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.
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:
- Get your credit score above 700. We have tips here.
- 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.
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.