The Pros and Cons of Banking Options

The scandal at Wells Fargo (WFC 2.73%) that recently came to light brings up a question that percolated soon after the financial crisis: What other options do consumers have in terms of picking a bank?

Motley Fool analyst Gaby Lapera and contributor John Maxfield discuss this question in the latest episode of Industry Focus: Financials, a weekly podcast dedicated to the financial sector. Among other things, they discuss internet banks and credit unions.

A full transcript follows the video.

This podcast was recorded on Sept. 19, 2016.

Gaby Lapera: You might be sitting there thinking, "I don't know if big banks are for me! Are there any other options?" Sorry to sound a little bit like an infomercial there, but I guess that's the nature of this episode. There are a few different options besides the big banks. The two that come to mind are internet banks and credit unions. And, of course, big banks, credit unions, internet banks -- they all have their pros and cons. We're going to go over them for you so you can think about what's best for you.

Let's start with internet banks. Internet banks, like we were talking about earlier, actually have the best interest rates on savings accounts. That's typically because they don't actually have to sink any costs into opening physical branches. So, all that money that they save, they can give back to you. And when I say they give you the best interest rates, I mean typically 1% or higher on your savings accounts, which is much higher than 0.15%. The other nice things about the Internet banks is that they're open 24/7. That's good.

John Maxfield: And, let's be honest, a lot of banks are going in this direction.

Lapera: That's true. Cons of internet banks. Sometimes, not having a physical location can be a hassle, because every once in a while you actually have to go into a bank's branch to present identification or whatever it is you're trying to do, get a cashier's check or something like that. A con is, I guess, if you don't trust the internet, then the internet bank is not for you. (laughs) That's an actual concern, I'm sorry to giggle. I have some older relatives, especially, who do not trust a bank that they cannot touch. Which is fine. If it's not for you, it's not for you. 

So, potentially, another option for you might be a credit union. Credit unions are really interesting. Earlier, we said that investors and consumers tend to be at odds, they tend to butt heads when it comes to the direction that the bank should take. Credit unions solve that problem, because anyone who is a member of the credit union who has a savings account there is technically of shareholder of the credit union, even though they're not publicly traded entity, they're all privately held by the people who actually have money in the credit union, which gets rid of a lot of those troubling interactions.

Maxfield: Yeah. There just isn't that conflict of interest. As a credit union, for lack of a better term, why would you screw yourself? Whereas a bank, the shareholders, there is an advantage to take advantage, because they're owners and they make more money if they take advantage of consumers. If the consumer owns the bank, it takes away that conflict entirely.

Lapera: Yeah. Some other pros of credit unions are, you tend to get much more favorable rates on loans, you often have ATM fees waived, because since credit unions aren't very large networks, they don't have a lot of ATMs, so sometimes they will pay for that for you, which is nice. That means you can use any ATM wherever. That's not true of all credit unions, so that's something you definitely need to check. What else? I know that we talked about a bunch.

Maxfield: You just get the impression when you talk to people who bank at credit unions that it's a much more pleasant and personal experience.

Lapera: Yes. I remember another one. Their savings account also tend to carry higher interest rates than big banks. Not as big as internet banks, but higher than you would get at a big bank. 

That being said, there are some cons to credit unions. Like I said, potential ATM fees without a lot of ATMs around. Although, I was thinking about this the other day, I don't remember the last time I paid in cash for anything, so I don't know that that would be a huge deal.

Maxfield: Yeah. I mean, ATMs may not even be around for that much longer, you know? To your point, not a lot of people use cash. And the other thing to keep in mind, we were talking about this before the show, let's say you're in the worst-case scenario, and you do need to use ATMs not infrequently. And let's say you incur some additional fees as a result, if you're credit union customer as opposed to, say, a Wells Fargo customer or a Bank of America customer, where they have ATMs all over the country. It's not like there's just a cost. There's also that offsetting benefit, because of the more pleasant experience. And the other thing to keep in mind is, because of the other advantages that credit unions provide, when you factor in even additional ATM fees, it still may be a more economical relationship between you and a credit union than it would be between you and a big bank, even if the big bank waives those ATM fees.

Lapera: Yes. Let me hit you with my second potential con -- credit union credit cards are a lot less likely to have rewards attached to them. If you are a power user of those rewards, this might not be the best relationship for you.

On the other hand, you can always open a credit card with whatever bank you want, and not have to have your savings or your mortgage or whatever with that bank. I think a lot of people don't realize this, but Visa doesn't actually own your credit card. Your credit card comes from, say, Bank of America or JPMorgan Chase or Wells Fargo, and Visa just administers the transaction. So whenever you open a credit card up with a bank, you're actually opening a bank account. So, you can still benefit from that and have most of your business be done with your credit union. I, for example, have credit cards accounts open with two different banks.