The Big Switch: Just How Hard Is It to Change Banks?
WASHINGTON — During the Great Depression, many Americans responded to financial cataclysm by stuffing cash inside their mattresses.
This time, we're taking less extreme measures. We're merely moving our money to another bank.
While undoubtedly a smarter choice, it's also proving to be considerably more complicated than cutting a hole in your Sealy and jamming it full of greenbacks.
First there's the process of choosing a new bank. Then there's the need to open a new account, and to figure out how to disentangle every part of your life from your old bank. Finally, it's necessary to cut ties with the old place without incurring any costly fees. The whole process can easily take weeks or even months.
So how hard is it to switch banks? The answer will play a major role in determining the pace of change in retail deposits over the coming months and years.
Clearly, the number of Americans who are switching banks is now on the rise, as many customers of large banks, long accustomed to free checking accounts, will soon get hit by a wave of new fees.
Bank of America's $5-per-month debit-card fee has gotten the most attention, but in the wake of a new regulation that limits the amount of revenue generated when consumers swipe their debit cards, other big banks are instituting their own charges.
These fees are part of a strategy by some large banks to shed certain customers, especially those who don't maintain hefty balances and don't have a mortgage or another important relationship with the bank. Small banks, credit unions, and Internet banks, all of which have an easier time turning a profit from consumer accounts, are likely to be some of the biggest beneficiaries.
In 2010, U.S. banks with $50 billion or more in assets lost about 4 million more customers than they gained, according to an estimate by Michael Moebs, an economist who is the chief executive of Moebs Services, Inc. This year, he estimates that those same banks, the 34 largest banks in the United States, will lose 9 million-12 million more customers than they add.
"And the small guys are getting them," Moebs said in an interview. "There's no doubt about it."
Like a lot of people I know, I long had a vague feeling that my bank didn't particularly value my business.
When I moved to Washington, D.C. in late 2008, I opened checking and savings accounts at B of A. My decision was based entirely on convenience. B of A's ATMs were ubiquitous, and they had a branch right outside my subway stop.
I didn't have a mortgage or a B of A credit card, so the Charlotte-based bank had only a few ways to make money from me. In theory, they could charge me fees for overdrafts and the like, but I'm typically careful enough to avoid those charges.
They could lend my money and make a profit on the spread, but I maintained a relatively small balance, which meant this revenue would be modest. All that remained, in terms of B of A's ability to profit from my business, was the revenue it collected every time I made a purchase with my debit card. Of course, that revenue has fallen recently.
The end of 2008 was an exceedingly tumultuous time for B of A, as it took $45 billion in bailout funds while trying to absorb Countrywide and Merrill Lynch. But for a time I got the sense that B of A was trying to hold on to customers like me. In late 2009, a sign in the window of my branch offered customers a one-time payment of $35 for using their online bill pay service. I tried it, and found it hugely convenient.
More recently, though, I've been getting the strong sense that B of A would be thrilled if folks like me took our money elsewhere.
Earlier this year, for example, I noticed that the interest B of A was paying on my savings account fell by more than 80% in a single month. The interest I was getting was already miniscule, but it became microscopic. I also observed that B of A's recent advertising campaigns seem heavily weighted toward adding customers to their credit-card business, rather than their retail banking business.
Finally came the news that B of A would charge me $5 during each month that I made at least one purchase with my debit card. This was enough to turn me from a disenchanted but lazy customer into someone willing to do the work to switch banks.
Well, actually, I was willing to do some work, but not a whole lot. I probably should have done more research on my options. But it can be hard to comparison shop for a bank.
As Ed Mierzwinski, consumer director for the U.S. Public Interest Research Group, later told me in an interview, the 1991 federal law that requires banks to publish their fee schedules did not contemplate a world in which consumers shop online. So while banks must provide copies of their fee schedules in their branches, there's no requirement that they do so on the Internet.
To be honest, even if bank fee schedules were easy to find online, I probably wouldn't have done much research. Instead I fell back on convenience. And the bank closest to my home was TD Bank.
Initially I tried to enroll in a new account on TD Bank's website. I felt pretty sure that I didn't make any errors, but for whatever reason, the application didn't get processed.
This is not an uncommon experience, according to a report released this week by Javelin Strategy & Research.
"Only 53% of consumers who applied online to open a checking account succeeded in opening and funding the account. The remaining applicants met with frustration," stated the report, which is based on data from more than 5,000 consumers in March 2011. "About 17% were able to open an account but were unable to fund it, 25% abandoned the process, and 5% of applicants said their applications were rejected."
Two days later, I walked into my neighborhood TD Bank branch, where it took about 20 minutes to open a checking account. At my office the following day, I downloaded the form I needed to fill out to switch the direct deposit of my paychecks to my new bank. Unfortunately, I learned from the form that this process would take 4-6 weeks.
On the other hand, I was lucky not to have any monthly bills that were being automatically deducted from my checking account. These regular deductions — known as automatic clearinghouse, or ACH, payments — are one of the biggest hassles that consumers face when they switch banks.
Consumers must contact the cable company, the electric company, and so on, and one by one, update their payment methods.
"You get hooked on not having to deal with the phone company and electric company and everyone else you send bills to every month," Mierzwinski said, "and it's obviously something that the banks rely on to keep you sticky."
ACH payments have grown from 7.9% of all non-cash transactions in 2000 to 18.5% in 2009, according to research by Moebs Services, Inc. That figure is projected to grow to 28% in 2020, surpassing credit cards.
Moebs told me that community banks and credit unions, which he expects to absorb many of the customers who will be leaving large banks, need to develop a better system for switching over customers' automatic payments.
"The consumer is basically saying, 'I don't want to be with this large bank. But I don't want to go through the hassle of changing all my automatic payments,'" he said. "They find that a huge inconvenience."
Moebs sees a great opportunity for a company that offers small banks and credit unions the ability to say to prospective customers, "'If you have ACH payments, you're not going to have a problem. I will change all of those for you.'"
I haven't yet gotten to the last step in the process of switching banks. B of A doesn't allow customers to close their accounts online. But when the time comes, I expect it to be easy for me to walk into my local branch and close my account.
For some customers, though, this final step can be treacherous. In some cases, banks charge customers fees for closing their accounts early. These fees generally apply to accounts that have been open for less than 180 days, according to Mierzwinski.
In addition, consumers who are in the midst of disputing fees that the bank says they owe can encounter problems getting approved to open an account at a new bank.
These impediments would be addressed by legislation introduced recently in the House of Representatives by Rep. Brad Miller, D-N.C. The bill would give consumers the right to close a checking or savings account at no charge. It would also prohibit banks from reporting closed accounts as delinquent solely as a result of overdraft and other fees.
"It should be as easy to move from one bank to another as it is to move from one grocery store to another," Miller said recently.
Although Miller's legislation has the support of some consumer groups, its prospects in the Republican-led House appear dim. And even some consumer advocates feel that legislation is not the right way to address the ways that banks can make it painful for their customers to leave.
Kathleen Day, spokeswoman for the Center for Responsible Lending, said that the Consumer Financial Protection Bureau should look at the issue, rather than Congress.
"Having legislation for every twist and turn is just an inefficient way to stamp out bad banking practices," she said.
Nearly two years ago, Arianna Huffington and some dinner companions dreamed up the idea for what came to be called the Move Your Money project.
Their original idea was political. Individual citizens, by moving their money from too-big-to-fail banks to community banks or credit unions, would be helping to make the financial system safer.
Today, the idea of switching banks is gaining momentum. A grassroots campaign on Facebook that has designated Sat., Nov. 5 as "Bank Transfer Day" now has more than 59,000 members.
But it is not clear how much the bank-switching trend is being driven by politics. Many folks seem motivated not only by the negative headlines they read about big banks, but also by their own personal frustrations in dealing with those firms. In other words, activism appears to be intersecting with self-interest.
Sara Ackerman, the Move Your Money project coordinator, told me that project's original message was that switching banks was the right thing to do. But now she's added an economic argument; she tells consumers that large banks cost more than their smaller competitors.
For now, it remains to be seen whether there will be a major shift in where Americans do their banking. Much will depend on how small banks market themselves, and whether they are able to convince customers that switching banks is not so difficult.
Mark Schwanhausser, senior analyst at Javelin Strategy & Research, said that in the past, consumers have complained more about their banks than they've changed their own behavior.
"The consumer is not powerless here," he said. "You have a chance to say, 'How much is my inertia worth?'"
In banking, inertia has traditionally been worth a lot. According to a recent study by J.D. Power and Associates, even among people who were very dissatisfied with their banks, nearly 40% had no plans to switch.
"So people will tolerate a lot before they finally decide to switch," said Michael Beird, the director of banking services at J.D. Power and Associates.