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Do you really need a bank?

The answer may not be as clear-cut as it once was. Consider the alternatives.

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Stopping by the local bank branch used to be part of most Americans' everyday routine, like picking up milk and bread at the grocery store. But in recent years, a changing technological and regulatory landscape and a steady onslaught of fee increases at banks has helped erode the central role they once played in many people's lives.

In response to these and other issues facing banks in recent years, many brokerage firms have started offering their customers a range of financial services that are similar to those found at conventional banks. "Brokerages have come to believe they can offer all the primary services a bank would offer, either directly or through third-party arrangements," says Sam McLimans, senior vice president of cash management at Fidelity Investments. "These include the ability to write checks against brokerage accounts and link debit cards to those accounts for easier access via either ATMs or point-of-sale transactions, or through brokerage accounts that have been set up to act like checking accounts."

“Some brokerage firms have also introduced enhanced cash management services, including mobile deposit and bill payment functionality, to better compete with banks,” says McLimans. “This shift has led to more benefits to brokerage customers to allow them to manage their money and investments in one place."

Today's banks are grappling with certain issues

Less traffic in the branches: The rise of Internet and mobile banking is largely responsible for one of the most important trends in banking: fewer visits to branches. Indeed, it's hard to remember the days when it was necessary to visit a branch to perform a simple transaction like a funds transfer. Now most transactions, including mobile check deposits, can be completed with the tap of a finger or a click of a mouse. As a result, banks across the country are closing branches, citing the high costs of operating those branches and the decline in traffic from customers at their branches.

Perhaps as a sign of this changing landscape, many banks have been reimagining the design of their branches and replacing tellers with high-tech ATMs and other interactive technologies.1

Fallout from the financial crisis. The 2008 financial crisis and its aftermath forced new rules, such as those in the Dodd–Frank Act, on financial services firms. These rules include bans on high overdraft fees and limitations on interchange fees, and continue to impose higher costs as they go into effect. 

Fees can add up. The average monthly checking account maintenance fee is about $5.86. ATM fees for noncustomers to use bank ATMs average $2.88, according to Bankrate.2

"Since 2008, the regulatory environment, along with current litigation dealing with mortgages and foreclosures, has become a tremendous burden for banks, forcing them through tremendous change," says McLimans. For some banks, that’s meant branch closings, along with staff and service cutbacks.

Some benefits of brokerage firms

The financial crisis has brought new regulatory challenges to brokerage firms as well. Nonetheless, some of the above-mentioned issues have spelled opportunities for brokerage firms, particularly those whose business models never relied heavily on branches. "Brokerage firms saw a great opportunity to look at their services and find ways to close the gap with banks," says McLimans. For example, some brokerage firms now offer:

FDIC insurance. Bank accounts are FDIC insured up to $250,000.3 But at some brokerage firms (Fidelity included), it is now possible to have uninvested cash balances swept to multiple banks, making those balances eligible for well over $1 million of FDIC insurance coverage.4 "If you wanted to do that at a bank, you'd have to set up differently titled accounts or have your funds literally placed in different banks," says McLimans. "A more convenient way to gain the expanded coverage may be to open one account at a brokerage provider that can automatically cascade your assets throughout its bank network coverage, rather than having separate deposits in a bank or multiple banks."

Cash management services. Brokerage firms don't have as many branches as most major banks, so in the days before online banking, it was difficult for them to offer services that required initial branch visits, such as direct deposit or bill payment. Now that online and mobile banking is widespread, some brokerage firms offer a wide range of services, including direct deposit, mobile deposit, and online and mobile bill payment, as well as check-writing capabilities and debit cards linked to brokerage accounts, most of which previously were solely the domain of banks.

Credit cards linked to investment accounts. Some brokerage firms partner with third parties to offer their customers credit cards that may provide a boost to an individual's investment account. For example, clients using a brokerage-linked credit card might accumulate cash rewards that are deposited in their retirement or investment accounts.

Relief from fees. Many brokerage firms are targeting disgruntled bank consumers by offering cash management services with no or low fees. For example, brokerage firms may offer free check-writing capabilities and reimbursement of ATM fees.

Trouble-free transfers to brokerage accounts. Some brokerage firms allow their clients to link checking and other banking accounts with their investment accounts. This arrangement simplifies the process of transferring money in and out of brokerage accounts—giving clients access to their cash when they need it, or enabling them to add to their investment portfolio quickly and easily. Moreover, consumers can arrange for brokerage assets to cover overdrafts on checking accounts, potentially avoiding steep fees.

Some benefits of banks

Despite the expanded offerings of brokerage firms, banks provide some services that are difficult to find elsewhere. These include:

Availability of personal loans. Most notably, businesses and consumers looking for personal loans are typically best off heading to a bank. "Brokerage firms generally are not in a position to provide this type of consumer lending," says McLimans. This means any consumer who needs a mortgage, car loan, home equity loan, or personal loan is likely to require the services of a traditional bank or a specialty online provider of these lending products.

A way to establish credit. A good credit record means that you have a better chance of qualifying for a loan, and possibly getting a better (meaning lower) interest rate on a loan. This means that you may be able to pay less money (in interest) for the amount of any money you have to borrow. Therefore, putting your money in a bank may benefit you when it comes to applying for a loan or mortgage on that same bank, even if you have higher fees on your accounts.

A sense of comfort and tradition. Many bank customers are just more accustomed to walking into a bank or using their bank's online services. Some people may feel more comfortable with bank services and like having their money in one place. Other people are just reluctant to change their banking practices, or they may value a nearby, in-branch relationship that may be easier to find at a local bank.

Be sure to weigh the pros and cons of any change

So do you still need a bank? Like most financial decision making, there is no one right answer, just the answer that is right for your particular needs and circumstances. Before making any decision, it’s important to weigh the pros and cons of working with a bank versus working with a brokerage firm, for similar services. And given the changing competitive environment, keep a sharp eye on service levels and fees. Says McLimans, "Given how the banking environment is evolving, customers should be wary."

Learn more

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1. Crain's New York Business, "Banks Plot Major Shrinking of Branches," April 26, 2013.
2. Bankrate 2015 Checking Survey.
3. FDIC insurance covers all deposit accounts, including checking and savings accounts, money market deposit accounts, and certificates of deposit. The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

4. The Fidelity® Cash Management Account is a brokerage account designed for spending and cash management. It is not intended to serve as your main account for securities trading. Customers interested in securities trading should consider a Fidelity Account®

The Fidelity® Cash Management Account's uninvested cash balance is swept to one or more program banks where it earns a variable rate of interest and is eligible for FDIC insurance. At a minimum, there are five banks available to accept these deposits, making customers eligible for nearly $1,250,000 of FDIC insurance. If the number of available banks changes, or you elect not to use, and/or have existing assets at, one or more of the available banks, the actual amount could be higher or lower. For more information on FDIC insurance coverage, please visit www.FDIC.gov. Customers are responsible for monitoring their total assets at each of the Program Banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. Refer to the FDIC-Insured Cash (Core) Disclosure Statement and list of eligible Program Banks for details. The deposits at Program Banks are not covered by SIPC.

All Fidelity ATM withdrawal fees will be waived for your Fidelity® Cash Management Account. In addition, your account will automatically be reimbursed for all ATM fees charged by other institutions while using a Fidelity® Visa® Gold Check Card linked to your account at any ATM displaying the Visa®, PLUS®, or STAR® logos. The reimbursement will be credited to the account the same day the ATM fee is debited from the account. Please note that there is a foreign transaction fee of 1% that is not waived, and which will be included in the amount charged to your account. The Fidelity® Visa® Gold Check Card is issued by PNC Bank, N.A., and the check card program is administered by BNY Mellon Investment Servicing Trust Company. Those entities are not affiliated with each other or with Fidelity Investments. Visa is a registered trademark of Visa International Service Association and is used by PNC Bank pursuant to license from Visa U.S.A. Inc.
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Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

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