Bottom Line: The money you have sitting at your bank (savings, checking, CD’s) is being loaned out as mortgages, business loans, etc., and is generating interest from those loans, some of which is paid to you, some of which is profit to the shareholders. When you consider where you want to bank, in addition to security, convenience, and service, also think about where you would like to see your bank lend out your money, and who you would like to profit from it.
- If you’d rather have the money available as loans to your own community, consider a local community bank or credit union. Try looking here, though this list really stretches the definition of “community” (under $65 billion, Amy Cortese defines it as < $1B in Locavesting)
- If you’d like to benefit a historically disadvantaged community, consider a Community Development Fund Institution in those communities. Find one here.
- If you would like to have the profits of your financial institution’s operations shared with you and other members by way of better rates, consider a credit union. Find one here.
- If convenience is your top value, then maybe one of the national “Too Big To Fail” banks is your best bet.
Mission Related Investing for the Rest of Us series:
- Part 1: Motivation (Using your investments to earn a “social,” values-based, return as well as a financial one)
- Part 2: Background & Investing Theory (Where I’m coming from, and how I used to think about investing)
- Part 3: Banking and Cash Alternatives
- Part 4: Bond-like Alternatives
- Part 5: Stock-like Alternatives
Banking
I have been a customer of long-standing with Wells Fargo. Nearly 20 years ago, when I moved to Stanford, I opened an account with them, mainly for the convenience. They had a branch on campus, a wide ATM network, provided free checking and credit card with decent perks. Over the years, I’ve stuck with them, based mostly on inertia. Sure, they pay almost nothing in interest today, but changing to a different bank for a slightly higher rate would be a hassle. I haven’t required much in the way of additional services, and the few things I have needed (safe deposit box, wiring money internationally) they’ve been able to provide. Their customer service has been all right, and I think has gotten better in the last couple years as they’ve implemented a new CRM system so that each person you deal with sees the full picture of your Wells Fargo relationship.
Not long after signing on with Wells Fargo, I opted to open a brokerage account with Fidelity. Again, convenience, breadth of offerings, and reputation entered into my consideration, and they have continued to earn my business over the years, with nice online tools, a great Donor Advised Fund account, and ATM fee rebates.
Current Banking Selection Criteria:
- Convenience / Access (distance to closest branches, online presence, number of branches/ATMs)
- Breadth of offerings
- Service
- Reputation
The Challenge
Recent discussions and readings have led me to ask myself whether my investments match my values. Paul Herman’s article “Where does your cash sleep at night?” was one that not only raised the questions, but offered some specific alternatives. “Your money can be your voice,” he writes. Do I want my deposits going to a bank that is practicing investment banking and buying investments rather than making loans?
Chapter 5 of Amy Cortese’s Locavesting also talks about the advantages of credit unions and local banks. Institute for Local Self-Reliance’s “Top 5 reasons to choose a local bank or credit union” added fuel to the fire. While some of the other financial moves potential expose you to greater risk, this one doesn’t: you have the same or equivalent insurance, and you can actually expect higher interest. These credit unions and local banks are not top of mind, because they aren’t spending millions on marketing, but with a bit of research, you can find some very attractive alternatives.
Alternatives
Community Banks:
A community bank is just a smaller, local version of your “Too Big To Fail” national bank. Deposits are FDIC insured, and they are likely to offer the same basic services: checking and savings accounts, credit cards, safe deposit boxes, mortgages, personal or auto loans, and CD’s. They will probably have a smaller number of branches, and few of their own ATM’s, though you will likely be part of a network that gives you access to ATMs across the country for a modest fee.
The main advantage of a community bank is that your money stays within the community (your deposits are more likely to be loaned out to someone locally, and the bank’s profit is more likely to accrue to local investors). Community banks are more likely to emphasize friendly customer service. Compared to a national bank, the rates are likely to be comparable or slightly better. They are less likely to have more arcane services, but you may be surprised: my hometown bank offers health savings accounts.
Credit Unions:
A credit union is a not-for-profit financial institution which is owned by its members (you become a member when you open your first account). Credit unions typically have some criterion for membership: they might be open to employees of a certain company, students/alumni of a certain school, professionals in a certain occupation, or people living in a certain county. Credit union accounts are not FDIC-insured. Instead, there’s a different government agency, the National Credit Union Administration (www.ncua.gov) that provides a comparable level of deposit insurance.
Since credit unions are not out to make a profit, their rates are typically more favorable to the customer. They offer higher interest rates paid for deposits that the customer makes, and charge lower rates when the customer borrows money. A comparison provided by SNL Datatrac for December 2011 (the most recent readily available at NCUA.gov) shows that Credit Unions pay about 25% more interest: a regular savings account at a bank paid 0.16%, compared to a credit union where it paid 0.21%. A 60-month loan for a new car would cost 4.98% at the average national bank, but only 3.55% at a credit union. The exception was home mortgages, where national banks’ interest rates came in slightly cheaper than credit unions (though it would be interesting to see if that comparison holds when points/fees are added to the picture.)
Community Development Fund Institutions (CDFI’s):
Not to be confused with a community bank, a CDFI explicitly trades off profit motivation for the social return of improving the community. A CDFI could be a bank or a credit union (subject to the regulations of either type). They are typically chartered for communities that have been “historically denied access to capital by traditional financial institutions” (definition from Forum for Sustainable and Responsible Investing) and offer basic financial services to the community. The advent of online banking means that you don’t need to be physically in the community in order to conduct your banking business with the institution.
CDFI banks are FDIC-insured, which was relevant recently, when the poster-child of CDFI banks, ShoreBank, became insolvent due to over-extension in questionable real estate loans. A group of investors re-capitalized the bank as Urban Partnership Bank, and covered 20% of the losses, with the FDIC covering the rest, so depositors didn’t lose money (up to the limits of FDIC insurance). This bankruptcy does highlight the risk of banking with a CDFI, but on the other hand, plenty of regular banks ran into equivalent trouble.
Making the Move
If you do decide to switch your primary banking affiliation (or even create a secondary one that holds a portion of your assets for a social return), the “Move Your Money Project” (an outgrowth of the Occupy Movement) offers a checklist to help you plan your move. I’ll have to admit that I’m still in the planning stages, but will likely switch to the Stanford Credit Union.
