Bigger doesn't always mean better, especially when it comes to choosing where to park your money. Big banks might dazzle customers with cutting-edge apps and ATM locations across the country, but these benefits come at a high (and sometimes hidden) price. Small banks and credit unions often represent a better option for many consumers, but finding out if they're right for you first requires understanding the reasons people should beware of big banks.
Bank customers are charged overdraft fees only if they opt in to something called "overdraft protection." The phrase sounds reassuring, but the Consumer Financial Protection Bureau suggests customers avoid it. Customers who don't have it simply can't make transactions when there's not enough money in their accounts; but with it, banks can charge customers a fee every time they overdraft -- typically $35 at big banks in 2016, when The New York Times reported on a study showing that even the "not representative" group of small banks with overdraft fees tended to charge a little less ($32) and in ways that minimized the financial damage.
Big banks have moved away from harsh overdraft fees in recent years, but the downside is they seem to have replaced that lost revenue by eliminating free checking services. Today, the best bet for finding free checking can be found in small banks, credit unions, and banks without bricks-and-mortar locations.
Small banks tend to provide more personalized service because their business depends in part on maintaining good relationships with the community. This kind of intimacy is hard to achieve at big banks, which tend to be more bureaucratic and have higher staff turnover. Developing a good relationship with a bank can come in handy, especially when you need to get fees waived or negotiate the terms of a loan.
Tellers and financial advisers at big banks often earn commission when they sell customers cards, mutual funds, or high mortgage loans. Each offer varies, but there are often better deals on these financial products at credit unions or small banks. Just remember: Before signing up for services at a big bank, do some research and consult a financial adviser if possible.
Big banks have to process huge numbers of loan applications every day. To do this efficiently, they approve or decline applicants based on a fairly rigid set of guidelines. Small banks are often more flexible when it comes to lending for two main reasons: You're more likely to deal directly with a decision-maker, and small banks are more familiar with local market conditions.
Wells Fargo announced last year that it had discovered a total of 3.5 million fake deposit and credit card accounts registered to real customers, many of whom were charged hidden fees. It's far from the first time big banks have engaged in shady practices -- investor deception, mortgage and foreclosure abuses, and municipal bond bid rigging, just to name a few. Every bank is different, but it's safe to say these kinds of practices are less prevalent in community banks.
In 2014, JPMorgan was hit by hackers in a data breach that affected some 76 million households, resulting in "the largest theft of customer data from a U.S. financial institution in history." Big banks such as JPMorgan Chase aren't necessarily more vulnerable than small banks, but it's worth considering that they represent a much bigger target for hackers.
Many small banks offer high-yield checking accounts that earn interest if they meet certain requirements -- some with rates that can be three times higher than those of national banks. (Remember that rates and conditions vary, so do some research before jumping at the first high-yield checking account offer you find.)
Big banks are for-profit institutions that have little reason to offer customers low-interest loans or high-interest savings accounts. In contract, a credit union is owned by its members and is therefore able to offer great rates on loans and savings accounts. Every credit union account is still insured up to $250,000 by the U.S. government, though -- the same amount as banks.
Many big banks now charge monthly fees simply for maintaining a checking account that contains less than a certain amount of money. At Bank of America, it's now $12 -- or $144 annually just to hold your money and perform basic services. If you don't meet the requirements needed to dodge these fees, consider opening an account with a credit union or community bank that doesn't hit customers with monthly "service" charges.
Big banks might seem like the obvious winner when it comes to convenience: They have more bricks-and-mortar locations in more cities than small banks and credit unions. But it can vary significantly from city to city, while credit unions solve the problem through shared branching, allowing members of one credit union to access financial services at other credit unions, such as in the CO-OP Financial Services network. Some small banks reimburse customers for using out-of-network ATMs.