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.
A recent example: At least 700,000 consumers left their bank of choice and joined a credit union during the second half of 2012, according to Pat Keefe, a spokesperson for the Credit Union National Association (CUNA). Credit union membership has grown to almost 95 million members in 2013, from 83 million in 2004, according to CUNA.
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 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. Last year, more than 2,200 branches shut their doors, and that trend is expected to continue in the coming years.1
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.2
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. The tightened rules have helped many consumers, but have been hard on some banks, which have seen some fee revenues decline and have sought to build new revenue sources.3
Still, banks have recently been raising fees again. The average monthly checking account maintenance fee was about $5.50, up from less than $2 in 2009. ATM fees have also gone up for noncustomers to use bank ATMs, rising to an average of $2.60 in 2013, up from less than $1.50 in 2003, according to Bankrate.4
"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.
The case for 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:
Consider FDIC insurance. Bank accounts are FDIC insured up to $250,000.5 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.6 "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.
The case for 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.7 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."
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917