Small Business

Little Banks vs. Big Banks

The Bank of America debit-card-fee debacle reveals why more Americans should be banking at smaller banks.

Bank of America.

Bank of America

It has not been a good year for Bank of America. The enormous company is hemorrhaging cash, and has had to toss units good and bad overboard in an effort to repair its balance sheet. Its stock has cratered, and even Warren Buffett injecting $5 billion has done nothing to turn investors bullish.

And now it is enraging many customers by announcing a new $5 a month fee for using a debit card linked to a checking account. Hundreds of account holders vented online, on-camera, and just about everywhere else, many promising to close their accounts. Rep. Brad Miller, D-N.C., swiftly introduced a bill preventing big banks from charging fees on anyone wanting to close their accounts. Even President Barack Obama chimed in, telling George Stephanopolous, “You don’t have some inherent right just to get a certain amount of profit, if your customers are being mistreated.”

But Bank of America has every right to charge customers whatever fees it wants, as long as it is transparent about them. (In my mind, a straightforward $5 a month fee is a lot better than dozens of hidden ones. There is nothing truly free about free checking.) And the bank is actually not raking in any profits, let alone vulgar ones. It is deep in the red, and its global card services unit, the one that manages all these debit transactions, is bleeding money too. It lost $6.6 billion last year, according to the bank’s 2010 annual report.

That said, the $5 monthly fee is absurd. Debit transactions are dirt cheap for big banks to process, even with the changes imposed by the interchange reform law, the CARD Act, and the Dodd-Frank bill. The consumer advocates agree. “This fee appears to be unreasonable and unrelated to the actual cost of processing debit card transactions,” Pamela F. Banks of Consumers Union wrote in a letter (PDF) to the relevant congressional banking overseers.

Why did Bank of America choose to impose such a public fee? Why didn’t it just hike the checking-account fee it already charges many customers? Or slap a fee on something that actually costs the bank money, like using paper checks? I am evidently not the only person asking just those questions. Indeed, the debit-card-fee debacle has many people wondering whether there is a better banking option out there: a bank that offers free checking with no minimums, and does not have any silly transaction fees. The good news is: There is—but not where you expect.

If you keep a significant balance in your checking account, you are exempted from the debit charge. But if your checking account drops low—and whose doesn’t—you’re not likely to find a mega-bank that will give you a sweet deal. Wells Fargo, for example, charges $5 a month if you dip below a $1,500 average balance. Citi charges $8 a month unless you “perform any combination of 5…everyday transactions,” like making an ATM withdrawal or setting up automatic bill pay, a strange hurdle to have to bother with. Chase charges $12 unless you meet certain minimum-balance or minimum-deposit requirements.

On top of that, a number of other big banks are testing out debit-card fees, just like Bank of America. SunTrust now charges $5 a month if you make a debit-card purchase. Chase and Wells Fargo are trying out a $3-a-month fee. Expect lots of other little nibbles in the future, as banks have baldly promised to make up the revenue they lost when interchange fees and overdrafts were capped. The big banks appear uninterested in competing with one another for basic-account customers.

So those basic customers will have better luck turning to one of two places. The first are online banks. They tend to have far lower overhead than mega-banks (Bank of America spent $4.7 billion keeping its many branches open last year). And they are lobbying hard to win over customers fed up with the big banks. Therefore, many of them keep basic checking accounts and debit cards totally free. ING Direct offers a free “electric orange” checking account, for instance. And Ally bank offers basic online banking, bill pay services, a debit card, checks, and overdraft transfers for free too. In both cases, you can use most other banks’ ATMs to withdraw cash with no fees.

The second option is the neighborhood credit union. These are small-business non-profits that have no interest in generating overkill fee income. The vast majority offer basic checking and debit cards for zilch, and many offer better customer service than the big guys to boot. (Find a local credit union here.) Apparently, word has caught on. The massive Navy Federal Credit Union and numerous others have reported surges in enrollment since Bank of America announced its fees.

So who should keep banking with Bank of America? Well, if you keep plenty of money in checking and savings, have an investment account, and take out loan products, the big banks want to keep you around and tend to throw in many services for free. But for very basic banking, smaller, webbier, and more local alternatives tend to be better.