Pick a Bank, Not Any Bank: Loyalty May Be Key to Cutting Costs in New, Regulated Environment

It seems like every week we hear about new laws reducing the fees banks can charge. From a limit on credit card interest hikes to a cap on late fees to a virtual end to overdraft fees on both credit and debit accounts, the government is making it more difficult for banks to charge customers for transactions that “break the rules.”

Depending on your worldview, this may be good or bad. On one hand, many bank fees are unreasonable or excessive, and it makes sense to regulate them. On the other hand, the banks set up a system in which those who handled their finances responsibly skated by for free, or even made money via bank reward programs. If banks now take away these perks, many people will feel they are being penalized in order to help those who couldn’t handle their finances.

Regardless of your opinion, the reality is that new regulations on the banking industry are sure to level the playing field in terms of who pays what. Those who are responsible with their money are still likely to have to pay fees, while those who’ve made mistakes will not be penalized nearly as harshly. (I should take a moment to state that even the most responsible consumers mess up once in a while, and are understandably furious over huge fees for small transgressions, so I don’t want to portray this as a situation in which “good” customers must pay the price for the actions of “bad” customers.)

With the costs of banking likely to go up across the board, what can you do to limit the damage in terms of the fees and interest you pay for the convenience of credit cards, debit cards, checking accounts, etc.?

One word: loyalty.

It’s a novel concept, yes. For those of us under age 60 or so, the thought of being loyal to a bank is a quaint notion. This ain’t the 1940s; we don’t know our neighborhood banker, we don’t go to the neighborhood bank to get all of our loans. No way. Instead, the banking industry has taught us to chase the deal. Who’s got the best interest rate? Who’s got the best rewards? Who’s offering something for nothing?  From credit cards to car loans to mortgages, we have learned that loyalty to any financial institution is asking to be taken for a ride. Why get my mortgage from the bank that offers free checking when I can find a better rate from the out-of-state company with the online-only bank? Just as employers have encouraged worker disloyalty by laying people off in batches to please shareholders, banks have encouraged customer disloyalty by offering “deals” on the front end and trying to make money on the back end through fees, tricky interest rate hikes, and other fine-print “gotchas.”

But… the rules may be changing. Well, actually, they are changing. New laws are forcing lenders to re-think how they look at customers and how they make profits. One of the strategies they are reluctantly embracing is the old-fashioned notion of making money from loyal customers who do all their banking in one place instead of chasing a la carte deals.

OK, maybe that works for the banks, but what’s in it for you? Well, just as your insurance company may give you a price break if you buy multiple policies (such as car and home insurance together), banks are getting into the groove with price breaks (or extra perks) for those who show loyalty with multiple accounts at the same institution.

Examples:

• Chase offers an auto loan discount of up to 0.50% when you have a Chase checking account and a discount of up 0.75% total if you also have your monthly payment deducted straight from that checking account. Chase also offers reduced banking fee packages (or higher interest on deposits) when you keep multiple products such as checking, money market accounts, and CDs with them.
• Wells Fargo offers free, interest-earning checking for those with a Wells Fargo mortgage, or those with over $5,000 saved/invested in Wells Fargo accounts.

These types of incentives are not new, and the examples I use may not be the best on the market. The point is that you can expect banks to get more aggressive and creative in their use of loyalty incentives, while at the same increasing the costs for “free agents” who shop their money around looking for flashy deals.

In the new, highly-regulated banking world (for example, see my recent article on credit card regulation), it may be time to shed your fear of commitment and settle down with one bank. Offering your loyalty might not be as fun as playing the field, but it could be a whole lot cheaper.

This is a guest post from Adam Jusko, founder of IndexCreditCards.com, an information and comparison site for credit card offers that maintains a list of over 1200 cards.

Pre-Summit Bank Levy Proposals to Increase Cost of Banking

The turbulent month of May is behind us.  June has brought calm, but continued hand wrangling by government finance officials in Europe, the U.K. and the U.S. threatens to prolong the market uncertainty rather than deal with the real problems.  The latest round of public pronouncements suggest that bank levies are necessary to create a bail out pool of funds, ostensibly to shield such costs from having to be funded directly by taxpayers.  Since banks are merely conduits for the flow of capital, increased capital costs will eventually find their way to the retail side of banking.  Indirect funding by taxpayers must be acceptable in the latest government playbook.

Some news analysts are describing these latest antics as posturing before the G20 summit meetings this weekend in Toronto.  Officials always want to look and sound good when the cameras are rolling.  The new conservative leadership in Great Britain has been the most vocal about the levies since campaign promises hang in the balance.  The U.K. recently levied a one-time 50% tax on all discretionary bonuses paid by banks and collected £2.5 billion in the process.  According to budget papers, the new levies would start at £1.1 billion and rise in three years to £2.4 billion.

French and German banks have said they would support the levy system in their markets and bring the Eurozone along with them.  Proposals in the United States, twice the rate level in Great Britain, are currently tied up in the Senate awaiting approval.  However, not all banks are buying into the concept.  Notable exceptions are Canada, Japan, Australia and Switzerland.  Banks have already suggested that they would migrate activities, from global lending to Forex, away from taxing territories and favor exception countries with the their business.

The proposed levies would be applied to a bank’s balance sheet with a formula designed to exclude government securities and Tier 1 capital for the bank.  At this point, proposed legislation has had difficulty defining exactly what a bank is.  The intent is to include investment banks like Goldman Sachs.  Goldman paid $600 million in the one-time bonus tax and believes the new levy will approximate $100 million or about 1% of turnover.

Reactions from banking associations and their supporters were swift and predictable.  The private sector will have less access to credit and banks will be less competitive were the common themes.  One trade association executive remarked, “It is important to recognize that it is effective regulation, not taxation, that will help to prevent a future crisis. This tax is not a substitute for effective regulation.”

A more specific assessment of the economic impact was forthcoming from KPMG, a major audit firm with many banking clients, “The major UK banks will have to pay for the tax somehow and that will likely feed into a higher cost of borrowing for their clients, probably at the lower end of the scale. Mortgage borrowers, as well as retail and small corporate borrowers may be the worst hit.”

Levy proposals range from 4 to 15 basis points in some cases.  After adjusting for balance sheet exceptions, the resulting cost of capital increase may require a much higher cost allocation for new loans on the books. Banks would be prevented by contract from passing the levies down to all current borrowers.  Implementation issues cloud what the actual impacts would be on a loan-by-loan basis, but the assumption that loan costs will rise is inescapable. And this does not bode well for interest rates paid out by the bank for CDs, savings accounts, and money market accounts.

The new ruling government in the U.K. is not done with the banking sector.  Fresh from the victory of their bonus tax collections, officials admit that they are exploring additional “Finance Activity Taxes” on banking bonuses and profits.  However, they are quick to point out that they will not make these moves with agreement from their international partners.  Perhaps, these new conservatives understand competition after all, or they may be preparing their excuses in advance.

These new proposals may be nothing more than political rhetoric for the moment.  No one has mentioned the real issue in the developed economies of the world.  How do they plan to stimulate growth and employment in their respective domestic economies?  This “elephant in the room” will not go away.  Dealing with budget deficits always garners approval rating points, but conservatives have always stated that new taxes are no way to end a recovery or rebuild the labor pool.

Hopefully, some good will come from the G20 summit meetings, photo ops aside.  The United States has lost 8.8 million jobs over this recession, and it will take a long time to get those jobs back.  Banks need to be Banks again by loaning funds to small and medium size businesses to create new jobs.  New taxes only get in the way of that objective.

Bi line: Tom Cleveland is a market analyst for forex traders, and online resource for news on global markets and forex.

The Value in Gold in 2010 – Should you invest?

Just after gold reached a fresh new nominal high in trading this week, many analysts and speculative investors have come out of the wood works to either bash or praise it’s perceived value within the blogosphere. Some of the gold bullion bears pose the question – why is gold a store of value at all? After all, out of all the commodities available on the market, gold (along with other precious metals) hold some of the least practical and productive values out there. There is virtually no intrinsic value derived from this material. These skeptics basically hold the argument that it is merely a material of psychological value which is derived essentially from A) it’s history of backing currencies B) it’s history of being desired and C) it’s shiny-ness!

Yet despite all the naysayers claims (albeit fairly reasonable ones) gold has still reached some of the highest price levels on record, and, is still widely considered a safe and conservative place to park cash.

What are those long on gold saying? You have to look beyond it’s practical value which holds very little weight. A recent blog post on the fool.com suggested that the value of gold will continue to increase as the demand increases from developing powerhouse economies such as China and India. To further this value, the incremental supply of gold introduced into the market will continue to decline as well, thus creating a lack in supply for an increase in demand.

For more information you may want to check out the article, “Now Do You Understand Gold?,” which sums up the ironies of gold’s current price levels by asking a series of questions.

Here are some of the questions posed in the article…

- If gold were really just a “fear trade” as so many persistently presume, then would it have notched a fresh new nominal high within hours of Europe tossing a trillion-dollar bailout onto their portion of the debt crisis?

- If gold were really just a commodity as so many persistently presume, then would it have notched a fresh nominal high even as virtually every commodity dipped lower on the day? Commodities that dropped today include: oil, natural gas, copper, nickel, zinc, tin, lead, cattle, hogs, pork bellies, etc. If you think gold and silver are no different in fundamental nature than any of those items listed above, then today might just be a little confounding for you.

- If gold were really doomed to collapse before looming deflation and rising interest rates, then would would it have notched a fresh new nominal high even as Europe’s horrid economic state threatened prior (mythical) models of global recovery?

What’s next for the price of this impractical yet precious metal in our currently central-bank-backed-currency world? Would you buy gold in 2010?

Could Facebook.com enter the online banking industry?

An interesting question was posed over at Ecademy.com by writer Thomas Power who asked, “what happens when Facebook becomes an online bank?” The more you read about the relentless snowball effect that is Facebook, the more you realize the potential it has of uprooting entire industries (such as banking).

According to Thomas Power’s estimates, Facebook should catch and pass Google in total number of visitors sometime in 2011 if it stays on it’s current course. And it could reach 1 billion users by 2012! The sheer volume of this user base (and potentially consumer base) could completely rearrange an industry such as banking.

As Thomas Power states, “When you have an audience of that size you can sell them lots of things. You can help them buy better. In fact you can sell them everything negating the need for many existing and costly suppliers and their overheads. Many. Obviously you can offer them discounts through group buying. Cellphones, laptops, cars, flights, holidays, gas, electricity, groceries to name but a few. But then when you think about it you want to manage all your members transactions. All. Everything they buy and everything they sell. And at the end of the year wouldn’t it be nice if you could complete your members tax return negating the need for most of the Inland Revenue and thousands of civil servants. And then how about manage your members patient records so you can get the best deals on pharma products and healthcare too.”

Power then goes on to ask, “so what happens when Facebook becomes a bank?

It starts with a Facebook piggy bank, payment system and credit card. Then it’s a savings account and a loan perhaps for university. What about a mortgage, life insurance, health insurance, car insurance, house insurance and a pension? After all with a billion users these should be the best deals on the planet. Volume speaks price. Low price. This is before you offer your members peer to peer lending like Lending Club giving them better interest and lower risk on their savings.”

Would you bank with Facebook?

Read the entire article here.

A suggestion to the banking industry: Eliminate the FDIC?

An interesting article was forwarded to us this weekend out of Yahoo’s financial section that was released last Friday. It’s titled “Five Suggestions for Banking Reform” and it’s written by Peter Atwater who spent 10 years building JPMorgan’s securitization business in the late 1980′s and early 1990′s.

As the title of his article suggests, he is lending his experience and wisdom to the banking industry by suggesting 5 major reform idea’s which he believes will help the industry grow in a healthy direction. And while all 5 of his suggestions deserve discussion, we would like to narrow in on one specific notion…

As he states, “at the risk of being bold, the time has come to eliminate FDIC insurance.” He goes on to explain that, “When the FDIC was created in the 1930s, it was intended to be a temporary solution. Today, it puts the US taxpayer on the hook for more than $7 trillion in bank liabilities. But as a consequence, depositor due diligence is non-existent. And putting Wall Street aside, this crisis has shown, even with specific oversight, hundreds of now-failed banks took excessive risk in their traditional banking businesses and their insured depositors neither cared nor were adversely impacted. Their risk was borne by the government, while they earned returns far in excess of comparable US Treasuries. If we’re truly going to eliminate “moral hazard”/”too big to fail” we must eliminate deposit insurance in the process.”

How would this effect deposit rates offered by the large banks? If Peter’s suggestion was put into action, would bank CD’s then be considered “risky” investments or would this motivate banking institutions to build a more trustworthy brand?

Top 5 Least Trusted Banks in the United States

An interesting poll was conducted by The New York Times and reiterated on Yahoo’s Finance section yesterday regarding the level of trust consumers place in their current bank. Perhaps not surprisingly, the larger banks fared much worse than the smaller institutions.

The Report: (As seen in Yahoo’s Financial Section)

Forrester’s annual Customer Advocacy rankings, ranks nearly 50 financial services firms in the United States by the percentage of each firm’s customers who agree with the statement: “My financial provider does what’s best for me, not just its own bottom line.” The results are based on a survey of about 4,500 consumers.

The Results:

As we mentioned above, the largest institutions performed terribly in this study and have apparently been performing poorly in these regards for the last seven years (even before the bank collapse of 2008).

“…large banks have generally been at the bottom of the list since the survey was initiated seven years ago, and many of the banks have alternated between the bottom spots year to year…”

Top 5 Least Trusted Banks in the Country:

1) HSBC – Among HSBC customers, only 16 percent said they agreed with the statement.

2) CitiBank – Among CitiBank customers, 26 percent said they agreed with the statement.

3) Fifth Third – Among Fifth Third customers, 27 percent said they agreed with the statement.

4) TD/Commerce – Among TD/Commerce customers, 28 percent said they agreed with the statement.

5) Capital One – Among Capital One customers, 29 percent said they agreed with the statement.

These results coincidentally came out only a couple of weeks after President Obama’s proposal to send the repaid TARP money to small banks.

Bank certificate of deposits finish 2009 with abysmal rates

For bank deposit investors, the year of 2009 has been a year of extremes. The beginning of 2009 coincided with the first, and most severe half of the banking crisis which left many of the large national institutions desperate for funds and thus competing against one another for consumer deposits. Through this competition some of the most lucrative returns (through CD rates, money market rates, etc) were provided to consumers with excess cash seeking FDIC insured investments. This, needless to say, is no more.

A recent NYTimes article was sent in to BankVibe regarding the current state of bank CD rates. Upon reading the article you immediately gain a better understanding of how bleak the situation has become.

Unfortunately for us savers, the government’s response to the imminent collapse of some of the nations largest financial institutions may not have had our best interest in mind. The $200 billion spent on the bank bailout has allowed banks to pass on practically no returns in the form of savings rates to customers.

The outrage, however, lies in the audacity in which some of these banking executives possess — by proclaiming a 1.2% return on a “Savings Plus Account” as a “great rate” — which is what a recent CitiBank advertisement has done. To make matters worse, upon reading the fine print you notice the this rate only applies to balances of $25,000 and above. Shameful.

The NYTimes article goes on to state that in some cases people are actually losing money by opening these deposit accounts after the rate of inflation and potential fees that come with the banking product are factored in.

Timeline of Interest Rates Paid on CD’s throughout 2009:

• January 2009 – Elevations Credit Union offers a 7 month CD yeilding 7.0% APY
• Feburary 2009 – Regal Financial Bank offers 4.0% APY on a 12 month CD
• March 2009 – Navy Federal Credit Union offers 3.75% APY on a 12 month CD
• April 2009 – A 4 month online CD yields 3.0% APY by Danvers Bank
• May 2009 – A 12 month CD yielding 3.0% APY is offered through Melrose Credit Union
• June 2009 -  Quantum National Bank offers a 12 month CD yielding 2.76% APY
• July 2009 – WYMAR Federal Credit Union offers highest CD rates in the country: 12 month CD yielding 3.30% APY with a minimum deposit of $5,000.
• August 2009 – Central Sunbelt Federal Credit Union offers 2.76% APY on a 12 month CD
• September 2009 – The best CD rates in New jersey (Newark) are only paying 2.50% APY
• October 2009 – The best CD rates in North Carolina (Charlotte) are only paying 2.25% APY – and that’s for a 5 year CD.
• November 2009 – The best 7 year CD rates are only paying 4.0% APY
• December 2009 – The best 6 month CD rates in Florida beat the national average by almost 2 x – and they only pay 1.76% APY.

The Future of Brazil’s Economy: Investment Grade.

The potential for Brazil to be among the world’s front-runners as one of the most stable and prosperous economies has existed for as long as it’s been inhabited. It’s natural resource quality and quantity is rivaled by no other nation and it’s society is controlled by a democratic government whom support capitalistic philosophies and open and free markets (although Brazilians still prefer a strong government presence). And when you take a closer look at the formation of Brazil you can’t help but notice striking resemblances to elements seen in the formation of the United States (although not all of them beneficial towards economic growth).

A November issue of The Economist noted several similarities of the make-up of Brazil to the US. The most prominent listed below:

• Both are continent sized countries in the western hemisphere with vast amounts of natural resources.
• Both are controlled by federal democracies in which individual states have substantial power.
• Both were originally formed by small European nations before gaining independence.
• Both populations are comprised of the descendants of their original inhabitants, early colonists and African slaves along with European and Asian immigrants following closely behind.
• Both places show a favoritism of consumption over saving during times of prosperity.

When you combine a country who is rich in natural resources (Brazilian/Portuguese term for understatement), who encountered a similar formation to a country with the largest economy in the world, and a democratic government with capitalistic tendencies, you’re surely bound for financial success, no?

Economic Facts suggesting a very successful 2010 for Brazil:

• Self sufficient in oil.
• Recent discoveries in off shore oil being brought to market.
• 3 out of 3 of the main rating agencies classify Brazil as “investment grade.”
• Brazil has announced it will begin lending money to the IMF (an organization who only 10 years prior was reluctant to lend money to Brazil).
• FDI (foreign direct investment) was up 30% in 2009 while the rest of the world suffered a 14% loss in FDI.

While the bulk of economic gains for Brazil will undoubtedly take place outside of the 365 days making up 2010, the long-term future is certainly bright for this South American country.

Further Reading:

Learn how to add foreign currency bank CD’s to your portfolio, OR foreign currency index CD’s.

Best online brokerage for options traders

Barron’s online broker survey rated OptionHouse the # 1 online brokerage firm for trading options a few months back and we just wanted to make a quick note of it on BankVibe.com. Barron’s survey was based on usability, trade experience, trading technology, range of offers, research amenities, portfolio analysis and report, customer service and access, and costs. 

After we posted TradeKing’s $50 promotion, we figured we would give a shout out to another online brokerage offering an exceptional product.

The Dow has been making somewhat of a comeback over the last few weeks and we have seen many BankVibe readers opt to invest in the market over conservative bank certificates of deposit.

OptionHouse’s Prices:

• Only $2.95 per trade (flat rate for all stock trades!)
• $9.95 flat rate for options
• $14.95 flat rate spreads (up to four legs)

Does this bank stand a chance?

A very interesting story came into our inbox over the weekend…

Apparently the smallest bank in the country resides in a small town known as Oakwood, Texas. With a population of only 512, the median resident age is a decade older in Oakwood than the rest of the state. Maybe it’s these older residents that keeps this bank in business.

Oakwood bank has been around for over 100 years and employees 2 full time staff members along with the president, Rodey Wiley. Forget about going green, Oakwood bank refuses to use computers and provide online banking options to it’s customers. In fact the only piece of “modern technology” used is a typewriter/calcualtor which was manufactured “before Bill Gates was born.”

It’s open for 5 hours a day and the speed of operation seems to move at a snail’s pace…