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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.

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.

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. Some brokerage firms have also introduced enhanced cash management services, including mobile deposit and bill payment functionality, to better compete with banks. This shift has led to new opportunities for brokerage firms and their clients."

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 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 on financial services firms such as the Dodd–Frank Act. These rules, including bans on high overdraft fees and limitations on interchange fees, 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 revenue decline and sought to build new revenue sources.3

"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

Since the 2008 financial crisis, there have been 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

Consider FDIC insurance. Bank accounts are FDIC insured up to $250,000.4 But at some brokerage firms (including Fidelity), 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.5 "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."

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 checkwriting capabilities and debit cards linked to brokerage accounts that previously were the sole 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 IRAs.

Relief from fees

Consumers have grown increasingly frustrated with bank fees, particular those on services they expect to be free. 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 checkwriting 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. The 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.6

Less paperwork

Moreover, some consumers may be reluctant to change their banking practices because of the potential paperwork and fees that can be associated with closing and moving their services. Others may value a nearby, in-branch relationship that may be easier to find at a local bank.

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.

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. So, 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."

Next steps

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Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
1. Wall Street Journal, "After Years of Growth, Banks Are Pruning Their Branches," March 31, 2013.
2. Crain's New York Business, "Banks Plot Major Shrinking of Branches," April 26, 2013.
3. Wall Street Journal, "Fed Study Rebuts Banks on Swipe Fees," May 23, 2013.
4. 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.
5. 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®. Your 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 three banks available to accept these deposits, making customers eligible for nearly $750,000 of FDIC insurance. If the number of available banks changes, those banks become unavailable, 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. For additional information, see the Fidelity® Cash Management Account FDIC-Insured Deposit Sweep Program Disclosure (PDF).
6. The National Association of State Treasurers Foundation, "Tomorrow’s Money for Today’s Woman," November 7, 2011.
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®, PLUSs®, 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%percent that is not waived, 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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