If Credit Unions Are Better, Why Don't More People Use Them?

You've probably read it somewhere -- credit unions are better than banks. That's what Consumer Reports, Bankrate.com, and Money magazine say. Credit unions are owned by members. They are not for profit. They pay higher interest rates on checking accounts, savings accounts and CDs. They charge lower interest rates on credit cards, car loans and home loans. They also charge lower fees for overdrafts and late payments. They have more friendly customer service. Credit Unions have NCUA insurance just like FDIC insurance for bank deposits. What's not to like them? It begs for a question:

If credit unions are better than banks, why don't more people use them?

According to Monthly Credit Union Estimates (pdf, pp 9-10) by the Credit Union National Association, credit unions' market share is much smaller than banks'. For the purpose of market share comparison, I'm counting savings and loans -- think Washington Mutual and ING Direct -- as banks.

	Credit Unions	Banks
Household Savings	10%	73%
Non-Revolving Consumer Loans	13%	33%

I don't have a good answer to this question of why the credit unions' market share is so small if the conventional wisdom is that they are better than banks. I'm hoping you can help me figure out. I have a few hypothesis in no particular order. First I will share why I'm not using a credit union myself.

1. Banks have better products. The Fidelity mySmart Cash account I'm using is technically not a bank account. The underlying services are provided by three banks -- Fifth Third for depositing the balance, PNC for debit card processing and UMB Bank for checks and ACH. I have yet to see a credit union offering anything that matches Fidelity mySmart Cash although some of the new reward checking offers come close. My credit cards are also issued by banks, not credit unions. These cards offer better rewards. My mortgage was also funded and serviced by a bank, although this is perhaps where credit unions are most competitive. If I ever refinance again, I will probably get it from a credit union. My car loan is through a manufacturer's finance company. It's neither a bank nor a credit union.

2. Banks market themselves better. Banks have larger marketing budgets. They advertise on TV, radio, billboards, in newspapers and magazines, and online. More marketing brings more customers. You would think customers choose their banks by the services they get and by the prices they pay, not by who advertises more, but maybe some fall for advertising.

3. Banks have more outlets. Banks have more branches and more ATMs. They are on street corners and in grocery stores. More outlets mean more convenience for their customers. In the world of direct deposits, debit cards, online bill payment, and cash back from grocery stores, I wonder if the benefit of more outlets is more perceived than real. Many credit unions also participate in the CO-OP Network which offers 25,000 surcharge-free ATMs nationwide. Even if one has to pay a few bucks for getting cash once in a while, the customers may still be better off with a credit union. Perhaps customers prefer to do their banking face to face.

4. People don't know they can join a credit union. This goes with #2 about marketing. In the past you have to be an employee of certain employers or you have to be a member of an association of some kind in order to join a credit union. Nowadays there are many community based credit unions. As long as you live in certain counties, you can join many credit unions in the area. There's even a FindACreditUnion.com which lets you search for a credit union by your address. I put in my info and I got a list of at least 15 different credit unions around me. I'm pretty sure most people can join a credit union if they really want to.

5. Banks are better than credit unions after everything is taken into consideration. Banks and credit unions compete for deposits and loans. Customers are looking out to their own best interests. After everything is taken into consideration, more people still chose banks. Sure people complain about banks ripping them off by giving them very little interest for their savings and charging them high fees for overdrafts, but after all is said and done, people voted for banks with their wallets. Maybe, just maybe, the conventional wisdom is wrong and banks are actually better after all?

Now it's your turn. Do you use a credit union for your checking account, savings account, CD, credit card, car loan, or home loan? If not, why not? If you already use a credit union, why do you think more people don't use one?

Never Pay a Late Fee Again

Ranking above overdraft or NSF fees from the banks, late fees from credit card companies are probably the most hated fees. Even finance blogger and business executive Shadox who is usually on top of these things is sometimes caught by a late fee. If you ask them nicely, as in Shadox's case, the credit card companies will sometimes reverse the late fee. It would be much nicer if you don't have to spend the time begging them. I wrote previously about how to avoid overdraft or NSF fees from the banks. This time I'm going to share a few tips about how to avoid the late fees from credit card companies.

1. Use a card that doesn't charge a late fee. Not all cards charge a late fee. Some cards actually advertise it as a feature which distinguishes themselves from other cards. If you hate late fees, use one of those cards that don't charge a late fee. If other cards begin to see that they are losing customers because of late fees, they may stop charging late fees too. Clear from American Express is a card that doesn't charge late fees or over the limit fees. I don't personally use this method because I have a better approach. Read on.

2. Reduce the number of cards you use. The fewer accounts, the fewer payments and due dates to worry about. I have only 3 cards: one for business travel, one for gas, groceries and drug store, and one for everything else.

3. Schedule an automatic payment of $100 every month using your bank's online bill payment function. Set it to a date between your credit card statement closing date and your payment due date. It's a one-time setup. Then you don't have to worry about being charged a late fee. I heard this tip from someone else. The minimum payment for most cards is 2% of the statement balance. $100 should cover the minimum payment in most cases. If you charge a lot, make it $150 or $200 or whatever amount that will always cover the minimum payment. With a minimum payment coming in automatically before the due date, you will never be charged a late fee. You can make up for the rest of the bill by your normal due date. Even if you are occasionally late with your second payment, you may be charged a small finance charge, but you won't pay a late fee.

4. Let them auto debit. This is what I use now. I turn over the responsibility for making the correct payment on time to the credit card companies. All my cards offer auto debit. If you don't see it offered online, call up customer service and ask for an enrollment form. I signed up all my cards for it. I let them debit my bank account for the full statement balance on the due date. This way *they* are responsible for making sure my balances are paid in full on time every time. It works perfectly. A side benefit is that I have my money in my bank account for a few extra days. When I was making the payments myself, I usually leave about a week of cushion for possible delays in processing. Now the credit card companies always debit on the exact due date.

This setup also solves the problem of due date creeps. Sometimes credit card companies reduce the grace period and therefore change the due date. If you didn't pay attention and always pay on the same date, your payment may be late. Now if they are doing auto debit, they are responsible to tracking the due date changes.

What if you have to dispute something? Letting them auto debit doesn't mean I don't read the statements. If I find something not right, I can still dispute it. If the amount isn't high, I'm OK with paying it while disputing it. That just makes it much cleaner. If I win the dispute, I get a credit back. If I lose, I already paid it. Unless it's an unauthorized charge or a duplicate billing, the credit card protection probably isn't as strong as they make you believe. In all these years using credit cards, I only had one dispute and it was denied.

Related Posts:

• How To Avoid Overdraft/NSF Fees
• Why Banks Push Debit Cards

Links: Overdraft, ETF Conversion, Junk Mail and a Quiz

Here are some articles I found interesting this week:

Consumers Want Informed Choice on Overdraft Fees and Banking Options (pdf, via Payments News) - A survey from Center for Responsible Lending found that most consumers want debit card purchases declined if they would result in overdraft fees. Rather than begging the banks, there are better ways to do it. See my previous post How To Avoid Overdraft/NSF Fees. The interesting tidbit from the survey is that when the consumers were asked about what they'd prefer when their $5 purchase is about to trigger a $34 overdraft fee, 20%(!) of the people said they would rather pay the fee and continue with their purchase (Table 5 on page 4). When the purchase amount goes up to $40, even among people who have been stung with an overdraft fee recently, 25% of them would choose to pay the fee again.

Review of VEIEX to VWO ETF conversion at VBS (indexfundfan @ indextown) - IndexFundFan wrote in detail how to convert a Vanguard mutual fund to an ETF. If you are not familiar with ETF conversion, also read Should I convert VEIEX to VWO ETF? and Is it worthwhile to pay the ETF conversion fee? by the same author.

Stop All Junk Mail (The Sun's Financial Diary) - Take you name off mailing lists. Save the environment and save those companies some money too.

The Feds financial quiz (Marketplace) - Test your financial IQ with the Federal Reserve's personal financial literacy quiz. I aced all 31 questions. What about you?

TFB's Stumbles: Week Ending March 28, 2008

Here are some interesting articles. Some are from last week which I didn't have room to include.

What Moves Mortgage Rates? (HSH Associates) - Excellent article from HSH Associates on what determines the mortgage rates. If you are in the market for a mortgage, their free weekly e-mail newsletter Market Trends is very helpful.

Things Can Always Get Worse (MFI Diary) - Magic Formula Investing is doing very badly since last year, but this blogger is still hanging on with discipline. In his own words,

"Not much to say, it has been a bloodbath in the markets and my portfolio continues to do worse than the benchmarks. I can't even bear to look or print the graphs. If it was possible to drop straight down, that is what you'd see."

Will it pay off in the end? I sure hope so. Here is his graph as of Feb. 1, 2008. Click on it for a larger picture.

Wells Fargo To Offer Retail Banking Customers a Personal Online Safe (Payments News) - Will an online safe deposit box gain consumers' trust even if it's offered by a bank?

Why Don't More Employers Provide Independent 401k Advice for Free? (FiLife) - Why don't more employers provide breakfast to all employees for free? Survey shows 70% of them don't have breakfast before they come to work. :-)

Should I Contribute To A Non-Deductible IRA? Part 1, Part 2 (My Money Blog) - Excellent write-up on contributing to a non-deductible IRA. If you are not eligible for a Roth IRA, contributing to a non-deductible IRA is still worthwhile after maxing out the 401k.

SmartyPig: A Simpler Way to Save Or A Fee Trap?

[This post first appeared as a guest post on Free Money Finance on March 19, 2008. Last updated on March 26, 2008 with two footnotes. This is NOT a "sponsored" post. I've had no private contact with anybody related to SmartyPig.]

Smarty what? That was my first reaction when I read about SmartyPig on Netbanker. It sure has a catchy name. What's it about then? From SmartyPig's web site:

"SmartyPig is a simple, smart, fun way to save for a specific goal. Using groundbreaking technology and the latest in security standards, SmartyPig allows you to invite family and friends to contribute to your account, gives you additional incentive boosts from top retailers who sell exactly what you’re saving for AND *4.30% (APY) interest on the money you’re saving."

"*Annual Percentage Yield (APY) is effective as of 3/9/2008. Rates may change at any time without prior notice."

SmartyPig wants to offer a service which encourages people to save for a specific goal, and then make the purchase when the goal is reached, as opposed to charging the purchase now on a credit card which adds to one's debt. I'm all for that. Want that new car or vacation? Save up. In a nutshell, here's how SmartyPig works:

1. Save for a Goal. You open an account with SmartyPig. You create one or more savings goals, minimum $250 per goal. You have to set up automatic monthly electronic fund transfers from your bank account toward these goals, minimum $25/month per goal, although you can also add more money on top of the automatic transfers by doing a one-time transfer. While you are saving toward the goals, your money earns interest in a FDIC insured savings account.

2. Get Help from Family. You can keep the goal private to yourself or make a goal public and solicit help from friends and family. They will have to pay a $5 fee every time they contribute to your goal [note 1]. The SmartyPig founders said they got this idea of collecting money from family members from 529 plans where it's common for grandparents to contribute to their grandchildren's account, although I don't think 529 plans charge fees to the contributors.

3. Redeem Your Savings. You can't get your money back unless you close your goal. You can close your goal at any time, either because you reached your goal or because you changed your mind. You get a prepaid MasterCard debit card from SmartyPig. You can either withdraw money to the debit card or use the money to buy gift cards from SmartyPig's partner retailers. Some retailers will add an up to 5% bonus if you buy their gift cards [note 2]. It's possible to get a check from SmartyPig but you will have to pay a $25 fee per check. From the terms and conditions,

"At no point in time can the funds in your SmartyPig Savings Account be transferred to a third party or a bank account outside of SmartyPig. Funds can only be redeemed on a SmartyPig MasterCard® Debit Card, a Best-In-Class Retail Gift Card or cashiers check."

If SmartyPig achieves what it's supposed to achieve, i.e. getting people to back off from charging their credit cards, it would be a great benefit to the consumers. Netbanker thinks it's "the most innovative financial service we've seen since Prosper launched two years ago" and they gave it a Best of the Web award. However I doubt it will have a material impact on people's behavior, because I think people who want to save will save and people who want to charge will still charge. It's not like people who want to save don't have a good way to save. Online savings accounts are everywhere. Industry pioneer ING Direct lets you set up multiple accounts for tracking different goals. There is no minimum balance, no mandatory requirement for automatic transfers, and no limitation on getting your money back. Or does SmartyPig think people who want to charge their credit card now will give up instant gratification just because there is SmartyPig now? Letting family members contribute to a goal is touted as an innovation but they can do it today easily by sending a check or PayPal payment.

The SmartyPig service itself also has quite a few fee traps. Hey, they've got to make money somehow! You want to contribute $100 to your sister's wedding? They will charge you $5 every time you do it [note 1]. How come you can add money to your SmartyPig account by electronic fund transfer but you can't pull your money back the same way when your goal is reached? Because they want to earn the interchange fees from the debit card. If it takes 1 year for a typical goal to be reached, they pay you 4% interest on an average of 50% of the ending balance (because money is added to the account over time), but they take back 2% interchange fee from the merchants when you use the debit card. That's smart business (for SmartyPig, not you)! They get to recoup their entire interest cost. What a deal. If you ever lose your debit card, they will charge you $20 for a replacement. Don't want the debit card but want a check instead? $25 fee for producing a check. Are the gift cards with up to 5% bonus such a big deal [note 2]? You can buy gift cards today from eBay and a few other places at a discount which translates to a bigger bonus. I can get all kinds of gift cards with a 5.26% bonus if I buy them from a grocery store using a credit card which gives me 5% rebate on grocery store purchases. How did SmartyPig become a roach motel where your money can check in so easily but it's so hard to come out? What's wrong with just crediting back to the same checking account the money came from? I'm afraid it's because they don't make any money that way. Breakage from prepaid debit cards and gift cards is a big deal.

Call me old-fashioned but I see a lot of smoke and mirror in SmartyPig. I also don't see how it solves any problem that's not being solved today. Announcing a goal and sharing the progress with family members is nice. Being charged $5 for the privilege of chipping in is not [note 1]. Separating the savings account balance into specific goals is nice, but not being able to get the saved-up balance back into your bank account is not.

References:

• Netbanker: Social Networking Meets Savings Accounts: SmartyPig Launches this Week
• SmartyPig: Terms and Conditions, Frequently Asked Questions

Notes:

(1) According to the SmartyPig blog, due to customer complaints, they removed the $5 fee for funding someone else's goal if the money comes from a SmartyPig member using a linked bank account. However there is no indication that they will allow free withdrawals to a bank account after the goal is reached or closed.

(2) Without opening an account, I'm not able to see a detailed listing of the gift card bonus rate for each retailer. All we have is a vague footnote:

"Incentive rates and card terms vary based on merchants and are subject to change."

Amazon gift cards are probably the most desirable because Amazon has a wide selection of products and competitive prices. But for all we know, you may not get any bonus at all if you redeem for an Amazon gift card. According to the comment below from Jon Gaskell of SmartyPig, the bonus on Amazon gift card is 2%. There is still no info for other retailers. If someone knows exactly what these "incentive boosts" are for each retailer, please post in the comments. SmartyPig insiders care to comment?

Related posts:

• Why Banks Push Debit Cards
• Online Savings Accounts and Their Backers

Schwab AMT Tax-Free Money Market Funds

Charles Schwab started offering AMT tax-free money market funds. I read about it in the spring 2008 edition of Schwab's On Investing magazine. AMT tax-free money market funds are good for investors who are in a higher tax bracket due to the Alternative Minimum Tax, especially those who also face high state income tax.

Previously Fidelity is the only place I know that offers this kind of funds. Schwab now offers one national and four state-specific (CA, MA, NJ, and NY) AMT tax-free money market funds. The national fund and the NY fund also have two share classes with different expense ratios. The Value Advantage share class is cheaper but you can't use them for automatic sweeps. Investors in MA and NJ only have the more expensive Sweep Shares version, while investors in CA only have the non-sweep version. Like the comparable Fidelity funds, these AMT tax-free money market funds all require a $25,000 minimum initial investment.

Here's the complete list of Schwab's AMT-free money funds*:

Fund	Expense	Yield	Comparable Fidelity Fund
Schwab AMT Tax-Free Money Fund - Value Advantage Shares (SWWXX)	0.45%	2.80%	0.43% / 2.83%
Schwab AMT Tax-Free Money Fund (SWFXX)	0.63%	2.61%	N/A
Schwab CA AMT Tax-Free Money Fund - Value Advantage Shares (SNKXX)	0.45%	2.42%	0.30% / 2.76%
Schwab MA AMT Tax-Free Money Fund - Sweep Shares (SWDXX)	0.65%	2.64%	0.30% / 2.72%
Schwab NJ AMT Tax-Free Money Fund - Sweep Shares (SWJXX)	0.65%	2.64%	0.30% / 2.95%
Schwab NY AMT Tax-Free Money Fund - Value Advantage Shares (SWYXX)	0.45%	2.68%	0.30% / 2.95%
Schwab NY AMT Tax-Free Money Fund - Sweep Shares (SWNXX)	0.65%	2.47%	N/A

* Expense ratios and effective yields for the Schwab funds were from Schwab's web site: sweep funds, purchased funds. Expense ratios and effective yields for the Fidelity funds were from Fidelity's web site. All data were retrieved on Saturday March 8, 2008.

Except for the national fund, Schwab's AMT tax-free money market funds all have a substantially higher expense ratio and a lower yield than the comparable Fidelity funds. But if you prefer to keep your money at Schwab, now you have some new options for your short-term cash.

Related posts:

• Which Vanguard Money Market Fund?
• Risks In Money Market Funds
  
• Tax Equivalent Yield Calculator Updated
• A Baby Step for Simplifying My Finances

TFB's Stumbles: Week Ending March 7, 2008

Here are some of the interesting articles I came across this week.

Gore Invests $35 Million for Hedge Funds With EBay Billionaire (Bloomberg) - Entrepreneur Al Gore increased his networth by at least 30 fold in 8 years (from $3 million to over $100 million). What about you?

Carlyle Fund Misses Margin Calls (New York Times) - A $21 billion hedge fund with 99 percent of AAA-rated US agency mortgage securities could not meet $37 million margin calls. That's what happens when you invest with borrowed money.

Study: Mortgage Intervention Programs Distribute Costs Unfairly (FreedomWorks.org) - Wharton professor writes about the inequality of the mortgage intervention programs. No good deeds go unpunished.

A Great Bargain or a Big Rip-off? Consumers Perceptions of Price Fairness in the U.S. and China (Knowledge@Wharton) - Are you upset if you find out others paid a lower price than you did for the same purchase? Charging different prices to different customers for the same thing and still keep all of them happy is an art.

Series I Savings Bonds vs the stock market (Savings Bond Advisor) - An equal amount invested monthly into I-Bonds in the last 10 years beats the same investment into S&P 500. Surprised?

Banking Fees Are Rising And Often Undisclosed (Washington Post) - Undercover agents from the Government Accounting Office posing as customers couldn't get all the info on fees from the banks. Nor are the fees on many banks' web sites. The banks said the agents spoke to the wrong people.

Knee Deep in Turbid Tax (The Financial Engineer) - Blogger Kristin raised doubts over Obama's proposal to have the IRS fill out the tax forms for you. Who fills out the tax form isn't the problem. The problem is with the complex rules. Politicians either don't think or don't bother thinking about the details.

 

Have a great weekend!

How To Avoid Overdraft/NSF Fees

There is a long discussion on Wesabe Groups about overdraft fees. Some banks call it NSF which stands for Non-Sufficient Funds. In case you don't know, banks apply the debits in a way that maximizes the number of instances of overdraft. They sort the debits on a given day by the amount and apply them in descending order, the largest first, the smallest last. If a large debit produces an overdraft, each subsequent smaller debit on the same day also generates an overdraft. Because the banks charge some customers one overdraft fee for each overdraft occurrence, the more overdrafts, the more fees.

This post is not about whether such practice is fair or how sneaky banks are. You can read about that from the Wesabe Groups discussion and from the articles linked in it. I'm writing about how to avoid the overdraft/NSF fees.

There are basically three ways to avoid overdraft fees:

(a) Find a bank or credit union that doesn't charge an overdraft fee. If they don't charge a fee, you can have as many overdrafts as you want and still not pay any overdraft fees. Good luck at that.

(b) Avoid overdrafts by tracking the account closely. Diligently record every check, debit card purchase, and bill payment. Time the debits and deposits well and understand the bank's funds availability policy. This may work for some people but it's probably too much work for many others. Some banks give their customers a "get out of jail free card" by allowing one overdraft in a year without charge. If you manage your money well, that one forgiveness a year may be enough. For others, mis-timing will still happen.

(c) Avoid overdrafts by having enough money all the time. Duh! If you never have overdrafts, you will never pay an overdraft fee.

Let me expand on option (c). You know everyone is supposed to have an emergency fund that covers 3 months of living expenses. If you have enough money for 3 months without a penny of income coming in, then while you have income, no matter which order the banks apply the debits or how long they hold your deposits, you will never have an overdraft. There are several ways to ensure that you always have enough money for your debits:

1. Leave a cushion in your checking account. You leave some extra dollars in your checking account and never let the balance fall below a certain level, say $3,000. When the balance gets close to the low mark, transfer in some money from somewhere, like an online savings account or a money market fund. That way even if the timing of a withdrawal or deposit is off sometimes, you are still covered. I used to do this. This will avoid the overdraft fees but it also creates a dead balance in a usually no-interest checking account. At even 2% interest rate, the lost interest is $60 a year on a $3,000 cushion. If your checking account pays good interest, then there's no problem.

2. Checking + Savings + Overdraft Protection. In this setup, there's less cushion in the checking account. The extra money stays in a savings account at the same bank. You also sign up for the Overdraft Protection service which will tap your savings account in case there is an overdraft in the checking account. Using the Overdraft Protection service can still incur a fee but it's usually less than the overdraft fee without the service. I've seen some banks charge like $10 per day regardless of how many items create an overdraft on the same day. $10 per day is certainly better than $35 per item. The problem with this setup is that the savings account has to be with the same bank which doesn't necessarily offer a good interest rate and it doesn't completely eliminate the overdraft fees.

3. Brokerage funded overdrafts. This is what I have now. I use Fidelity mySmart Cash account, which I think is the best checking account which is not a checking account. You can leave everything in the "core" part of it if you like simplicity. It'll work like option (1). Every dollar in the account earns some interest. You don't feel bad about having a dead balance. If you want to be more aggressive and have something like checking + savings, just buy a money market fund in the account. The "core" is like the checking part. The money market fund is like the savings part. The overdraft protection from the money market fund is automatic. There is no enrollment and there's no fee. It just happens. If you don't have enough balance on the core side when a debit comes in, your money market fund is automatically tapped for the difference. Neat. Some people go to the extreme of having $0 in the core and everything in a money market fund. I'm not that aggressive. I still leave a few thousand dollars in the core because I like to settle for good enough. Getting 2% sure beats 0% which I had before.

Now that I have Fidelity mySmart Cash, I can go out of the country for 3 months without pay and still have all my bills paid without an overdraft, while at the same time earning good interest on my money and not worrying about moving money back and forth. That's hard to beat.

Financial Terms From the UK

I started listening to a podcast from Financial Times in the UK, The FT Money Show, because I'm interested in how people in other countries deal with their finances. I've heard the expression that "England and America are two countries separated by a common language." It is true. Just from listening to two recent shows, I've learned quite a few things for which the terms are different in the UK and in the US. I had to look them up in Wikipedia. I'm listing them here with their rough equivalents in the US.

UK	US
Building Society	Savings & Loan
Current Account	Checking Account
Property Fund	open-end mutual fund which invests directly in real estate, uncommon in the US
Property Investment Trust	closed-end mutual fund which invests directly in real estate
gearing, geared	leverage, leveraged
Unit Trust	Mutual Fund
OEIC	Mutual Fund
Individual Savings Account (ISA)	Roth IRA
Venture Capital Trust (VCT)	no equivalent in the US
dealing charges	(brokerage) commission
Base Rate	Federal Funds Rate
quid (1 quid = 1 pound)	buck (1 buck = 1 dollar)

Terms aside, people in the UK are actually dealing with similar issues. There is concern for the housing market (flat to slightly down) and for the commercial real estate market (down 30-40%). There is speculation on what the British currency will do against the U.S. dollar, on whether the central bank will lower interest rate, talks about getting account opening bonuses for switching checking accounts and lowering utility costs by switching energy providers. It is quite interesting.

Why Banks Push Debit Cards

The Wall Street Journal reporters at FiLife started a series of "Why Don't They ..." blog posts making suggestions about services and practices which seem to make sense to the customers but not offered by the financial institutions. I gave a one-word answer -- economics. If you think they should do something but they are not doing it, first think about the economics. More likely that not, it's because they make more money by not doing it. Companies are driven by ROI -- return on investment. They also compete with each other. The companies are NOT stupid. If something provides a benefit to the customers and it delivers a good ROI, you bet some companies will do it. If you don't see it happening, it means there is no good ROI or they are pursuing something else with a better ROI.

In Why Don’t They… Let Me Have an ATM card that Isn’t a Debit Card?, Ron Lieber asked why the banks give their customers a debit card bearing a Visa or MasterCard logo (also known as a Check Card) instead of just a plain ATM card which can also be used as a debit card but only with a PIN. In a follow-up post, Ron found out that many large banks actually do give out plain ATM cards but they don't make it the default option. Nor do they make it apparent that the customers have that choice. You have to specifically ask for it. It goes back to my previous post Opt In or Opt Out: The Power of the Default Option. The default choice is designed to benefit the business offering the choices.

A Visa/MasterCard debit card can be used with or without a PIN. When you use it with a PIN, it's called "PIN debit." When you use it without a PIN, it's called "signature debit." If you lose the debit card, whoever found it can use it in any store by doing signature debit. The cashier is supposed to check the signature but we all know they don't do a good job at that. A plain ATM card can only use PIN debits. Therefore it's more secure. If you lose it, nobody can use it without a PIN. You would think the banks should prefer a more secure card, but they don't. They push for the less secure card because they make more money if you use signature debit instead of PIN debit.

According to this article on MSNBC, for a $100 purchase, the bank can earn $1.48 if you use signature debit, $0.20 if you use PIN debit. Guess which button the banks want you to push? If you are a bank, which card do you want to send to your customers, a debit card that can do signature debit or a plain ATM card that can be used only with PIN debit? No contest. The banks make all kinds of efforts to push their customers to use signature debit instead of PIN debit. Examples:

- Wells Fargo gives ~0.25% reward for using their check card. Only signature debits are eligible. PIN debits don't count. In some areas, Wells Fargo charges $1 in any month you use PIN debit at least once. No charge for signature debits.

- U.S. Bank charges customers in some states $0.25 for each PIN debit. Ouch! That sting will sure train the customers well not to push that debit button or say "debit" ever again. No charge for signature debits.

Another reason the banks push debit cards is that the customers are more likely to generate overdraft fees that way. When the customers switch from writing checks to using debit cards, they often also ditch their check register. It becomes harder to track the purchases. Before you know, small purchases add up and you will bounce a check or scheduled draft.

If you like using a debit card instead of a credit card, and you care about security, ask your bank for a plain ATM card. You don't get it unless you ask for it. Avoid banks that punish you for using PIN debits.

Best Checking Account Which Is Not A Checking Account

[Rates and offers change. All rates and features were current as of the date of this post. Please check the current rate and offer with each company.]

Traditionally a checking account pays no or low interest but lets you write checks, have a debit card, withdraw cash from ATMs, and do online bill payment. A savings account or money market fund pays higher interest but lacks some of the transactional features. Bank savings accounts also limit you to 6 withdrawals per month due to Federal Reserve Regulation D. Wouldn't it be nice to have all the transactional features and high interest rate in a single account?

Here comes Fidelity's new mySmart Cash Account. Technically it's not a checking account but it has all the good features of bank accounts and none of the limitations. Check these out:

• No minimum balance.
• Up to 6.3% tax equivalent APY
• Unlimited ATM fee rebates from *any* ATMs
• Unlimited check writing with no minimum per check
• Free online bill payment, free debit card, free checks, free postage-paid deposit-by-mail envelopes
• Does not require direct deposit or debit card usage
• Does not require a separate brokerage account (it is a brokerage account)

Some other banks also offer high yield checking accounts, although none match the full features of Fidelity's mySmart Cash Account. Here are some of the alternatives in comparison to mySmart Cash Account.

1. ING Direct Electric Orange. Fee-free ATMs limited to Allpoint Network, which covers only 1 in 12 ATMs in the United States. No paper check.

2. Salem Five Direct eOne. ATM fee rebates limited to $15 per month. Only the first order of checks is free.

3. E*Trade Max-Rate Checking. Only 0.5% interest on balances below $5,000. $15 monthly fee if balance is under $5,000 (waived with direct deposit or asset qualification). Only the first order order of checks is free.

4. Schwab Bank High Yield Checking. Requires separate Schwab brokerage account. Lower yield on money market funds.

Although the "core" fund in mySmart Cash Account is only 3.50% APY, you can leave the balance in the core at $0 and use the money to buy higher yield Fidelity money market funds. If you are in the highest tax bracket, an AMT free state tax exempt money market fund can be as high as 6.3% tax equivalent APY. All debits will automatically overdraft from the money market fund.

This is revolutionary. It's checking, saving and brokerage accounts rolled into one neat package. I will give it a TFB Award. Before mySmart Cash Account, I have a 0% interest checking account and a Vanguard money market fund. When I have too much in the checking account, I transfer to the money market fund. When I need money to pay large bills, I transfer back. With mySmart Cash Account, there is no more transferring back and forth. Everything goes into mySmart Cash Account. Everything earns good interest from day one. I don't have to hunt for a specific bank's ATM either. After everything is set up, I will close my bank checking account. I will move over the money in the Vanguard money market fund as well.

This is Fidelity's counterattack to Wells Fargo's free trade offer. Wells Fargo attracts customers to its checking accounts by offering free trades on the brokerage side. Fidelity attracts customers to its brokerage business by offering the best banking features.

I find it ironic that to get the best deals you have to go to a brokerage firm for banking and go to a bank for brokerage. But that's the way it is, and it's perfectly understandable. Checking accounts are bread and butter for Wells Fargo. They don't want to pay high interest on them. So are brokerage accounts for Fidelity. Free trades for all will be suicide for Fidelity.

References:

• Online account application
• FAQs
• FatWallet thread

What Happens When a Bank Goes Out of Business

Last week I wondered in a comment to a post on The Simple Dollar about what the FDIC insurance claims process is really like when a bank fails. If a bank fails, do you get paid right away, or do you have to wait until everything is sorted out? For how long? How do you prove how much you had in your account if the bank’s computer is screwed up because the bank failed?

As if I jinxed it, there was news report about a bank failure in Pittsburgh on the same day. It was the first bank failure in the country since June 2004, no less. Here's an excerpt from the news report on Pittsburgh Post-Gazette:

"Mr. Cavacini is one of 1,453 Metropolitan Savings account holders tangled up in the first Pittsburgh-area bank seizure since the collapse of FS&LA of Pittsburgh in 1991 -- and the first in the United States since June 2004. The Pennsylvania Department of Banking shut down the Lawrenceville bank Friday and handed the keys to the Federal Deposit Insurance Corp."

So there we have it, a perfect example to study what really happens when a bank goes out of business and how the FDIC protects the bank customers. On Friday Feb. 2, 2007 the Pennsylvania state bank regulators shut down Metropolitan Savings Bank and gave control over to the FDIC. The FDIC quickly solicited bids from other banks and awarded the failed bank to another bank, Allegheny Valley Bank, which operates in the same town. Allegheny Valley Bank and FDIC personnel moved in to the failed bank, took the weekend to organize the books and re-opened the failed bank as a branch of Allegheny Valley Bank on the following Monday. That was quick! All customers of the failed Metropolitan Savings Bank became customers of the succeeding bank Allegheny Valley Bank.

However, some 70 unlucky customers had balances over the FDIC insurance limit at the failed bank. They will become creditors to the failed bank. The FDIC will sell off the the failed bank's assets and pay them from the proceeds. That process can take years. The lesson learned? Don't keep over $100,000 at any bank -- not a problem for me because I don't have that much money!

Bank failures are rare but they still happen. According to the FDIC, there were 28 bank failures since October 2000, averaging 4-5 a year. In most cases, the FDIC would arrange another bank to take over the deposits at the failed bank and the customers continue on without harm. When the FDIC couldn't find a buyer, it paid out the insured balance from its own fund (for example, NextBank failure in 2002). This fast action gives me comfort in the system. One of my questions remains unanswered:

How do you prove how much you had in your account if the bank’s computer is screwed up because the bank failed?

I think for this reason, I will continue to favor larger international or national banks over smaller no-name banks. Because security and control are largely a fixed cost, in other words, a bank needs to invest in more or less the same level of security and control whether it has 10,000 customers or 10,000,000 customers, a larger bank will have more resources for security and control.

Resources:

• Failed Bank List from FDIC, with links to what happed to each failed bank.

Update:

• Frugal Frugalson writes about personal experience in a bank failure

Related Post:

• What Happens When Your Mortgage Lender Goes Out of Business