Bank Switching Costs

One of the Free Exchange bloggers (some people know who is who by name, but I don’t — if anyone wants to enlighten me, I’m listening) admits choosing his bank because it was big, and staying there because it is big. He also links to James Surowiecki, who asks in the “notes” to his latest column,

“[W]hy, given the broader backlash against the big banks and the less-than-inspiring performance they’ve turned in over the last couple of years, are people still sticking with them? What makes this even more curious is that the big banks, which have historically offered their customers worse deals than smaller banks, have not changed their ways: they pay less for deposits, charge more for loans, make billions from overdraft fees, and have jacked up credit-card rates.”

When it comes to retail customers (you and me), Surowiecki highlights switching costs (add your own example) and brand (“It’s nearly impossible for consumers to evaluate how healthy a bank is. So, at a time when banks are failing with some regularity, the size and ubiquity of these big banks is reassuring.”). Free Exchange thinks the issue is the implicit government guarantee:

“[I] bigness is associated with security, then real bank competition means convincing customers, along with everyone else, that the government has a plan to unwind its implicit guarantee for banks and that ultimately the country’s largest banks will be as subject to failure as everyone else. If that can’t be achieved—if real market pressures aren’t ever going to apply—then it may be time to start thinking of large banks as natural monopolies, to be treated like regulated utilities.”

I’m a little skeptical of the brand/security argument, since most people don’t have more than $250,000 (the FDIC insurance limit) in their bank accounts. But maybe people don’t really trust the FDIC, or don’t realize how seamless the process is for them, and they would rather trust the Citibank logo.

The switching costs certainly are high, and I can provide some anecdotal details. I’m in the process of switching out of Bank of America. Moving all my bill payments and direct debits from B of A to another bank was pretty easy, although in some cases I had to call someone to get the right form. Moving my safe deposit box was a pain that cost several hours of time. Moving my direct deposits was pretty easy, although again it required paper forms. The trick was the ATM fees, but I found a checking account (PeoplesBank in Holyoke, Massachusetts, with branches in the Springfield-Holyoke-Northampton area) that refunds other banks’ ATM fees. (In the interest of fairness, I should also put in a plug for my other local bank, Greenfield Savings, which pays 0.75% on checking accounts.)

It can be done. But a bigger question would be, why? I feel like I need to as a matter of principle, given my well-known positions on this issue. But I don’t expect the average person who is frustrated by big, unfriendly, bailed-out banks — even the average reader of this blog — to invest the few or several hours it takes to switch. Most people probably don’t have enough money in their deposit accounts for the higher rates you can get at local banks to matter. When it comes to most political issues, I think most people feel individually helpless; when it comes to Too Big To Fail, which, let’s face it, is a pretty technocratic issue, I suspect we feel even more helpless.

Update: One reader wrote in to say that Florence Savings Bank (also in Western Massachusetts) also refunds depositors’ ATM fees incurred at other banks.

By James Kwak

49 thoughts on “Bank Switching Costs

  1. Calling them “natural monopolies” is ridiculous. It would be impractical to have 40 companies pulling cables into your basement; that is the only reason utilities are “natural” monopolies.

    Huge banks are not “natural monopolies”; they are simply monopolies. Once upon a time, the people of America and her leaders knew what to do with a monopoly. The former are now too busy watching reality television and the latter have simply been bought off.

  2. I stay with the big bank because I am a retired employee of the bank and have benefits that others don’t. I also know exactly who to call if I have a problem and can call them directly. Even then, I have given serious thought to changing banks. The deck is stacked against the customer of the large bank, not by design but by the culture of never admitting a mistake. When a customer has a problem it will remain the customer’s problem – scary stuff when the bank’s nightly ledger postings rarely balance.

  3. My father turned me on to Credit Unions years ago. Credit Unions give higher rates on savings and lower rates for loans. Less fees and better service. I STRONGLY recommend anyone who is changing accounts, or thinking about changing accounts to give Credit Unions a good and long look. Membership rules are much more liberal than in the past, so make sure you check it out.

    Credit Unions are a slam-dunk over banks.

  4. On principle, we’ve moved from BoA to a local credit union. It was a pain, and my wife only endured it because it makes me feel better. I just couldn’t grimace over TBTF and not move. Even then it took some time to work up the gumption to arrange and execute.

  5. Hear, hear.

    I have been with my credit union for years. I can use any ATM in the world and they will refund the fee. (I do make an effort to use their native ATMs, however. They treat me with respect, so I return the favor.)

    Last year I canceled my BofA credit card. That was the last account I had with any large financial firm. I got a new Visa from my credit union that gives me 1% cash back on all purchases. That is good enough, and my conscience is clear.

    Click here to locate a credit union near you.

  6. It must be a common trait among readers because I too have been with my credit union for years. Recently I just convinced my girlfriend to switch over from BofA. It didn’t take much convincing after they practically swindled her parents’ savings in the name of “fees”. I really wish everybody would stop using these large banks.

  7. I don’t switch because here’s the chain of events I (properly) fear:

    *I change 20 direct auto-bill-pay accounts
    *4 of them don’t get swapped properly
    *I get charged 4 non/late payment penalties
    *Using various receipts and documents as browbeating, 3 of the recipients agree the switch problem is their fault and waive penalties and fees
    *One company refuses to budge and either I pay $75 or watch my credit score dwindle into nothingness…

    I’ve had similar experiences happen more than once just staying in place, I’m terrified of trying to move.

  8. I’m retired & 73. My youngest daughter called me several months ago & said, “dad, lets get out of BofA. The fees are killing us.”

    So we switched to a local Credit Union. It was very easy, took only a few days. And I needed something useful to do. And the service is excellant. Screw BofA, Goldman, etc.

  9. I’ll add another voice for Credit Unions. I’ve banked with one for years, they have all the services I want or need, and their loan and savings rates always beat anyone I compared them with.

    James, you’ve made your decision and I’m sure you have good reasons for the choice you’ve made, but for all the great reporting you and Simon have done complaining about too big to fail and out of touch institutions, I’d love to have you trumpet the advantages of Credit Unions more.

  10. I am very sympathetic, but I have a few additional reasons for not switching:

    1. My mortgage is with a big bank that does 90+% of its own servicing, so I have not had my servicing sold off to Countrywide or any other organization more heinous than the big bank itself. The mortgage also gets me free checking. When I checked with a couple of local credit unions about getting a local mortgage, they said they would send my application to a giant credit union mortgage servicer located in Texas, and I would not get a particularly great rate or any of the benefits I get from the big bank.

    My employer banks with one of the large banks, so they offer me benefits for direct depositing my paycheck.

    I can find a fee-less ATM almost anywhere. And no way am I ever going to gather up my ATM slips and send them in for a $5 refund every month.

  11. Here’s another vote for credit unions. I tallied up the fees I was paying and the interest received and discovered that I was hundreds of dollars per year better off with my local credit union. And the fact that I can walk in and talk to a banker about my accounts and that they hold my mortgage and haven’t sold it matters to me. As for ATMs, all I have to do is find the nearest credit union with my phone and it’s fee-free. I don’t see any reason to deal with a big bank.

  12. I got fed up with the big banks and all their sneaky fees about 15 years ago, back when I was broke as a joke. I moved around the country and ended up with two credit union accounts, one in Austin and one in Seattle. The Seallte one had free online checking (they practically forced me into it, but now that I like it, it seems like other credit unions are trying to charge a premium for online banking). Unfortunately I closed the Austin account about a year before moving back here.

    So now I have a credit union 2400 miles away. They too are getting creative with fees. It used to be that if I overdrafted my checking they would take it out of my savings for free, so I never paid any attention (it happened once in 5 years). Then it happened again and they charged me $20 when there were tens of thousands of dollars sitting in my savings account to cover a small check. So I am becoming wary of my CU too. But the main drawback is the ATM fees. For years WaMu didn’t charge them, so I went to WaMu for my ATM. Now I have to go to 7-11 for the Citabank ATM. When that deal ends, I may have to find a local credit union that doesn’t have too many fees. Besides the ATM thing, I’m finding it hard to beat the deal I have now.

  13. I wouldn’t worry too much about the credit rating for a little ding like that. Many if not most Americans will be in much worse shape than that the way things are going…

  14. So who’s plotting the histogram?

    2 biggies, 1 CU, and USAA. One of the biggies is European w/ a local branch that has been great so far. I can’t convince my spouse to leave the other one (see the excuses listed above).

  15. I bank with USAA as do my parents and a couple of my siblings. They’ve treated us quite well. I’m one of those people who doesn’t have enough money to pay attention to interest rates so I can’t really evaluate them. USAA automatically refunds fees for using other bank’s ATMs, no submitting claims required. They’ve always given me great service.

    Someone should start a campaign asking people to leave the big banks for small banks/credit unions as a way to make a civic statement. If enough people leave, one or two of the banks might get to the point where the government has to choose between an orderly resolution and another bailout. At minimum it would improve both the finances of people who participate and those of the small banks. Not that anyone reading this has a public profile suitable for launching such a campaign…

  16. And the true nature of auto-bill pay finally becomes clear, doesn’t it? Ever wonder why the banks push it so intensely?


  17. The FDIC is a big part of the problem. Failing banks have been using that guarantee to offer above-market CD rates for two years now, to the detriment of more conservative competitors. In fact, some otherwise outraged individuals I know have taken advantage of this situation.

    The FDIC will be going to the Treasury soon enough, and then the “guarantee” will be coming out of our own hides, to paper over the already pocketed profits the banks have paid out over the last decade.

    It’s another fine idea that has bread ignorance, dependence and helplessness in the general populace.

    Speaking of which, how about a post on the California pension situation?

    Not every day that the Treasurer of the eighth largest economy in the world admits his government is bankrupt.


  18. Switched to USAA from BofA over the last year. Aside from causing my caveman-side a bit of angst in not having physical access to a branch, it’s been great.

    And there are other, shinier ways to satisfy my caveman side.


  19. To be bluntly honest: as the itty bitty individual customer I have been a customer at large banks for a while because most smaller banks and credit unions treat the convenience modern technology (particularly the internet) can bring as a foreign concept or a luxury. The internet is the great equalizer, the thing that can facilitate relatively cheap addition of convenient services to your customers, and small banks are *still* to this day treating that necessary competitive tool as optional.

    It’s no longer optional. To compete, you need to make things convenient to me. That convenience saves me a lot of time. Phone banking is not convenient, expanded hours are not convenient. Banking in 30 seconds from my desk over my water break at work *is* convenient.

    I know this doesn’t deal with why businesses might need big banks, but it’s why big banks have the smaller customers like me. As much as I’d like to tell the big guys to shove it and use a small local credit union, the convenience makes a difference. If the little guys would stop using 1960s tech to run a 21st century operation, they’d have me as a customer in a second.

  20. Glass-Steagall was the check for the FDIC, from what I can tell. No problems of this magnitude until it was repealed…

  21. I have my money in a very large (TBTF) bank, but have used the same bank for many years. I had, at one time, incurred overdraft fees because of an honest mixup. They refunded every penny of more than two hundred dollars in charges. Each branch operates as its own little bank, so there is never a question of getting good service. When I phone them, they are responsive, they are very near by. My ATM card has twice been violated, and in each case they made the correction and change for me quickly and easily. I have very little cash, so there is really no question of security.

    All of that having been said, I would change in a heartbeat if they started pulling stuff on me. I don’t like some of the things they have done, but I am not sorry to be using them. I would be in favor of every kind of regulation to tame the really bad violators (i.e Citi, Goldman, etal). I don’t consider my bank to be one of those, although it is frequently mentioned in the same breath.

  22. There are lots of small(er) banks with a very sophisticated internet infrastructure. Indeed there are small banks that specialize in internet banking. The internet is basically the only way I connect with my bank (USAA). You might have to look at several small banks before you find one with amazing internet banking tools, but good web services aren’t limited to the big banks. The key to being satisfied with a banking change is to switch from a large bank to a good small bank, obviously a bad small bank isn’t likely to be better than a large bank.

  23. To increase competition we should just make the switch between banks easier. Like for telephone companies whereby you can keep your telephone number and the new company takes care of it.
    In Belgium, as from November 1st, to enhance competition they make the switch easier and your new bank, must according to regulations, just takes care of all your changes and moves all your accounts informing all counterparts. That is a way to increase competition and break monopolies like in telecommunication.

  24. One thing to watch for… Some banks have special paperwork to close an account. i was told I didn;t fill out the right paperwork to close my Wamu account after Chase acquired them. Chase then added $135 in fees…

  25. The issue is access to large networks of ATMs without having to pay $2 plus dollars for getting money out. I was in a credit union but found the fees for ATMs outweighed the better interest (on my puny savings).

  26. My brother got mad at his bank and switched. His new bank was promptly acquired by the old one. With all the mergers in the banking industry, people may be reluctant to switch. You can just wait and the bank changes for you.

  27. atm fees suck (and the atm fee reimbursements offered by credit unions tend to be complicated or insufficient)

    bofa has atms everywhere

    people stick with bofa

  28. This is why I plan in advance… I haven’t had to use an out of network ATM in the United States in over a decade, and I’ve stuck mainly with small banks and credit unions. Despite travelling outside my home state, I’ve only once used an ATM outside my county in the last five years.

    I do carry more cash than most, but even then, I tend not to need to spend it. $150-$250 is usually adequate for a week’s cash on a business trip to North Carolina (my most frequent domestic business destination) or a weeklong visit to my parents in New Jersey.

    I’ve been accused of overplanning, but I’d rather overplan than give money to banks.

  29. I’ve been banking with the same CU for nearly 5 years. I’ve rarely paid any ATM fees. My CU has ATMs in my workplace. Every Friday I withdraw enough cash to last me the weekend. When I travel I take a few hundred dollars in cash and pay with my credit card (also from my CU) as much as I can.

    I five years I’ve found myself in situations where I had to use big bank ATMs probably less than 5 times. You just need to be a bit disciplined.

  30. Here are my personal reasons for using the Big Banks, which may or may not shed light on the monoploy issue. I have two checking accounts. One is at Citibank and one is at Bank for America! So both my checking accounts are at the two banks most likely to go under.

    Am I crazy? Well, I live and work in Manhattan. So the friendly local hick credit union isn’t an option. There simply aren’t any here. I’d like to have an account at a bank where I can actually walk to the branch. In Manhattan, only the big banks can afford the high commercial rents to have branches.

    I also travel quite a bit and would like a checking account at a bank where there is some chance of being able to use my ATM card. That pretty much means having a Citibank or Chase account. I’ve always had problems accessing my BofA account when I’m outside the US, but am usually able to access my Citibank account. When I’m in Brazil, I’ve discovered that I can withdraw money using my Citibank ATM directly from a Citibank branch in Brazil -there are usually a couple in each of the major cities- and that is pretty much it. I would be pretty much SOL if my only account was with a locally based credit union with a few branches in the US.

    So I stay with the big banks because they are more convenient for me. I’d imagine if I was retired, and living in a small rural town, and rarely left that town, I would use whatever small local bank was there instead. I agree that for various reasons the hick banks are in much better shape at the moment.

    My two accounts are both well under the FDIC limit, though I’m pretty sure that at least Citibank would be in line for a federal bailout if things got too bad. I’m more worried about the US federal government solvency than the big bank solvency at this moment.

  31. Three cheers for Greenfield Savings bank (in business for more than a century).
    An argument for using a local, small bank is that its more likely to loan capital to business in its market area than a large national TBTF bank. Some years ago, New England Economic Review (Fed. boston) published an article that examined bank concentration and investment patterns. At that time Bank of New England had yet to be purchased by whomever got it, but what stood out was that while it took deposits all over the region, its investments were elsewhere (e.g. Latin America.
    In Italy, the casse di risparmio (savings banks) must by law, invest a significant % in their own region. A few of them are fairly large (e.g. Cariplo)
    NE EC review also noted that as banking becomes more concentrated, the costs consumers are charged for services inevitably rise. Witness credit card fees, overdraft protection, ATM charges etc.

  32. I’m looking into ING Direct and Charles Schwab as alternative checking accounts because the they have no maintenance fees, yet interest bearing checking accounts. CS say they even reimburse all ATM fees.

    Anyone had some experience with either?

  33. James said: ¨… but I’d rather overplan than give money to banks.¨

    We can pretend to be keyboard revolutionists, and our outrage is completely justified, but it does not change anything (so much for change you can not believe in….).

    The WH/Congress route is clear: shovel the bad assets out of the banks and onto the taxpayers, bail-out the banks with hundreds of billions, to be paid for by issuing RECORDS of treasuries — this week alone $ 123 billion: WHAT!!! $ 123 billion in a week; it used to be we needed that in a year — and guess what… government sachs et al. get money for free from the FED with which they buy those treasuries, getting 3.5% interest from the taxpayers, letting those banks ´earn´ almost record profits, etc. etc.

    If we do not like that process: wealth transfer from middle class Americans to the few bonus banksters and friends, than we have to STOP it ourselves.


    Sorry to use caps, but it is utterly incomprehensible to me how a few hours of ones life spent to search for a non-TBTE and not bailed-out bank, would me too much. Really, it are the BEST hours of your whole life.
    Individually we are quite powerless indeed, but collectively we can stop this theft and injustice.

    How long do you think these TBTE banks could continue if we organize bank runs?!
    Please take action yourself, and tell all your family and friends to do the same.
    See among others:

  34. Has anyone addressed the catch-22 with the credit rating services which is happening? Assuming a good credit rating is a good thing, which seems reasonable- if I dump my cards, my credit rating will suffer. Hence, in order to maintain my credit rating I’ll have to keep my cards and continue to pay their fees e.g. user, inactivity, etc.
    No big deal to some, but very irritating to me. In fact with just the slightest amount of collusion between bank and credit rating service this kind of cleverness can really amount to a lot of cash for both parties.

  35. And, frankly, switching costs have increased over time. In the mid-1970s, I switched banks three times in one year, because of lousy service. But, then, all that meant was closing one checking account and one savings account and opening one of each elsewhere. No direct deposit to deal with, no automatic payments/debits. No ATMs, so no ATM fees.

    Furthermore, if one moved, one absolutely had to change banks (no direct deposit…).

    What we now routinely do through our banks has become much more complicated, so switching has become much more costly. And as we develop new ways to use financial institutions (and as financial institutions develop new ways to do things), the costs of switching can only rise.

  36. I mostly don’t use ATMs. I make purchases at stores that provide cash back. No ATM fees. No problems. (I live outside Chicago and have done this in New York, in central Florida, in southern California…)

  37. Just an FYI Ed, most credit unions belong to the Credit Union Service Center Network. That means you can use just about any credit unions branches no matter where you are in the US; and if you’re overseas near a US military base you probably have access to the base military credit union.

    The other option is to find a credit union like the one I work for where you can create inter-institutional account transfers. Then you could transfer money to a “big” bank when you really needed access outside the US.

    Oh, and for your information, it’s impossible for the US government to be insolvent. You (and I) may not like the financial situation but the government can not run out of US dollars – they just make more.

  38. I recently refused a change in my interest rate at JPM Chase card, on their offer. They closed the account. I owe nothing on it.

    I feel free of them at last!

    But have I screwed my credit rating? And for how long?

    Do any of us know what we’re doing, really?

  39. As I have before, I again suggest to those looking for a cu to investigate mine, NuUnion, formerly the State Employees CU, based in Lansing, MI. Fully Internet integrated and pays 4.5% (up to $25,000) on checking accts. ( must make 14 debit card transactions per month to obtain interest)…but try to match that on any CD! I have been a member for 30+ years; while I have also had mortgages with large banks, my day to day financial business has been with credit unions and always will be.

  40. we got monopolies up the wazoo. Arguing about whether they are natural or synthetic or whatever the heck you try and assert here is pointless. I think the whole point of the article is people are defenseless against these behomoths. Unless they band together and make coordinated consumer oriented thrusts they will be stuck with these giant things stomping around their garden patches forever.
    I had a fee free checking acount with the fractional bank, I found out they had imposed a fee on my employee for cashing a check I wrote on my account with them. A fee to cash a check that was written from that bank. So they lied to me about the fee free. When I brought it up they said something like everyone else (ie. the price fixing monopoly) does it, where have you been for the last decade or two? So I closed my account with them or tried to. There was a $50 fee for closing my fee free account. I later found out they were one of the regional sized banks that still owed tarp funds and still couldn’t pay it back. I now have a business account with a bank I do not respect or want to be associated with. I have a balance of zero dollars and zero cents in it. But I can’t close it unless I want to pay them $50. They can wait for snowballs in heck before I’ll think about giving them 50 bucks.

  41. Folks,

    Credit Unions are excellent in so many areas:

    1. Transparency Depth x Breadth via includes detailed quarterly financials via “5300 Reports” (balance sheet, income statement, loan details, investment details, expense details, etc).

    2. Low/no fees and higher rates – like any financial institution they make money on loan/investment vs deposit spreads and have low opex due to no Wall Stree Salaries and Dividends to Shareholders

    3. Member owned not shareholder owned

    4. ATMs – include any/all Credit Unions, most all 7-11’s, many refund fees when charged

    5. Full portfolio of loan products: home, car, credit card.

    6. Full portfolio of services: online, branch, safety deposit

  42. Credit unions, CDFIs, and local banks can all be wonderful, though you do need to do ordinary homework. There are an awful lot of former local banks that have become part of something bigger and more distant. But it is possible to find something stable that lends to the kind of people you’d like to lend to.

    If you don’t think you can live without the big bank’s ATM network, you can always maintain a rudimentary account relationship for that and put your serious savings account someplace that actually pays interest.

  43. I have an ING account, both an equity line of credit and a savings account. Their telephone staff are courteous and professional. The online site is easy to navigate and the security measures seem strong.

    I have just received a Schwab VISA card, after applying on the telephone only five days prior to receiving the card in the mail. It pays 2% cash back, there are no ATM charges (they are refunded), and there are no foreign-exchange fees (a great feature if you travel or purchase international products online).

    Both companies are heartily recommended.

  44. How come there is no discussion here of the subsidies credit unions receive? Banks pay taxes, usually at about 39%, but credit unions pay none. I know they are shareholder owned – so? It seems like everyone else in the economy, especially small business is paying for this loophole. Why shouldn’t credit unions pay taxes the same as community banks? Make them both comply with the Community Reinvestment Act.
    I suspect credit unions would confront the same economic reality that banks face if they weren’t continually drinking from the public subsidy trough. They were started to help disadvantaged local groups, and that was legitimate. Now they have virtually no membership requirements and anyone can belong. I don’t like the big banks but this isn’t right either.

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