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What the Reported Earnings of the Big 4 Banks Means for You

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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The big four banks (Bank of America, Citi, Chase and Wells Fargo) have all reported their earnings for the third quarter. In the last three months, the largest banks continued to generate mega-returns from their consumer business, which offer basic bank accounts, credit cards, and other loans.

At MagnifyMoney, we believe in following the money. If you understand how banks make money, then you can figure out where you can save the most by completing a price comparison, ditching and switching.

Deposits: “Rate paid on deposits remained low”

The big four banks continue to pay close to nothing for retail deposits. Banks borrow at close to 0%, only to lend at much higher rates.

  • Bank of America has $545 billion of deposits in the consumer business. In their presentation, they brag that “rate paid on deposits remained low at 6 bps in 3Q14”
  • Citibank has $165 billion of deposits in the North American consumer business (and a lot more from the rest of the world).
  • Chase has $492 billion of deposits, and they are number one in deposit growth for the fourth consecutive year.
  • Wells Fargo does not split out their consumer and corporate deposits. But they did show that the $1 trillion of core deposits cost 0.1%.

We are putting trillions (with a t) of dollars into bank accounts that pay nothing, helping to increase the net interest margin of banks. There are alternatives out there. Currently, Internet (branch-free) savings accounts are paying 0.95%. You can see the best rates on our savings account page.

Fees

Banks like to charge fees. And one of the biggest sources of fee income is the dreaded overdraft charge on bank accounts. In quarter three this year; we have seen continued growth of the fee income line. I always enjoy the commentary in the investor section. The audience for the presentation is the shareholder. So, they celebrate higher fees and higher interest charges. What is good for investors is not good for customers. Here are some examples:

  • Bank of America: noninterest income improved from both comparative periods driven by higher service charges and card income. 
  • Wells Fargo bragged that “deposit service charges up $28 million LQ.” That means they charged $28 million more in fees during Q3 2014 than they did in Q2 2014.

Bank are generate significant fee income from overdrafts. There are alternative products that do not charge overdraft fees. You can find all of the accounts in our marketplace, but a few of my favorites are here:

  • Bank of Internet: no monthly service fee, no overdraft fee and all ATM fees are reimbursed the next day
  • Ally Bank: no monthly service free, free overdraft transfer service, and all ATM fees are reimbursed at the end of the month

Interest on Credit Cards

Banks generate a lot of income from interest rates on credit card debt. That is why credit card businesses have the highest Return on Equity (ROE) out there. If you charge 15% (or higher) on credit cards, and pay well below 1% on deposits, you can generate a great return.

And the credit card companies had incredible earnings. In fact, the Wall Street Journal reported that credit card companies are on track to generate $159 billion of revenue this year.

The only way to fight the trap of high interest rates on your credit card debt is to pay off your debt as quickly as possible. And, to pay off that debt, you need to:

  1. Get your credit score above 700. We have tips here.
  2. Once you have a good score, accelerate your debt repayment by shifting that debt from a high interest rate credit card to a low rate using a balance transfer. You can see the best offers here.

In Conclusion

Banks are continuing to generate high returns on their consumer businesses. They do it by paying very little on deposits, charging high fees on checking accounts, and charging high interest rates on loans.

A savvy consumer will look for ways to attack each of those revenue line items. You can exponentially increase the interest rate on your deposits by switching to a branch-free bank. You can eliminate checking account fees with a branch-free bank. Credit unions, like PenFed, offer amazing balance transfer deals to cut your debt. I have helped people save thousands of dollars by doing those three simple steps. You should see if you could do the same thing, because bank earnings will only continue to increase. And that money comes from you.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Are Bank Branches the Next Blockbuster?

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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First, I must confess that I love bank branches and always have.  As a child, I used to enjoy going with my mom to the bank.  The people were friendly, the lollipops were tasty and I had a real sense of accomplishment when I could deposit a roll of coins.  My affinity for bank branches makes this article particularly difficult for me to write, but it contains good news for all of you out there who would rather do anything else other than go to a bank branch.

You can finally switch to internet-only banks and put hundreds of dollars back into your pocket.  Real choices finally exist.  In fact, after doing the research on the best bank accounts for MagnifyMoney, I switched to Ally (both checking and savings account).  And I doubt I will ever go back to branches.  (Note: I have not been paid by Ally, and they are not a sponsor or investor in this site).

How do traditional banks make money?

I used to work for large banks (like Citibank and Barclays).  Retail banks branches are expensive to run, but banks banks make a lot of money with their brick-and-mortar locations.  So, how do banks make money?

1.  You give them interest-free loans.  If you keep a lot of money in your checking and/or savings account (usually $2,000 is enough), the bank makes money by paying you virtually nothing, and then lending that money in the form of loans that make a lot more money.  When I worked at a bank, I loved “sticky, low-cost deposits” to fund our business. Every $1,000 you keep at the bank is about $20 of profit to a retail bank.  $20,000 savings accounts were the best.  We would make at least $400 a year.

2.  You pay them lots of fees.  If you don’t have a lot of money, then banks will make their money on fees.  Banks make the most money on overdraft fees.  Almost 70% of their revenue comes from overdrafts – which is the most expensive way to borrow money short-term that I have ever seen.  In addition, banks make a good chunk of money with monthly maintenance fees (those pesky charges if your balance falls below a minimum) or ATM fees (you use someone else’s ATMs).

And, although fees vary by bank – the differences are not dramatic.  The monthly fee at Citibank is $10 per month.  At Bank of America it is $12 per month.  You can save a little money at Citi, but the difference is marginal.  That is why building branches made sense for banks.  The product offering did not differ much – so people would choose banks based upon the proximity of the branch.

Credit unions are usually a little bit better than banks at both fees and interest rates.  Why? Because they don’t have shareholders.  Their customers also own the credit union, so the goal is to pay higher deposit interest rates and charge lower fees.  They do a decent job of lowering fees — credit unions have many more free accounts and much lower monthly and overdraft fees.  But while they can be dramatically better on some fees, they still tend to have hefty overdraft fees ($25 average instead of $35) and low interest rates on savings account (PenFed pays 0.05% compared to 0.01% at Bank of America).

Enter internet-only banks….

How do internet banks create a revolution in banking?

Amazon is able to charge less than Barnes and Noble.  Why?  Because they don’t have to pay for all of those bookstores and people.  Internet banking is no different.  By removing branches, you are removing the single biggest cost of banking.

So what can internet banks do with all the money they save?  They can slash the cost of routine, everyday banking for you and save you the cost of gas.

How does that add up for you?

  • Dramatically higher interest rates on your savings

The Bank of America Savings Account pays only 0.01% interest rate. Compare that to the best online savings accounts.  Right now Ally is paying 0.87% on savings, with no minimum.  So, you could earn $50 at Bank of America, or $435 at Ally on that $50,000 deposit!

  • Dramatically lower fees on your checking account

Ally, Charles Schwab and Bank of the Internet Rewards Checking (just to name a few) have no monthly fee, no minimum deposit and no requirement to keep the account free.  A real free account.

  • Actual overdraft protection

Online banks are revolutionizing overdraft charges.  Ally, Schwab and Bank of the Internet let you link your savings/money market account to your checking account.  If you make a mistake, they will transfer funds from your savings to your checking account – FOR NO CHARGE!

If you actually need to borrow money, Capital One 360 has created a line of credit that is linked to your internet checking account.  There is no overdraft fee, and interest is charged only for the days that you use the line of credit.  This is an incredible deal.

  • Reimburse you for ATM fees

Not only do internet banks not charge you for using other bank ATMs, but they also reimburse you for any charge that you may receive from the other bank.  Ally and Schwab have no limit on the reimbursement.  You can use any bank’s ATM for free!  With my Ally checking account, I happily go to the closest ATM when I need cash – and I don’t worry about fees.

  • Deposit checks with your mobile phone

MagnifyMoney did a survey of Americans, and the #1 reason people go to a bank branch is to deposit a check.  Now you can deposit a check by taking a picture with your mobile phone.  Ally Bank allows you to deposit checks with a value up to $10,000.  Thanks to the power of your mobile phone camera, you really don’t need a bank branch.

In an ironic twist: banks have made this revolution themselves. They have gone out of their way to push us into digital channels.  They want us to give up paper statements, deposit checks with our mobile and use the ATM.  Why?  Because they want marginal cost improvements.  Fewer people in the branches.  More part-time employees in the branch. But banks keep the savings of our digital banking.  They want us to make the digital switch so that they can make more money.  But  now we can make more money by switching to internet banks.

But are they safe?

Yes, they are safe.  All of these banks are FDIC Insured.  That means you have the same protections and rights as any other bank (up to $250,000).

In addition, a lot of these banks are actually being created by well-known financial organizations.  Ally has been created out of the shell of the old GMAC.  Charles Schwab is already well-known brand in its own right.  And some of the new entrants have been rapidly acquired by banks that know the world is changing.  Simple, an internet-only bank, was just acquired by BBVA – one of the largest banks in the world targeting Latin America.

Is the future finally here?

People are remarkably loyal to their bricks and mortar bank branches and banks know that. So, they pay 0.01% on deposits, charge $12 per month and $35 if you go overdraft.

But, for the first time, real competition is coming.  At MagnifyMoney we are thrilled to see the competition, and the money that it could save you. You can just see that these businesses have been designed to delight and satisfy customers. When my Ally Bank CD expired, they sent me a letter and gave me a loyalty bonus.  My rate would be 0.15% higher than the highest advertised rate – to thank me for being a customer!  Most traditional banks do it the other way.  They give big teaser introductory offers to get you to switch, and then it only gets worse over time.

But now with Ally, Schwab, Bank of the Internet, Simple and others – we will have a big incentive to switch – because the savings will go into our pocket and not the banks’.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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