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Brick and Mortar Bank Myths

Posted By Jim On 04/14/2010 @ 7:06 am In Banking | 63 Comments

In the last few years, I’ve reviewed several online banks from the gray beard ING Direct [3] to the more recent Ally Bank [4] and Sallie Mae [5]. With each review, there invariably are commenters who are totally against online banks and bring up reasons why it’s a mistake to put your money with an online bank.

They cite reason after reason that brick and mortar is better, failing to recognize that the last online bank to fail was Netbank in 2007 (and hundreds of brick and mortar banks have failed since) and that despite all their concerns, online banks are FDIC insured. Well today I’m going to tackle many of these myths head on and show why they are either wrong or grossly exaggerated.

Brick & Mortar Banks are Safer

I touched on this when I mentioned Netbank but all too often people think of brick and mortar banks, with their branches and more traditional feel, as safer. They point to the higher interest rates of online banks and can’t believe they can afford to pay them. I believe that at the core of this argument is the idea that you don’t fix what’s not broken. If my regular bank works and I’m happy earning 0% APY, then why change? OK, I can accept that, but when couched in the argument that the old way is safer, it’s just wrong.

Netbank failed in 2007, not a single penny of deposits was lost, and since then hundreds of banks have failed. All of them were traditional brick and mortar banks. People cite the recent trouble at Ally Bank, how regulators are complaining the bank is offering too high of an interest rate, and to that I say – Federal Deposit Insurance Corporation. Deposits insured up to $250,000. It doesn’t matter what the name on the front of the bank, or the bank’s website, says as long as there’s an FDIC placard.

Finally, think of it like this – I’m willing to bet you that the next bank to fail is going to be a brick and mortar bank, are you going to take that bet?

Your Money is in the Vault

The biggest myth about brick and mortar banks is that you can go to the bank and get your money if you wanted it. While this is true in normal situations, the reality is that in moments of widespread distress or panic, which are probably the scenarios you’re thinking of when you want to touch your money, you probably won’t be able to get your money.

When you deposit money into your bank account, the bank puts it in a pot and starts lending it out again. The amount they need to keep on hand is known as the reserve requirement or cash reserve ratio [6]. If the reserve requirement is 10%, then for every $100 you deposit, the bank is only required to keep $10 on hand or at a Federal Reserve bank.

If everyone wanted to get their money out at once, in theory the bank only has 10% of it on hand to pay and could have far less, especially if much of the requirement is kept at the Federal Reserve bank.

Building a Banking Relationship

Another touted benefit of a brick and mortar bank is the myth of the banking relationship. The only difference between your relationship with your online bank and with your brick and mortar bank is that with an online bank you know you’re an account number. I’m OK with this because they pay much higher interest rates. After all, banking is about money, right?

It’s all about scale. You may have a good relationship with someone at a community bank or a local credit union, but at the commercials banks you’re a number. When you think of all the times you interact with the bank, how often do you talk to a teller versus using an ATM? How often does the teller change? What is your branch manager’s name? For most, but not all, people, you don’t know who these people are. You may have a relationship with your bank, but you’re paying for it (just compare high yield savings account rates [7]).

There are a few other brick and mortar bank myths floating around out there but I feel these are the most prominent. Do you think I’m right? Think I’m off my rocker? Think of some good reasons to go with a brick and mortar over an online bank or some other myths you’ve seen or heard of?


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[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/brick-and-mortar-bank-myths.html

[3] ING Direct: http://www.bargaineering.com/articles/ing-direct-review.html

[4] Ally Bank: http://www.bargaineering.com/articles/ally-bank-review.html

[5] Sallie Mae: http://www.bargaineering.com/articles/sallie-mae-bank-review.html

[6] reserve requirement or cash reserve ratio: http://www.newyorkfed.org/aboutthefed/fedpoint/fed45.html

[7] high yield savings account rates: http://www.bargaineering.com/articles/high-yield-savings-accounts-rates.html

Thank you for reading!