The Perfect Time for Bank Shopping

10/06/2011 7:30 am EST

Focus: MARKETS

Bob Carlson

Vice President and Regional Manager, Northern Trust Investments

Financial re-regulation, known as the Dodd-Frank law, is costing consumers a bundle, and here are a few tips to make sure you're not stuck paying more than you have to, writes Bob Carlson of Retirement Watch.

Dodd-Frank was supposed to be a pro-consumer, anti-bank law. The law did close a lot of ways banks were making money.

But the banks aren’t poorer for it. They’re increasing other fees and dropping services in order to maintain their revenues and earnings. Of course, they’re also looking for ways to recover some of their losses from bad loans made during the pre-2007 boom.

You don’t have to sit still for the higher fees on checking accounts, debit cards, and other services. If you do, your bank likely will take several hundred dollars annually from you. Otherwise, it's a good idea to look around for alternatives to your checking account.

  • Before looking around, be sure you're getting the best deal possible from your current bank.

Most banks will give credit for all your accounts with them when computing fees. And many fees generally are reduced or waived for customers with higher balances. Credit card and mortgage balances often are counted for this purpose. If you have a mortgage with the bank, you shouldn't be paying fees for checking.

Of course, the bank might not give you the best deal on the mortgage, and the savings from getting your mortgage elsewhere with a lower interest rate could be more substantial than the bank fees. Or you may not have a mortgage. In these cases, you should shop around for better checking alternatives.

  • After looking at banks in your area, take a look at online banks and brokerage firms.

In fact, you may not need a bank checking account. Some of the best deals on checking accounts are at brokerage firms.

Online accounts, whether at banks or brokerages, can be found without most of the fees charged by traditional banks. You should be able to avoid monthly fees and minimum balances.

Many also will not charge for check printing, overdrafts, and foreign transactions. A brokerage, for example, often will transfer automatically funds from your investment account to the checking account when needed to cover checks or withdrawals.

Many of the online banks and brokerages waive all ATM fees. Most conventional banks don't charge fees on transactions their customers make on their own ATMs. But use another bank's ATM, and you are likely to be charged fees by both the bank owning the ATM and your own bank.

The fees usually are a dollar or two by each bank per transaction. Many online banks and brokerages will pay the fees charged by the bank owning the ATM, and not charge you a fee for using it.

The online banks and brokerages also will pay interest on checking balances, even very low balances, though the yields today are extremely low. The online banks and those associated with brokers are FDIC insured.

The discount brokerages are leaders in this field, including Charles Schwab, Fidelity, and TD Ameritrade. The most popular online banks are ING Direct and Ally Bank (part of GMAC Financial Services).

The downside of online banks and brokerages is that you don't have a place for in-person transactions, especially deposits. Some of the brokers have offices around the country, and you may live near one of them.

Otherwise, when you are paid with a paper check you have to mail it to the bank and wait for it to be processed and credited to your account (which usually takes a few days). Questions, complaints, and other transactions are handled online or on the telephone.

Another potential downside is it may be harder to obtain a home equity line of credit or other loan from a local bank when you don't have a checking relationship with the bank, or you might have to pay a higher rate on the loan.

  • You might even want to completely dispense with a traditional checking account.

You’ll find many younger people doing this, and there’s no reason you shouldn’t consider it.

Instead of a checking account, make all your purchases with debit cards associated with a savings or brokerage account or credit cards. Almost every retailer now accepts plastic for payment, even taxi cabs and fast food restaurants.

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For the few times you need cash, you can make use of an ATM. Again, you can look to online banks or any brokerage firm as a place to establish an account tied to a debit or credit card.

Many people are rightly wary of making a lot of credit card use these days. Interest rates and other fees are high. It seems to be easier to make a late payment that incurs those charges.

Debit cards deduct charges directly from your account. There is no monthly statement and no fees for late payments. You need to keep enough money in the account to cover your charges.

Regular bills, such as utilities, can be set up to be drafted automatically from an account. You’ll still see a monthly statement, but you won’t have to write a check and won’t risk late payment fees.

When you want a checking account and want to avoid the high fees and low interest of traditional banks, you still have alternatives.

  • Take a look at high-yield or rewards checking accounts.

These pay high interest rates without fees, and often without minimum balance requirements.

The average yield on a high-yield checking account is 2.56%, according to a recent Bankrate.com survey. This is lower than last year’s 3.3%, but its considerably higher than money market funds and certificate of deposit yields.

The yields come with some requirements. Most require at least one monthly direct deposit or automated payment, plus ten or more debit card transactions monthly. Debit-card issuers earn good fees on each transaction, so those fees replace traditional checking account fees and make it worthwhile to pay high interest on the accounts.

Fail to make the minimum number of debit-card transactions in a month, and your interest rate falls to about 0.11% annually, according to Bankrate.com.

Restrictions are being placed on debit-card fees, but smaller banks are exempt. They find it profitable to tie high-yield checking accounts to debit card use.

There’s usually a limit to the account balance that qualifies for the higher rate. Sometimes only a few hundred dollars qualify for the higher rate. Usually no more than $10,000 earns the high rate. Balances above the ceiling receive a rate comparable to other accounts or money market funds.

So far, there’s no dollar minimum on the debit-card requirement. When your goal is to earn high income on cash, you can meet the minimum number of debit card uses with relatively small purchases you’d make anyway, such as purchasing gasoline or lunch.

  • You won’t find these high-yield checking account deals at major national or regional banks.

They are offered by credit unions and by banks that are small enough to avoid the new rules on debit cards, such as community banks. The highest yield found by Bankrate was over 6% offered by the Boeing Employees’ Credit Union. But the high yield is only on the balance up to $500.

Bankrate found 27 banks or credit unions offering high-yield checking accounts nationwide. But you probably haven’t heard of them. They include Ouachita Independent Bank in Louisiana, BankTexas, Danversbank in Massachusetts, and Atlantic Coast Bank of Florida and Georgia. Another 30 institutions offers high-yield checking on a more limited basis.

You want to be sure that in your quest for a higher yield, you don’t spend more money because of the debit-card requirement. Some observers believe the banks make a lot of money on the accounts because of overdraft fees from people who overspend trying to meet the debit-card requirement.

  • Also, be sure to check for other fees that could take away the high yield advantage.

Many of the accounts require online banking and electronic statements. You’ll pay extra for in-person banking or paper statements. You also could pay heavily for replacement debit cards, check printing, copies of canceled checks and statements, and other services.

The new law and regulations haven’t completely stifled financial innovation and alternatives for consumers. You don’t have to settle for the new fees and reduced services of traditional banking. Search for the alternative that meets your needs.

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