Jan. 22, 2010 at 9:00 AM ET
Arianna Huffington made waves recently when she went on national television calling on consumers to dump their big banks and deposit all their money into local, community banks. Huffington's site, HuffingtonPost.com, threw its weight behind a Web site designed to make breaking up with your bank a little easier -- MoveYourMoney.info. It includes a ZIP-code based locator to help consumers pick through the thousands of banks in the U.S. It even sports a short, cleverly edited video that juxtaposes the classic film "It's a Wonderful Life" with images from testy congressional hearings about the banking industry.
Driven largely by Huffington's media popularity, the site quickly gained traction. Huffington's appearances on MSNBC's Countdown and CNN's Larry King Live, among many others, had some observers calling MoveYourMoney a movement. One of Huffington's partners in the venture, Dennis Santiago of Institutional Risk Analytics, says visitors have searched for banks in more than 16,000 ZIP codes -- better than half the ZIP codes in the country.
It's far too early to tell if Huffington has done something that might genuinely take a bite out big banks -- real data probably won't be available for months. But Huffington is tapping into frustration that has been building since 2008 banking collapse and bailout, say advocates for credit unions and smaller, community banks.
"It has been developing for the last several months," said Bill Hampel, chief economist of the Credit Union National Association. "Annual growth in credit union members had been very weak for the past several years...but during the first 11 months of 2009, our growth rate doubled." Credit unions added 2 million new consumers during that stretch, Hampel said.
Karen Tyson, spokeswoman for the Independent Community Bankers Association, said her 5,000 member banks were experiencing similar, frustration-driven growth.
"Community banks have, since the onset of the financial crisis, gained new customers," she said.
The American banking system appears to provide seemingly endless alternatives.There are 8,000 banks and 7,600 federally insured credit unions, according to the American Bankers Association.
"The good news is people have choice," said Nessa Feddis, spokeswoman for the American Bankers Association. "There's lots of competition, and if people are dissatisfied they should look around and vote with their feet."
But most don't. A tiny group of large banks dominate. In 2009, four banks -- Citigroup, JPMorgan Chase, Bank of America and Wells Fargo -- held 39 percent of all deposits in FDIC-insured banks, according to Reuters.
The high concentration of account-holders -- combined with a low concentration of good will – certainly seems create the potential for a mass exodus. So why the need for a Huffington Post-prompted movement?
It turns out the breaking up with your bank is hard to do.
In 2008, the Federal Reserve published a study around what economists call "switching costs" -- the pain and suffering consumers must face when trying to leave one bank to join another. The results were disturbing. The study, by Fed senior economist Timothy Hannan, found it was incredibly difficult for consumers to get reliable information about the true costs of the new bank, for example, and described what a "bargains-then-rip-off" strategy to reel in customers and then exploit them.
The euphemistic name for the strategy is a "two-period" model. Period one is a free toaster. Period two is cascading overdraft fees.
Even worse, the true costs and fees levied on account holders may not even be available to consumers until they've committed to the new bank. In many cases, fee schedules aren't listed on generic Web sites and can only be viewed by account holders after they've logged in – so there is literally no way to comparison shop.
"There may be some lack of transparency with regard to pricing," acknowledged American Bankers Association chief economist Keith Leggett.
The switching costs become apparent when trying to extract your old bank's tentacles from your new financial life. Today, most consumers use their checking account for a dozen different activities -- direct deposit of payroll checks, automated online bill payment of mortgages and auto loans, recurring debit card transactions, automatic savings plan deductions, credit card bill payment and so on. Ending all these transactions, and starting the payments anew, is such a hassle that "inertia" often takes over, says Hampel.
"Changing where you have your checking account can be a royal pain in the neck," he said. "It's like if you lose a credit card and have to inform all those people you have a new one, only much worse than that."
To combat the switching cost problem, many credit unions have developed "switch kits" to grease the skids, including forms that help new consumers track the changes needed for all payments and deposits. Those may ease the pain a little, but ultimately getting a new bank means fighting through a lot of red tape.
Still, consumers should look past the hassle and find a bank or lending institution that suits their needs, says Leggett.
"Who you do banking with is very important. It may be the most important financial relationship of your life, so you should do your homework," he said.
Leggett welcomed the discussion about switching to smaller banks and credit unions started by the Huffington Post, but he cautioned consumers against a "knee-jerk" reaction to it.
"In not every case is a credit union better than a bank with regard to pricing or fee structure," he said, saying that credit unions have also been guilty of charging annoying fees, just like big banks. "People have to realize when looking for a financial provider that they should always shop around and find a provider who offers the appropriate level of convenience.
Smaller banks and credit unions, he warned, will not provide the same "product mix" as larger banks, and are less likely to offer benefits for using multiple products – such as free checks or discounted loans.
But credit unions provide obvious benefits – in the form of better interest rates, both on loans and deposits, said Hampel. According to Datatrac Corp., average credit union credit card rates are currently more than one full interest point lower, car loans are 1.5 percent lower, and one--year CD rates are 0.30 percent higher. (Banks currently enjoy a small edge over credit unions in mortgage rates.)
Meanwhile, community banks offer something big banks find nearly impossible to compete with -- local ownership and the ability to talk with a familiar face in the event of unexpected financial hardship, said Tyson of the community bankers group.
"They always put customer service first, and doing right by the community first. They will not give you a
loan purely to make a profit. And you're not going to be just a number," she said. "You'll be able to walk in the door and you can find the bank president, and know that he lives in your community. … It's a different sort of a custoimer relationship."
Like Huffington, Tyson sees the switching issue in a larger context. Federal law provides for a nationwide "concentration cap" of 10 percent, meaning no one bank can control more than 10 percent of the U.S. deposit market.
Because of the banking collapse and resulting consolidation – leaving four banks with nearly 40 percent of deposits -- the cap is currently being threatened, leaving the U.S. financial system concentrated in too few hands, Tyson said. Through its "Fix Too Big to Fail" marketing campaign, the community bankers group is lobbying Congress to lower the cap and force large banks to divest some of their holdings.
"The only way to change the dynamic is to have legislation in place that makes it not as appealing to be … large institutions," she said.
RED TAPE WRESTLING TIPS
Marketing campaign and blog-initiated movement aside, it's always a good idea to review your financial relationships and see if you can get a better deal. Consumers interested in investigating a move away from big banks should know it takes a bit of work, but there's plenty of help available online, and one or two lunch hours should do the trick. Here are some tips:
Rates aren't everything, and people matter. Leggett points out that many consumers are far too concerned with the published interest rate they'll earn on savings and checking accounts, and sometimes pick banks based on small differences. Given that current rates are so low, earned interest should be of little concern at the moment; fee schedules are more significant. But even more important is the likelihood that the bank will treat you like a human being should anything go wrong; if, for example, you accidentally overdraw your account and land a series of overdraft fees. Will a familiar teller help you, or will you end up stuck on a long voice mail tree? We all make mistakes. It's hard to put a price tag on the reassurance that you'll be treated like a person, and not a criminal, when your turn comes.
Don't forget the middle child. Feddis points out that there is middle ground between the four huge banks and thousands of small banks -- what she calls "medium-sized" institutions. They might offer the best of both worlds.
Beat the feared late fee: The real fear over switching comes from the potential for a missed loan or credit card payment, or double payments that could lead to an overdraft. There are several ways to ease the transition between institutions, although all of them involve a little extra money.
The easiest thing to do is double up. Keep both accounts open and keep all your payments turned on until you can confirm that new payments have been received by the old payee. This will require having a lot of extra money to spare. A variation involves paying with your new account a full 10 days earlier, giving you time to cancel scheduled payments from your old account. You'll still need the extra money in case a payment lands in limbo. In either case, it's good to set up overdraft protection on both accounts by linking the checking account to a credit card, savings account or line of credit, so there's backup if you screw up.
The simplest – but most time-consuming -- method is to open the new account without closing the old one, and then switching one bill payment one month at a time to the new account, making sure each one is set up properly before switching the next one.
If your credit card issuer has cut you off: Many consumers find they are losing available credit on their cards or losing their cards altogether. This hurts their credit score. Hampel said consumers thus spurned should still apply to a credit union for a new card and will likely get the account as long as their credit isn't severely damaged. Expect a lower credit limit than you're used to, however -- credit unions are much more stingy about credit card maximums. That's a good thing, Leggett says: that's partly why the bank credit credit card default rate is currently around 10 percent, while credit union rates are down near 2.5 percent.
Finding an alternative. While credit unions have certain limitations on membership, Leggett says that virtually all U.S. adults are eligible to join at least a few credit unions. If you're stumped, try this credit union locator. To find a small bank, try this bank locator or use the Huffington Post tool, which lists only banks graded B or higher on Institutional Risk Analytics' scale.