Alternatives to Traditional Banks
New ways of making payments and borrowing money aren’t always better than traditional banking.
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%.
[EMBED TYPE=POLL ID=24073]
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.
If you need to rein in your spending, however, a prepaid card that keeps fees to a minimum may be for you. “A customer who has a tendency to overdraw can save money by using a prepaid card,” Weinstock says, because prepaid cards usually don’t allow overdrafts. Bank overdraft fees run an average of roughly $31 a pop. Some other prepaid-card fees, such as monthly maintenance fees and ATM charges, are in line with those that banks charge. You can pay many types of bills with a prepaid card. Still, if you rely on a prepaid card, you’ll have to purchase money orders to pay bills that don’t allow payment with a debit or credit card, says Tom Feltner, director of financial services for the Consumer Federation of America. These may include rent and auto-loan payments.
Beyond making purchases, transferring money to individuals is an essential checking-account function. PayPal is a behemoth in the business of moving money around outside the banking system. To load a PayPal account, you can transfer money free from a bank account (it takes three to five business days) or add cash with a Green Dot MoneyPak, which you can buy at retailers such as Walmart and CVS for $5 or less. PayPal doesn’t charge a fee if you transfer money within the U.S. using funds you’ve put in your PayPal account. Transferring money from a debit or credit card using PayPal costs 2.9% of the amount sent plus 30 cents per transaction, and the sender decides who pays the fee. Amazon WebPay and Dwolla also allow individuals to transfer funds for little or no cost.
Funneling money through alternative services could save on fees if you prefer to send cash electronically and your bank charges to receive or send transfers. And depending on your bank’s ATM fees, the PayPal Debit MasterCard could be worth a look. PayPal charges $1 per domestic ATM withdrawal. That compares favorably with the average fee that banks charge. According to Bankrate.com’s 2012 Checking Account Survey, customers pay an average of $1.57 to withdraw from out-of-network ATMs. And the Pew report found that the median fee levied on prepaid-card users for ATM withdrawals is $2.25. The PayPal debit card could also be a bargain when you go abroad. Chase Total Checking users, for example, pay $5 per ATM withdrawal outside the U.S., plus a 3% currency-conversion fee. PayPal levies a 1% fee for ATM use overseas and a 2.5% currency-conversion fee. (The figures above do not include charges from ATM owners.)
In the aftermath of the financial crisis, tight credit guidelines pose an ongoing problem for people who lack clean credit or who have minimal credit histories. But even people who can get a bank loan are looking into alternatives.
One of the main reasons borrowers say they use peer-to-peer Lending Club is that it’s not a bank, says Renaud Laplanche, founder and CEO. Many borrowers use P2P loans to transfer high-interest credit card debt to a lower rate. Unsecured personal loans with terms of three or five years are available through Lending Club, with annual percentage rates recently as low as 6.78%, depending on creditworthiness. Applicants make their case at LendingClub.com, which screens their credit profiles. If your loan request is accepted, you’re assigned a credit rating, and Lending Club lists the loan on the site for investors to consider. Multiple investors may contribute to a loan, and it remains listed until it is fully funded or two weeks have passed. If a loan isn’t fully funded within two weeks, you may accept partial funding or relist it. (Laplanche says the vast majority of loans are fully funded.) Prosper.com runs on a similar model. Because both sites’ credit standards are sufficiently high—among its criteria, Lending Club requires a minimum FICO score of 660, at least two revolving accounts and a debt-to-income ratio of less than 35%—they accept only about 10% of the loan applications they receive.
The fee structure for both sites is straightforward. Lending Club borrowers pay an origination fee of 1.11% to 5%, depending on creditworthiness and the loan term, which is rolled into the APR. Prosper.com borrowers pay 0.50% to 4.95%. Both sites also charge borrowers for late and failed payments, and Lending Club has a $15 fee for each payment made with a paper check.
Unless you’re unalterably opposed to dealing with a bank, you’re probably better off with a bank loan if a bank offers you a lower interest rate. But Dan Bradford of Jacksonville, Fla., says he saved several percentage points in interest when he got a loan through Lending Club in the summer of 2011 to help fund a car-restoration project. The three-year, $10,000 loan had an 11% interest rate, in contrast to the minimum 17% rate he says he would have paid by using a credit card or getting a bank loan. Last year he rolled some of his first loan into a five-year, $22,000 loan with a rate of 18%. Bradford, 54, hopes to refinance it with a shorter term and lower rate later this year, when he expects a bankruptcy to clear from his credit report. Both loans were funded within a couple of days of listing, which Bradford says was the result of his detailed budget and plans for the project.
Banks To Go
Instead of scrapping the concept of banking, some services are tweaking it and making good use of mobile technology. With Simple, a platform that requires you to have an Android phone or Apple iOS device, you can open a checking account with the Bancorp Bank. Basic services that usually come with a checking account are included: a debit card, direct deposit and bill-paying. However, some of the usual checking-account penalties—such as monthly maintenance, overdraft and returned-item fees—don’t exist. Use domestic ATMs in the Allpoint network and you can avoid withdrawal fees, too. The fees that Simple does charge are clearly listed and include a $5 inactivity fee if your account is dormant for 180 days and a $2 fee to replace your debit card. Simple also has tools for analyzing and managing money in the account, a la Mint.com. Organize your savings with the Goals tool, and decide whether to make a purchase with the Safe-to-Spend feature, which accounts for upcoming transactions and goals to give you an idea of how much money you really have. You can sign up for an invitation at Simple.com.
GoBank, a project of prepaid-card issuer Green Dot, is still in testing mode, but it has some promising features. Like Simple, it’s designed for use on mobile devices and is centered on a checking account and debit card. GoBank charges minimal fees (with no monthly maintenance or overdraft charges) and forgoes brick-and-mortar venues. You can sign up to be an early member at GoBank.com.