It’s hard to find an entity that is more disliked by the public than the banks. From excessive fees to indifferent customer service to outrageous CEO compensation, everyone has a reason to hate them.
In spite of this, the majority continue to do business with these institutions. Why? For all their faults, fear of the unknown keeps most from seeking out alternatives. Better the devil you know than the devil you don’t know.
However, we live in an age of abundant information. Not only are there non-bank financial institutions out there, but it also has never been easier to learn about them. In today’s blog, we’ll lay out why banks are so despised and why it is best to seek out alternatives.
Banks have an established history of bad behaviour and illegal conduct
Unless you work for one, it’s unlikely you have anything good to say about your bank. Despite a multitude of brands (especially in the USA), they all seem to be universally awful.
Why is this? Without them, where would you park your money? When you need a home or car loan, where else are you going to turn? They have all of us over a barrel, and they know it. They can treat customers however they like, all while pushing ahead with initiatives like hidden fees. What are we going to do – store our life savings in our mattresses?
Everywhere you look, someone has a story about how their bank screwed them over. Consider the case of Paul Guillaume, a journalist assigned to cover the war in Afghanistan. Shortly after arriving, he discovered that Wells Fargo had cancelled his card.
With his lifeline to the outside world cut off, he struggled to eat. To make matters worse, management at his hotel threatened jail if he didn’t pay his bills.
Pleading gave way to anger, as Wells Fargo refused to ship him a new card. At one point, his banker told him that they ‘didn’t like his attitude’. It cost his family $6,000 to pay his debts, cover his living costs, and book his flight home. Paul Guillaume is no longer a Wells Fargo customer.
John H’s example demonstrates how sociopathic banks can be. After his business failed, it took him two months to burn through his savings and credit. A user of checks, he thought he was still solvent – until he checked his balance.
He discovered his bank had intentionally processed his checks out of order. They did the large ones first, then many smaller ones to maximize overdraft fees. As a result, John H was over $1,000 in the red. Attempts to lower these fees fell on deaf ears.
The malfeasance of banks goes beyond unethical behaviour. In recent years, they have broken numerous laws, and have suffered little more than a slap on the wrist. We can trace much of it back to the Global Financial Crisis of 2009.
The ensuing investigations took place over the 2010s – by the end of 2014, banks had paid over £166 billion in fines. That sounds like a lot until you remember the world’s top 10 financial institutions have assets totalling $26.1 trillion.
Let’s talk about a couple of examples. From 2008 to 2013, five banks – JP Morgan, UBS, Citibank, HSBC, and the Royal Bank of Scotland – rigged interbank rates. They did this by coordinating their actions via a private internet chat room.
This way, they were able to maximize returns to the detriment of their clients. Eventually, financial regulators uncovered the scam – in November 2014, the Financial Conduct Authority in the UK levied fines worth £2.6 billion.
The collapse of the US housing market was one of the major triggers of the Great Recession. This house of cards collapsed when the interest rates of millions of subprime mortgage holders soared. This situation was a feature of so-called ‘toxic mortgages’, sold by banks like JP Morgan Chase.
In 2013, The US Department of Justice was about to proceed to trial against JP Morgan. Before that could happen, though, a meeting between CEO Jamie Dimon and then-Attorney General Eric Holder took place. Both parties reached a settlement – JP Morgan was fined $13 billion for misleading the public about its subprime mortgage products.
This penalty eclipsed the one levied on BP for the Deepwater Horizon incident. However, the backroom meeting between Holder and Dimon was seen by many as an example of big money corruption. Had the case proceeded to trial, several top executives could have received prison sentences.
In fact, only one Wall Street executive went to prison – Kareem Serageldin of Credit Suisse. He lied about the value of mortgage securities – once the truth came out, it worsened the market’s collapse.
His sentence? 30 months in jail, or 2 1/2 years. Scores of bankers did worse things than him, and yet, they are still free today.
Why should I seek out non-bank alternatives?
By now, we can agree on one thing: banks are deeply unethical entities. However, many of us feel trapped – it’s dangerous to store your life savings under your bed, and who else will lend you $200,000 to buy a house?
If we were having this conversation 30 years ago, your pessimism would be justifiable. These days, though, there are alternatives to banks in just about every subset of the financial services
These days, we can easily find non-bank finance companies, investment firms, and money transfer providers online. However, some are slow to trust these entities, as they fear scams. This concern is ebbing with every passing year, as reviews and oversight by regulators provide proof of trustworthiness.
Once potential clients jump the ‘fear hurdle’, they discover these companies offer incredible deals. There are online-only banks that offer interest on checking accounts, online investment firms that charge no management fees, and money transfer providers that exchange money at the interbank rate.
They can do this because they lack the overhead of legacy financial institutions. With fewer employees to pay and less real estate to maintain, they can cut their clients sweeter deals.
Finally, they offer vastly superior customer service. For generations, banks had no reason to care about their customers – where else were they going to put their money? Then, all of a sudden, scores of fintech startups emerged. For years, discontent had been building against the banks – treating clients like humans were enough for them to attract customers.
Which fintech companies can I trust with my money?
We’ve established there are viable alternatives to the banks – but which companies can you trust? Many have been around for close to a decade – as such, they have researchable track records.
Need a loan to buy equipment for your new cafe, but banks keep saying no? Non-bank finance companies like Lendio offer new businesses loans ranging between $500 and $5,000,000. With a Trust Score of 9.2/10 on Trustpilot, they are an excellent option for startups in need of financing.
Want to save for the future, don’t want to enrich some mutual fund manager that knows little about markets? Opt for a service like Wealthsimple. Instead of taking as much as 2% off the top, they charge as low as 0.4%. Additionally, they offer automatic re-balancing, dividend re-investing, and portfolios personalized to your wants and needs.
Need to move $10,000 to the Philippines to fund a down payment on the beach house of your dreams? Don’t get soaked by your bank – use a money transfer provider like Transferwise instead. Around since 2010, they have reduced the costs of wires to a fraction of what they used to be. Rather than charge a margin of 3% or more, you get to change your money at the interbank rate. Together with low fees, you can save thousands of dollars by favouring money transfer providers over the banks.
How much money can I save switching to a non-bank alternative?
Ironically, the majority of problems people have with banks boils down to money. The financial institutions we’ve grown up with have gotten fat by charging us outrageous fees.
Non-bank alternatives have taken an enormous bite out of their market share by offering dramatically lower costs. But, how much can you really save by ditching your bank? Let’s highlight a few examples.
There is no banking service more fundamental than checking and savings accounts. They help us squirrel away money for a rainy day, and so we can pay our bills. However, institutions like Bank of America now take advantage of this need by charging a fee for checking accounts.
They charge up to $12/month if you have a balance less than $1,500, amounting to as much as $144/year. Contrast that with Ally, an online-only bank. Not only do their checking account charge no maintenance fees, but they also grant 0.6% interest. Assuming a balance of $1,000, this policy means you’ll be ahead by approximately $6 at the end of the year.
What about mutual funds? As mentioned before, high fees can slow the growth of your money over time. But by how much? A study conducted by Nerdwallet.com highlights how bad it can get – if you put $10,000 into a mutual fund that skims 1% of assets off the top each year, you can lose up to $592,000 after 40 years.
This study contrasted 1% mutual funds against the rates charged by newcomers like Wealthsimple. By investing funds with a maintenance fee of 0.5%, Nerdwallet estimates you’ll be able to retire three years sooner.
Money transfer providers offer huge savings, better customer service
However, the most consistent returns can be realized by those who ditch banks for a money transfer provider. Let’s say you’re a Briton who has accepted a job in Toronto, Canada. You decide to send £20,000 from your savings to an account you opened in your new home via Barclays.
If you do a priority send from a branch, it will cost you £40 in fees, plus the £6 receiving fee. However, the exchange rate is where they really get you. At the writing of this article, Barclays charged a GBP/CAD rate of 1.6609. The interbank rate was 1.7740 – a sickening margin of over 6%.
Let’s compare that to what you’d get with a money transfer provider. World First is a firm that opened for business in London in 2004 – if you decided to transfer your funds with them, here’s what would happen.
First of all, they would be no fee – this has been a feature of theirs since the beginning. Second, you’d get a rate of 1.7710 – only 0.003 off the interbank rate. Bottom line: sending £20,000 with World First would yield you 35,425 CAD. If you stuck with Barclays, you’d just get 33,141 CAD – more than 2,000 CAD less!
Not sure which money transfer provider to go with? MTC reviewed 42 Fintech FX firms over the past 5 years – click on the link, and you’ll find one that meets your needs.
Make 2019 the year you stand up to the banks
The banks have gotten away with robbery for far too long. Make this the year you take control of your money back from the establishment. With scores of companies offering unbeatable deals, you’re sure to come out the other end in better financial shape.