Are your accounts set up with the right bank? Are you spending more money on banking than you need to? Banks are a viable business striving to make as much money as they can from you, the consumer. Let us discuss how banks work, some of their products and how you are affected. In this way, you can make sure your bank is not too deep in your pockets.
Understanding the Banking Business Model
As you deposit money, whether it be in a savings account, checking account or money market account, the bank takes your money and makes money for itself with your deposit money. So how does that work exactly?
It works like this, say you have a high yield savings account, and you keep $20,000 in your bank account, in case you run into some hard times. The bank takes your $20,000 and may add 1.50 percent or $300 to your account over a year. But what do they do with the $20,000 while they have in the bank on deposit? This is what they do; they lend it out for:
- Mortgages at 5-8% APR
- Student Loans at 6.5-8% APR
- Credit Cards at 15-26% APR
- Personal Loans at 5-36% APR
So to help clear up the financial picture, let ‘s use numbers to illustrate. The bank used your $20,000 to bring in between $1,000 and $7,200 after a year. Then your bank gave you a small token of $300 in your bank account for using your money. They kindly told you this is the interest you earned.
You may not have $20,000 sitting in your bank account. But you do deposit your check, and other money you receive in the bank regularly. The bank takes all of its customers and tallies the revenue up. Then uses their customers’ money to buy treasury notes for a nice healthy return and make loans.
There is another way the banking industry makes money, and they do not have to share any of the cash with their customers. This is by banking fees. The bank’s fees are pure profit. Here is a list of some of the pure profit banking fees.
Account Fees. They are checking account maintenance fees, credit card fees, investment account fees. Some banks charge for cashing checks not from their bank, even though you have an account with them.
ATM Fees. The fees you are charged for using another bank’s ATM, or when you travel and get some of your cash out of the bank. If you travel out of the country, you may get an additional currency conversion fee deducted from your account.
Penalty Fees. You may have an automatic withdrawal come out earlier than you thought and be a penny short for a whopping $15 or $25 fee per overdraft transaction. You know the bank is saying, “Chaa-Cheng” every time that happens.
Application Fees. The bank charges the borrow an application fee to loan them your money. Those fees can be $100 or more per application.
So this is the primary banking model for how banks make a profit. Banks take your money and line their pockets with cash. While you need your bank accounts, you also need to be consumer savvy. Let us look at how you can choose a bank to keep more money in your bank account.
Tips for Choosing a Consumer-Friendly Bank
Most people choose a bank for convenience, whether it be a close, easy to get to location or hours of operation. While convenience is important, each person must determine how much that convenience is worth in dollars and cents.
When you are choosing a bank or even looking at the banking service fees at your current bank, here are some helpful tips on what to look for:
- No Monthly Service fee. There are banks out there that offer no monthly fees for checking and savings accounts. Over a year or more time, no service fees keeps the cash in your account.
- No ATM service fees. Several large banking institutions offer no ATM fees. There is one large investment banking company that provides no ATM fees anywhere in the world, and as a bonus they refund you the ATM fee you pay to the local bank.
- Examine the schedule of penalty fees. Compare fee schedules between banks. Choose a bank with the most reasonable charges. Make sure the bank does not charge the recipient for your check to be cashed. Or charge you to cash a check even though you have an account with them.
- Shop around for your next loan. The interest rate of the loan is important to keep low. However, if the bank is making up their loss of interest rate in loan origination fees and other charges, then you may end up paying more for your loan even though the interest rate is low.
- Shopping for a consumer-friendly bank does not have to be time-consuming or difficult. Many banks post their banking products such as types of accounts, fees, schedules, and services on their website.
Many banks are changing over to a more virtual type of banking, where you can take a picture of a check to deposit or safely deposit cash at the ATM. These convenience measures are being extended to consumers by many larger banks throughout the country. There are many larger banks also going to change over to a more virtual teller banking model very soon.
Remember the little time and effort you use to find a consumer-friendly bank, the more cash in your pocket. The wise adage of “a penny saved is a penny earned”, can be updated to the 21st century “a dollar saved is a dollar you do not have to earn.” So save your hard earned money for something you want to have or do. Use these tips and choose a consumer-friendly bank for all of your banking needs.