Bank Switching Costs: Why Bother?

By James Kwak

One of the Free Exchange bloggers (some people know who is who by name, but I don’t — if anyone wants to enlighten me, I’m listening) admits choosing his bank because it was big, and staying there because it is big. He also links to James Surowiecki, who asks in the “notes” to his latest column,

“[W]hy, given the broader backlash against the big banks and the less-than-inspiring performance they’ve turned in over the last couple of years, are people still sticking with them? What makes this even more curious is that the big banks, which have historically offered their customers worse deals than smaller banks, have not changed their ways: they pay less for deposits, charge more for loans, make billions from overdraft fees, and have jacked up credit-card rates.”

When it comes to retail customers (you and me), Surowiecki highlights switching costs (add your own example) and brand (“It’s nearly impossible for consumers to evaluate how healthy a bank is. So, at a time when banks are failing with some regularity, the size and ubiquity of these big banks is reassuring.”). Free Exchange thinks the issue is the implicit government guarantee:

“[I] bigness is associated with security, then real bank competition means convincing customers, along with everyone else, that the government has a plan to unwind its implicit guarantee for banks and that ultimately the country’s largest banks will be as subject to failure as everyone else. If that can’t be achieved—if real market pressures aren’t ever going to apply—then it may be time to start thinking of large banks as natural monopolies, to be treated like regulated utilities.”

I’m a little skeptical of the brand/security argument, since most people don’t have more than $250,000 (the FDIC insurance limit) in their bank accounts. But maybe people don’t really trust the FDIC, or don’t realize how seamless the process is for them, and they would rather trust the Citigroup (C) logo.

The switching costs certainly are high, and I can provide some anecdotal details. I’m in the process of switching out of Bank of America (BAC). Moving all my bill payments and direct debits from B of A to another bank was pretty easy, although in some cases I had to call someone to get the right form. Moving my safe deposit box was a pain that cost several hours of time. Moving my direct deposits was pretty easy, although again it required paper forms. The trick was the ATM fees, but I found a checking account (PeoplesBank in Holyoke, Massachusetts, with branches in the Springfield-Holyoke-Northampton area) that refunds other banks’ ATM fees. (In the interest of fairness, I should also put in a plug for my other local bank, Greenfield Savings, which pays 0.75% on checking accounts.)

It can be done. But a bigger question would be, why? I feel like I need to as a matter of principle, given my well-known positions on this issue. But I don’t expect the average person who is frustrated by big, unfriendly, bailed-out banks — even the average reader of this blog — to invest the few or several hours it takes to switch. Most people probably don’t have enough money in their deposit accounts for the higher rates you can get at local banks to matter. When it comes to most political issues, I think most people feel individually helpless; when it comes to Too Big To Fail, which, let’s face it, is a pretty technocratic issue, I suspect we feel even more helpless.

Comments

[apppro:]

Those people who you refer to as 'helpless' to move are more then likely the same ones that took out all those loans they should have known they couldn't pay back in the 1st place. Have you not heard of personal responsibility? We are all in control of our own destiny when it comes down to day to day individual circumstances. However, we are not masters of our own fate, when it comes down to reigning in the "Let It All Fails" who drove us into this deplorable situation.

Again you seem to be placing the blame on everyone except the 2 people who caused all this:
1. The shorts who rumormongered our confidence into the toilet and naked shorted our financial system to the brink; and
2. OURSELVES, who couldn't control our own greedy personal wants and needs.

Oct 27 07:16 AM

[TinyTim:]

Thanks for the comments.
I doubt whether most people are not switching because of the brand stability TBTF and certainly not loyalty.

I think you hit it right. It would be a royal pain for me to switch out my BofA services (like yours- bill pays, several checking & savings accts, safe deposit box, credit cards, local branches, etc)

What I do instead is keep everything down to a minimum balance for the account bundle to avoid monthly fees. I take whatever excess cash I have and sweep it into a savings bank. In my case, Apple Bank in NY which offers a few percent on savings. I can transfer the funds from Apple to BofA easily. I did switch the credit cards easily to Cap One since there was no balance.

Oct 27 03:40 PM