The Rise of Alterna Banks

January 30, 2013 Categories: bank alternatives financial relationships

Credit Unions Aren't the Only Option for Leaving Your Traditional Bank

According to the FDIC, 821,000 households ditched their banks between 2009 and 2011. The financial crisis, the foreclosure robosigning scandal, and the huge amounts of money banks were raking in from fees turned many consumers against big banks. Bank Transfer Day during November 2011 was founded on some of these bad bank practices and had many consumers switching to credit unions.

Even as new regulations have forced banks to change some of their ways, more consumers are expected to close their accounts. A recent survey by Javelin Strategy & Research found that 11% of Americans plan to switch banking institutions in the next year.

While credit unions or community banks may be the best alternative to you—much like a traditional bank, but with none of the big fees or devious practices—others might find some of the “alterna-banks” a better fit.

An article in Time magazine, “The Rise of the Alterna-Banks: 4 Options Beyond Traditional Banking”, lays out four alternatives that might be of interest to consumers fed up with traditional banks.

1. Full-feature prepaid debit cards. Maybe you have been scared off from banks by overdraft fees and other zingers that zap your balance. You don’t mind paying a little bit, but you want to know what fees you’re paying upfront. You don’t really use paper checks, but you’d still like to get the other perks that come with a regular bank account. If these descriptions apply to you, look into prepaid cards.

What’s good: The prepaid landscape has expanded greatly over the past couple of years, prompting providers to lower fees and add features.

What’s not: Prepaid cards are still mostly unregulated. Most providers comply with rules for regular debit cards, so that customers are protected if a card is lost or stolen, but they are not required to comply. The lack of rules also means there is something of a free-for-all when it comes to fees. If choosing a prepaid option, be sure to examine the fine print so you know where all the fees stack up.

Standouts: Chase’s Liquid and Bluebird (offered jointly by American Express and Wal-Mart)

2. Web banking and budgeting accounts. New web-based platforms deliver a combination of banking and budgeting tools. They aren’t banks. But they do partner with financial institutions (like community banks and credit unions) that provide many of the services included in typical bank accounts. These platforms are loaded with money management tools that help users manage their spending.

What’s good: If you’re a fan of personal finance platforms like Mint.com and wish you could keep your money in the same place you manage it, this option gives you one-stop-shopping on your computer or smartphone without the fees that weigh down most regular checking accounts. Heavy-weight analytics tools give in-depth insight into your spending and saving habits.

What’s not: If you want a brick and mortar banking experience like seeing a teller or visiting a branch, this probably isn’t for you. Also, standard account features like paper checks also might not be available.

Standouts: Kasasa (used by many credit unions) and Simple

3. Prepaid debit with high-interest savings. This category combines the functions of a prepaid debit account with the high-APR (relatively speaking) savings feature of online banks like ING Direct and Ally.

What’s good: Interest rates in the 5% ballpark—much, much higher than the average bank account rate, which is barely above 0%—are not unusual. Some providers offer budgeting and personal finance tools as well.

What’s not: In a word, fees. The eye-popping interest rate is the eye-catching figure these providers want you to see, not the fee schedule which will show you really aren’t making any money on your savings. Some cards even charge a fee with every transaction.

Standout: Mango

4. Mobile bank account. Green Dot, one of the granddaddies of prepaid debit, rolled out a mobile bank account last week, following its acquisition of a bank in 2011 and mobile-location service provider Loopt last year.

Called GoBank, it’s designed to appeal to consumers who grew up with smartphones and social networks. The entire experience takes place via the bank’s app for iOS and Android or through a user’s mobile web browser.

What’s good: It doesn’t hit users over the head with fees. The monthly fee is set up on a sort of honor system: there’s a “pay what you want” feature that lets customers choose an amount varying from nothing to $9 per month. There are no overdraft fees and few other fees (like $2.50 to use an out-of-network ATM). Direct deposit and mobile check deposit using the phone’s camera are free. Users don’t get checkbooks, but the bank will mail a paper check to anyone on request, or they can send money to people via text message or through Facebook.

What’s not: To deposit cash, users can buy a Green Dot MoneyPak for around $5, or deposit cash fee-free at Walmart cash registers with a swipe of your debit card. Green Dot plans to make this feature available at more retailers in the future. For people who aren’t used to conducting transactions via their phone—or who don’t have a smartphone—GoBank won’t be a viable option. But GreenDot is betting that younger customers would rather have their bank at their fingertips than down the block.