Well, besides finance nerds like myself? And even a finance nerd like myself thinks that banks are inferior to social lending. But that’s another story.
This is my guide to internet banking. We’re going to cover everything from where to get a free business checking account to where to find the best high yield savings accounts.
Best Online Savings Accounts
- High Yield Savings – Find the best online savings account for you in 2012, build that emergency fund!
- Online Checking Account - I took a look at all the top online checking account options in the US
How Does A Bank Make Money?
I have this thing for annual reports. Even though I don’t own any stocks at the moment, I still find myself reading annual reports on companies that interest me. Lately, that has been large banks.
Specifically, I’ve been fascinated by how large of losses many of these institutions had in 2008/2009. They make my own trading losses of 300K look like peanuts!
But in uncovering how the banks lost so much money, I came to understand more about how banks make money, and manage risk. And it’s really, actually, quite simple, and yet very advanced at the same time.
How Banks Make Money
Here’s the most basic version:
You deposit $5,000 into a savings account at Huge Global Bank. Huge Global Bank pays you interest on your $5,000, of lets say, 1.1% APY.
That is Huge Global Bank’s “Interest Expense”
Now, Huge Global Bank also offers mortgages to it’s clients. Huge Global Bank is offering an 5/1 ARM (adjustable rate mortgage) at 4%.
That mortgage becomes Huge Global Bank’s “Interest Income”.
Interest Income (4%) – Interest Expense (1.1%) = 2.9% Net Interest Spread
The “Net Interest Spread”
The Net Interest Spread (Interest Income – Interest Expense) is the holy grail of banks. It’s the butter to the banks bread. It’s the Adwords of Banks, the cash cow. You get the idea.
Other Sources of Income
Huge Global Bank also may bring in income from other, non-interest sources like: overdraft fees on checking accounts, atm fees, insurance commissions, brokerage fees (if they offer securities), investment banking fees, etc.
Risks Bank Take
There are numerous risks that banks take in going after the holy grail of the “Net Interest Spread”
Interest Rate Risk
In managing the spread, banks open themselves up to the risk that interest rates may change. Since they typically “invest” (issue 30-year loans, or buy longer term investments like treasuries, municipal bonds, etc) at a longer time frame than they pay out interest (you could withdraw your savings at any time), this exposes the bank to scenarios where their holy grail “Net Interest Spread” gets very slim, or even negative (they are paying more in interest expense then receiving in interest income).
This is why Banks love Certificate’s of Deposit! If a bank can get you to purchase say at 2-year CD, they know the exact amount of interest they have to pay over those 2-years. It’s locked up, and this removes some of the risk they are exposed too. Of course, the longer they lock up your money, the high rate they will pay you.
Since banks also invest in treasuries, corporate bonds, and municipals bonds, they are also exposed to interest rate risk in those investments (if interest rates rise, bond prices typically fall).
Ouch. During the housing boom heyday, many banks dramatically under-estimated their default risk. Default risk is the risk a bank takes that the mortgages (or credit cards, or personal loans) that they issue will not be repaid by the borrower.
Many banks invest heavily in mortgages that are securitized. They may not have issued the mortgages, but they will buy packages of mortgages issued by other parties.
These investments are known as MBS (Mortgage Backed Securities). In the housing bubble heyday, many banks heavily invested in MBS that paid higher yields (in order to achieve a higher “Net Interest Spread”) because the underlying mortgages were sub-prime (even though they may have been rated AAA, but that’s another tale).
When those mortgages quit paying, the value of the MBS dropped like a rock. And thus the billions and billions of dollars in losses.
Banks also face currency risk, operational risk (a rogue employee), and liquidity risk. Liquidity risk comes into play when the bank experiences unexpected withdraws (a “run on the bank”), and currently doesn’t have the cash on hand to meet the withdrawals. Banks are regulated to keep a certain amount of reserves available to prevent this scenario.
Can You Be A bank?
Looking at how Banks invest, most seem to shoot for a 4-5% return on their money. Most achieve this primarily from issuing home loans, but also investing in corporate bonds, municipal bonds, treasuries, and mortgage backed securities (essentially bundles of home loans).
As an individual, you cannot make mortgages, but you can now become a lender for personal loans with Lending Club. Also, individuals can purchase corporate bonds and treasuries just like a bank. Even mortgage backed securities can be purchased (in $1,000 denominations from Freddie Mac & Fannie Mae, $25,000 for Ginnie Mae).
As for me, a 4-5% return doesn’t sound too shabby.
Five Lies Your Bank Will Tell You
Color me cynical. But I no longer love my bank. And they no longer love me.
In fact, I’ve come to realize that they never loved me, they were only in it for the money.
I used to think that one’s relationship with one’s banker was a key element of a happy adult life (the key to a happy childhood being one’s relationship with one’s blankey), but now I liken it more to a marriage in which the partner is of the what-have-you-done-for-me lately school of interpersonal expectation.
That only-in-it-for-the-money context applies in both cases, by the way.
And while I’ve changed both banks and domestic partners more than once, I’ve also learned how to recognize when the relationship is going south — it coincides with my credit score — and when to cut and run.
I’ve also learned why that happens. Because both banks and life partners are capable of lying through their teeth when it serves them.
Here’s five common untruths you will hear if you visit your bank often enough. You’re on your own regarding your co-signer.
They need to put your check on hold.
No, they don’t. And you can get around this by challenging that assertion.
Let’s say you’ve just sold your car, and you arrive at the bank with a personal check – even a cashier’s check at some paranoid banks – for, say, $17,ooo. A lot of money, that.
This gets worse if you’ve just sold a house and have a check in excess of six figures. (Then again, this is 2010… sorry, I reminisce… that’s not gonna happen.)
You’re not asking to have the check cashed, to walk out with a grocery bag full of bills. No, you just want to deposit the thing into your checking or savings account.
There’s a significant chance your bank, via the just-out-of-training teller, will tell you they need to put a hold on the check. That your deposit won’t become available to you for as many as 17 days (I’ve encountered this four times recently, as I’ve sold off everything I own to stay afloat, and have been given hold-times of 3, 11, 15 and 17 days.)
That little policy seems to change weekly, depending on which branch you go to.
The thing that’s wrong here is that checks – any check that doesn’t come from someplace like Kirgizstan or Caracas – no longer take 3, 11, 15 or 17 days to clear. They clear that night. Or if you show up too late in the day, it clears the next night.
Literally. The computers of the cashing bank and the issuing bank connect in the dark of the digital night to canoodle and reconcile their respective balance adjustments, which includes the availability of funds in the issuer’s account.
This decision to hold your check can be overridden by the bank manager. It happens daily. So don’t be afraid to ask. If you’ve had an account with them for a while, and your record is voidof fraudulent check cashing activities, don’t leave until they waive this ridiculous, inconsistent policy.
If they don’t, get a new bank. Because yours sucks.
They need to charge you a fee for your checking account.
No, they don’t. Virtually every bank has free checking, and some don’t even require a minimum daily balance.
Ask. Shop this one. A better deal is out there.
And it might include such features as free ATM transactions and no-fee checks, not to mention straight answers to your questions from someone who still has to bring their lunch to work with them everyday.
They pay a competitive interest rate.
No, they don’t. In fact, the rates paid by banks on interest-bearing checking and savings, included Certificates of Deposit for 90 days or a year, are laughable.
Shop this, too. A better deal is out there, probably in the form of a new account incentive or simply a better deal from a smaller, hungrier bank.
Big isn’t better when it comes to banking. In fact, read the news, the biggest names in banking are the bad guys in many of the economy-sabotaging events of recent years.
It isn’t like the old days. If your daughter wants to marry a banker, call in a counselor.
Your money is always safe with them.
Then again, the Big Boys probably aren’t going anywhere. They will continue to get bailed out and sucked-up to by lobbyist-appreciative legislators who will ensure their ongoing profitability.
Still, bank failures are at an all-time high. Two words: Washington Mutual.
The feds continue insure your money through FDIC, but there’s a real chance you’ll have to reprint your checks before your kid graduates high school.
A merger by any other name is still a bank failure.
They care about their customers.
Right. You can take that one to the bank. Which, if you’ve been paying attention, is the problem.
Rest assured, the moment things get rough and your credit score tanks, you bank will reduce your credit limits, shut down your line of credit and generally act like you are trying to abscond with their office furniture.
How long you’ve been with them makes absolutely no difference. This isn’t a family business, never has been. And it’s all about them, not you.
Take care of yourself first.
The banking industry has changed significantly since your parents opened that college fund for you back in the day — back when real estate and the stock market were a sure thing over time – and not just with the advent of Saturday banking and the ability of an ATM machine to everything just shy of a foot massage.
One of those changes is the proximity of viable consumer options. No longer are you stuck with the First National Bank of We Own Your Sorry Ass, there are small banks and alternative savings vehicles available through insurance companies and credit unions.
The latter of which actually might still care that you walk out their door confident and satisfied. At least until one of the bigger banks swoops in with a merger offer they can’t refuse.
Nolan has been banned from the lobby of several nationally-known banks for disrespecting the 28-year old recent M.B.A. who manages the branch while attempting to put a hold on his checks. He now banks online where he is not recognized as anything other than a number.