If you’re fed up with banks, you’re far from alone. TD Bank’s ads that show customers being bullied by a booming, disembodied voice play into that frustration. And in a recent report from the Deloitte Center for Financial Services, 65% of customers surveyed believed that banks “were not being fair in the way they implement new fees.”
Despite such rampant disillusionment, most people hang on to their accounts. Only about 8% of U.S. households say they don’t have a checking or savings account, according to a Federal Deposit Insurance Corp. survey, and the main reasons are familiar: People believe that they don’t have enough money to put into an account, they say they don’t want or need an account, or they can’t get an account because they don’t have the necessary documentation or good enough credit. Still, a small percentage of those without accounts say they don’t like dealing with or don’t trust banks.
But ditching standard bank and credit issuers entirely is tough to do without relying on cash (and watching your credit profile languish). And note that some of the more attractive alternatives to banks have a toe in the banking system. For example, many prepaid debit card issuers are not banks (though the cards are typically branded by American Express, Discover, MasterCard or Visa), but they often keep the funds pooled in bank accounts for insurance coverage. The major peer-to-peer lending sites, LendingClub.com and Prosper.com, use banks to service loans between borrowers and investors.
But even if backing all the way out of banks isn’t realistic, you may be able to work some worthy alternatives into your roster of financial products. Brett Rothenberg of Los Angeles has pieced together creative ways to make payments and earn interest on his money. With the American Express Prepaid Card, he buys items that maximize the card’s benefits, such as purchase protection, and his checking account is linked to PayPal so that he can get 1.5% cash rewards on purchases with Pay-Pal’s debit card. Rothenberg, 33, also earns returns of 8% to 10% on his money by investing in Lending Club loans. And he directs cash to Betterment.com, which invests each user’s money in a diversified portfolio of stocks and bonds. Betterment has flexible minimum balance and deposit requirements and charges expenses of 0.15% to 0.35%.
New Ways to Pay
Finding a checking account that’s free of monthly fees and has no balance or transaction requirements isn’t impossible (see 5 Free Checking Accounts With No Strings Attached). But using a prepaid debit card to make purchases—instead of or in addition to a checking account—is becoming popular. According to the Mercator Advisory Group, prepaid cards could hold $168 billion in value by 2015, compared with $28.6 billion in 2009.
Prepaid cards are notorious for their a la carte charges; a recent Pew Charitable Trusts study found that most impose between seven and 15 fees. Many impose a monthly fee, with a median of about $6. Charges are sometimes levied to activate a card, use an ATM, make a purchase using a PIN, and call a customer-service line.
Some cards, however, are more consumer-friendly. The Bluebird card from American Express and Wal-Mart skips the egregious fees and has some advanced options—for example, you can direct-deposit your paycheck to the card, pay bills online, write checks and authorize other users. Before you buy a prepaid card at a retail store, research it online, where you’re more likely to see disclosures about fees and other contingencies, says Susan Weinstock, director of the Safe Checking in the Electronic Age Project at Pew.
The Bluebird card and some other prepaid cards offer FDIC coverage in case of bank failure. But cards that claim to have the insurance may be on shaky ground. Money loaded on prepaid cards is typically held in pooled bank accounts, according to the Pew report, and can be covered with “pass through” insurance of up to $250,000 per cardholder. But because prepaid-card companies aren’t subject to federal regulation, customers can’t be certain that companies are properly complying with the insurance requirements. In spring 2012, the Consumer Financial Protection Bureau announced plans to investigate imposing rules on prepaid cards.