make them, how many checks you’ll write, and if you’ll have a savings account, how much you’re likely to keep in it.
For example, one person could have a no-fee checking account because they maintain a minimum of $100 within it, while another person could pay hefty fees on the same checking account because they can’t maintain the minimum balance. Remember, banks like to collect fees from their customers, so read the fine print.
Some fees to consider:
- Monthly account fees (including ones that may be triggered by low balances)
- Overdraft protection fees
- Bounced check fees (also known as a non-sufficient funds, or NSF, fee)
- ATM use fees
- Late payment fees for loan products
3. Balance Requirements
As mentioned above, some banks have minimum balance requirements that can trigger fees. There are three primary types of balance requirements:
- Average monthly balance. Your balance must be above a certain requirement, on average, throughout the month. Your balance can fall below the average temporarily without triggering a fee.
- Minimum balance. Your account must remain above a certain level to either avoid penalties or to guarantee a specific benefit (like a higher interest rate).
- Minimum amount in savings. Some banks, particularly credit unions, may require you to keep a certain amount in savings or else they’ll terminate your account.
Some banks will not have these balance requirements or you may be able to negotiate out of them. Whatever the case, make sure that any balance requirement suits your needs and won’t put you in a financial bind.
4. Interest Rates
Another factor to consider is how much interest you can earn on deposits, or will be charged on loans. Ideally, you are looking to generate high interest income through saving accounts and certificates of deposit, even though you may have to give up other benefits to find this.
For example, a bank may have the best customer service in the area, but if their interest rates are the lowest around, you may want to pass to find a better deal. Similarly, you might consider putting up with extra restrictions if it means you can earn a maximum level of interest on your deposits. That said, make sure that by tolerating restrictions or poor customer service, you won’t incur extra fees. Depending on your account balance, fees can quickly negate the amount of interest you’re likely to earn.
Ultimately, your bank should fit your current situation. For example, if you want to take out a loan, prioritize a bank that offers low loan rates. Then, once you are paid off and no longer need a loan, move to a bank that better suits your other banking needs.
5. Types of Accounts Offered
Check to see if your bank offers the types of accounts you need. Here are four to consider:
- Checking account. This is where you keep the cash that pays your bills and buys your groceries, and where many people hold most of their funds. Checking accounts typically offer a debit card, the ability to write checks, automatic deposit, and the ability to transfer funds to other accounts both within the bank and to an external bank. Online automatic bill payment plans may also be available, especially with the larger and online banks.
- Savings account. This is where many people keep their emergency fund. Since the money within a savings account is intended to stay put, you need not worry as much about accessibility issues. In fact, most savings accounts limit the number of withdrawals you can make to six per month. These accounts typically offer a higher interest rate than standard checking accounts.
- Money market account. A money market account is like mixing a checking and savings account together. You earn a higher interest rate, but still have the ability to write checks off of the account balance, though the number of checks you can write or debit purchases you can make is typically limited to a certain number per month.
- Rewards checking account. This is a different kind of checking account. There are specific requirements you must meet every month in order to earn a high interest rate, such as a certain number of debit card purchases, deposits, or ACH transfers. The rewards interest rate is usually limited to the first $25,000 you have deposited with the bank. A popular online checking account with cash back rewards is PerkStreet Financial.
6. Types of Financial Products Available
There are two primary types of financial products available from most banks: loans and income generating assets. Larger banks will offer a wider array of each product type, but that doesn’t necessarily mean a better deal. Here are a few example products by type and what to look for.
- Car loan (new or used). Check for low interest rates, origination fees, and prepayment penalties. Also, consider the various loan terms and how these fit your needs. You can normally find low new car rates easily, but used car rates are not advertised as often.
- Home mortgage loan. Check for low interest rates, origination fees or points, closing costs, and prepayment penalties. Also, consider the types of mortgages available (e.g. fixed vs. variable and 30 year vs. 15 year).
- Home equity line of credit or home equity loan. Check for low interest rates, origination fees or points, prepayment penalties, and closing costs.
- Credit cards. Check for interest rates (i.e. best low interest APR credit cards), if you carry a balance, and rewards programs (i.e. best cash back credit cards). Remember to always use credit cards and rewards wisely to avoid going into unnecessary debt.
Asset Growth Products:
- Individual retirement agreements (traditional IRA or Roth IRA) and brokerage accounts. Check for investment variety and fees. Can you invest in mutual funds, individual stocks and bonds, and other asset classes? How diverse are mutual fund options? What does it cost to place trades? Are there additional commissions charged on your purchase, such as front-end loads on mutual funds? What is the monthly or annual account fee and is it based on a percentage of your assets? Banks, unlike online discount brokers, can offer personalized one-on-one service when it comes to your investments, but keep in mind, you’ll pay for it.
- Certificates of deposit. Check for high interest rates and varying CD lengths. Ideally the bank has high rates for a range of terms (3 month, 6 month, 12 month, 24 month, 60 month), so you can build a CD ladder. Also check to see what penalties you’ll face for withdrawing CD funds early, if any.
With both sets of products, be aware of all fees and annual maintenance you will be charged or might be charged, as well as limits or restrictions you must comply with. Never assume you must stay with the same bank for every financial product you own. If you can get a better rate on a mortgage at another bank, do it. Don’t just stick with your bank because of the relationship you have with them.
7. Customer Service, Availability, and Other Services
Customer service can make or break your experience with a bank. Horrible service can drive you away from even the best of interest rates and cost you time as well as money. Search for reviews online and ask your friends if they have done business with the bank you’re interested in. If you start to see a trend in a negative direction, it might be best to look elsewhere.
A big contributor to good customer service is how accessible the representatives are. This is partially determined by the type of bank you are dealing with. A bank with one location in your area on the other side of town won’t be easy to get to, or getting through on the phone may be difficult. That said, while a bank on every corner may provide good customer service when you walk in, the service through their 1-800 number could be downright miserable. Consider whether you want “live” customer service that you drive to, or if you prefer to talk on the phone. Then, consider how accessible they are via either method.
If you are banking with an online bank or one that you cannot easily access, the service options available to you online or over the phone become critical. Are you going to be stuck in a phone tree for hours before someone answers your call, or do they pick up on the first ring? Also, how do you feel about outsourcing? Many larger banks and some online banks have outsourced their customer service to countries like India in order to save money. If you have a strong opinion about this, it’s best to find out before you open an account.
8. Services to Look for
Outside of customer service, you need to know if a bank offers:
- Online banking. This should be standard. If you cannot check your account balances online, move onto another bank. That said, arranging transfers, viewing checks you have written, and automatic bill pay may not be offered online by many small community banks or credit unions. Their online platform may be outdated and not user friendly.
- Electronic statements. Does the bank insist on mailing statements to you, or can you receive a monthly e-mail with a link to your statement? This is a quick indication of how progressive the bank is and how good their other online banking features are likely to be.
- Automatic payments. This is also known as automatic bill pay. Will your bank be able to pay your utility bill directly, and is there a cost for using this service?
- Direct deposit. Having your paycheck deposited electronically to your bank account is standard at most banking institutions. But how well does the system work? A good source for this information can be online reviews.
- Wire transfers. Can you transfer funds domestically and internationally? What fees are involved?
- Cashier’s checks. Many big financial transactions, such as closing on a home, require a cashier’s check with a verified amount, printed recipient, and watermark on the check. Does the bank offer this service, and if so, how much do they charge?
- ATM refunds. If you travel a lot and use cash, you are going to be charged “out of network” ATM fees. Does the bank refund all of these fees, some of them, or none at all?
Most banks will offer most of the above options, but cost structures can vary greatly. A cashier’s check at a credit union, for example, might cost $4, but across the street at the national bank it costs $12. If you rarely use cashier’s checks, this difference is not a big deal, but if you use them regularly, the higher fees will quickly add up. Likewise, some bill pay systems are free to all customers, while others have a monthly charge or require you to have a premium account.
Bank Security and Identity Theft
A big factor that is consistently played up in the media is bank security in regards to your personal information. It seems that every month, another bank’s technological infrastructure is compromised and thousands of customers’ personal information is stolen.
While the sophistication of a bank’s security is definitely important, don’t weigh this factor too heavily. The truth is that no bank is “hacker-proof.” Your personal information is constantly at risk, and at some point, one of the banks, retailers, or government entities you deal with is likely going to have data stolen.
What’s most important is how your bank reacts when personal information is stolen or otherwise compromised. Do they sit on the sidelines for a week while the media reports on the “disaster”? Or do they react quickly by closing accounts, shutting down unauthorized transactions, and issuing you a new account number? Moreover, do you get a call or text whenever something suspicious happens with your account?
The importance of choosing a bank should not be underestimated. But selecting the right one can have as much to do with your banking habits and personal preferences as it can with the bank’s individual attributes, such as low fees, great customer service, or high interest rates on accounts. First, identify what is most important to you regarding the types of accounts you want, products and level of service you need, and how you like to communicate with your bank. The points above can provide an outline for you to consider your own behavior as well as how a particular bank might fit it.
Once you’ve identified what you want in your bank, start reviewing your options. Visit bank websites, talk directly to a representative at each bank you’re considering, and go through your priorities with them. Then, after you’ve narrowed down this list even further, look to online reviews and ask friends or family if they have any experience with the banks in question. Follow this protocol to switch to a bank that will save you money and provide a headache-free experience.
What do you typically look for in a bank, and which one did you end up choosing?