With typical passbook savings accounts yielding little more than nothing in interest these days, many people are seeking better-paying alternative banking. Money market accounts, different bank accounts, and peer-to-peer lending are a few examples.
Fees for checking accounts, low savings rates, and indifferent customer service. Individuals may quit a large national bank for a variety of reasons, but deciding where to go next may be a more difficult decision.
Numerous significant banks in the United States have several similar perks, including extensive networks of bank-owned branches and ATMs and strong mobile apps. However, they share a number of the same disadvantages, including high overdraft fees and low savings rates. If you're looking for a bank that offers a variety of perks tailored to your specific needs, explore one of these alternatives to large banks.
Before we begin, it's important to note that bank alternatives may not offer the same breadth of products and services as a typical bank, and that means you may want to shop around for the greatest pricing on all the services that are important to you.
Not all of these services offer regular checking accounts. Some specialize in niche areas such as ways to save money while gaining access to higher interest rates; some offer low-cost currency services, and a few offers simplified access to loans via peer-to-peer lending. Let's begin by examining the top alternative banks available.
Alternative banking is a broad phrase that encompasses a variety of finance organizations and services that provide more flexibility than traditional financial institutions.
Alternative banking has grown in popularity due to a variety of factors. Many clients find the technology more user-friendly than traditional bank accounts' internet banking. Additionally, it expands borrowing alternatives, from small, short-term loans to greater amounts.
Alternative banking has established itself as a viable option for persons with low credit scores who struggle to obtain mainstream financial products.
Best Alternatives to Traditional Banking
Credit Unions
Credit unions are not-for-profit, community-oriented organizations that place a premium on client service. They offer the same types of accounts, services, and deposit protection as large banks, but their accounts often offer higher interest rates. In comparison to banks, credit unions charge higher interest rates on certain savings accounts and lower interest rates on auto and house loans, according to National Credit Union Administration data from June 2021.
Credit unions are founded on the principle of service, not profit. Rather than paying dividends to shareholders, credit unions distribute excess profits to members in the form of lower rates, improved services, or more access to services."
Each credit union places restrictions on who may join as a member depending on various variables. These considerations can include one's residence or place of employment, having a member relative, or even simply being linked with a certain organization through a small one-time gift. Due to these membership conditions, not all credit unions are accessible to all members. Another possible disadvantage of credit unions is their tendency to lag behind big banks embracing new technologies, such as mobile banking capabilities.
Community Banks
Community banks are smaller financial organizations in asset size that concentrate their operations in a particular geographic area. They are critical in establishing a neighborhood presence for relationship-based banking, particularly for mortgages and small business loans. According to a 2018 Brookings Institute analysis, one in three rural mortgages began with a small bank or credit union with less than $10 billion in assets. Additionally, in some country areas, a community bank is the only physical bank for miles around, allowing it to consider more customized variables when making loans and opening other accounts than large banks can.
Community banks — defined by the Independent Community Bankers of America as those with less than $50 billion in assets — made 4.7 million loans to small companies affected by the epidemic as part of the Paycheck Protection Program. According to an ICBA examination of Small Business Administration data, the loans totaled $429 billion and preserved an estimated 49 million jobs. Additionally, community banks expedited the processing of PPP loans by five to ten days compared to other PPP leaders.
Earlier in the pandemic, "there were too many examples of small businesses unable to obtain a bank account," according to Chris Cole, executive vice president of the ICBA. Meanwhile, community banks played an "outsized role in PPP to ensure enterprises continued to operate."
Community banks, including credit unions, struggle to stay up with updated technologies employed by larger institutions and online-focused suppliers.
Online banks are typically national institutions that consumers access via websites and, in some cases, mobile applications. Due to their branchless nature, internet banks may pass on cost savings to consumers with low fees and some of the best possible savings rates. While some internet banks operate independently, others are online subsidiaries of regular banks, and the Federal Deposit Insurance Corporation protects customers' funds.
According to a 2021 NerdWallet survey, almost 40% of Americans who joined online-only accounts during the first year of the epidemic did so due to their high rates. Interest rates on online savings accounts can range between 0.4 percent and 0.5 percent annual percentage yield, more than 20 times the average rate of 0.02 percent offered by the four largest banks — Chase, Bank of America, Wells Fargo, and Citibank. Online checking accounts typically do not charge or levy a minimal overdraft fee compared to those four banks, which charge an average of $35 for every transaction that results in a negative balance.
Neobanks
Neobanks are financial technology firms specializing in mobile-first banking services, particularly low-cost checking accounts with additional benefits not offered by traditional institutions. Neobanks, such as Chime and Current, either collaborate with a bank to deliver their services or, in rare cases, become banks themselves. In either instance, neobanks offer FDIC-insured accounts that function similarly to those offered by traditional online banks.
Wise
Suppose individuals are looking for a multi-currency account that allows them to send and receive international payments and spend without incurring foreign transaction fees. In that case, the Wise multi-currency account may be the best option.
Customers with Wise accounts can hold more than 50 currencies, send money to more than 80 destinations, and receive fee-free payments from more than 30 countries. Additionally, traders will receive a linked debit card that will allow them to spend at the mid-market exchange rate anywhere. Utilize the Wise account to receive payments, set up local and international direct debits, and convert money between currencies.
Although Wise is not a bank, its foreign payments can be up to six times cheaper than those made through a traditional bank, owing to its innovative approach to cross-border transfers and currency exchange. Traders will always receive the mid-market exchange rate without any markup and will be charged transparently for transactions.
Deposit Certificates
If individuals seek a banking alternative to receive a higher rate of interest on their savings, they should consider Certificates of Deposit (CDs). CDs are available through a variety of banks and credit unions and entail investing money for a specified amount of time in exchange for a pre-determined interest rate.
Individuals will receive different rates depending on the supplier, the amount they pay, and the length of time they are willing to leave it. CDs are frequently available for periods ranging from a few months to five years. Generally, the more people who invest and the longer they wait, the higher the interest rate - although there are penalties for early withdrawals.
Money Market Mutual Funds
Certificates of Deposit compel individuals to store their funds for an extended period. If investors desire a stable rate of return on their assets and require quick access to their funds, a money market mutual fund may be preferable.
Money market funds invest in a diversified portfolio of high-quality, highly liquid assets. Many investors place a premium on government-backed assets for added protection and peace of mind. These funds are rather dependable in that they often generate a consistent rate of return – but as with any investment, this is not guaranteed. Due to the low rate of return on money market funds, the number of money people earn may be masked by overall increases in the cost of living. However, money market mutual funds continue to be a popular alternative because they make it relatively easy for investors to access their money whenever they need it.
Peer-to-Peer Lending
Peer-to-peer lending services, typically conducted via websites, have grown in popularity in recent years. Individuals seeking to borrow money can now acquire personal loans without going to a bank—and individual lender investors can make fantastic returns on their investments by funding the loans with their lending account deposits. Individuals on the lending side supply loan capital to individuals on the borrowing side via websites such as Prosper.com.
Peer-to-peer lending accounts are not protected by the FDIC, unlike savings accounts at banks, and it is possible to lose money. The service screens borrowers and often requires them to meet certain criteria in order to acquire loans.
The framework of peer-to-peer lending significantly decreases risk. Each loan's risk is dispersed over a large number of lender investors. Individual lenders typically fund loans of no more than $25 to $50. For example, an individual requesting a $2,000 loan for house improvements may have the loan funded by 40 distinct individual lenders, each contributing $50 toward the loan's total amount.
The lending service examines borrowers and the purpose of the loan in order to determine credit risk and the interest rate to be charged on the loan.Individual lender investors can specify their risk tolerance when determining which types of loans to sponsor with their money. Even if a single borrower defaults on occasion, lenders benefit from the diversification of the investment. Nonetheless, as of 2015, loan investors earned an average return of between 5% to 9%. The National Bureau of Economic Research reports that loan default rates on prominent peer-to-peer lending sites averaged around 5%.
One of the advantages of investing in peer-to-peer lending is that an individual can open a lending account with very low deposit, as little as $25, and choose to make monthly deposits, just like with a savings account.
While this is not a government-guaranteed source of income in the same way that a savings account is, it can be a low-risk investment that gives prospective returns well above those offered by a standard savings account. However, the regulatory framework surrounding peer-to-peer lending is difficult and varies by state. Due diligence prior to investing—and a close analysis of how payment to you as a lender is structured—is particularly critical in this case.
Cash Management Accounts
A cash management account functions similarly to a bank/brokerage account in that it consolidates investments and day-to-day cash flow.
Brokerage firms developed Cash-management accounts (CMAs) for affluent consumers who desired a liquid, bank-like account that yielded a higher interest rate than a typical bank account.
Cash is invested at money market rates in a CMA, and customers receive checking and credit card privileges, an ATM debit card, and frequently a line of credit or margin account. If they overdraw their account, they will likely pay less interest on the loan than they would on a bank overdraft. Additionally, the interest may be classified as margin interest in many situations, which is tax-deductible.
The charge for CMA is normally between $50 to $180 per year, though it may be waived for individuals with $50,000 to $100,000 in the account. Additionally, individuals may be charged if they do transactions through their account or speak with an investment adviser at the brokerage linked with a bank subsidiary.
Obtaining a money market account is one of the simplest alternatives to depositing money in a regular passbook savings account. Money market accounts, like savings and checking accounts, are insured by the Federal Deposit Insurance Corporation (FDIC).
In addition to providing higher interest rates than conventional savings accounts, money market accounts offer limited checking account amenities. The maximum amount of checks that a customer can write on their account per month is typically between five and ten—often between five and ten. Money market account holders earn a higher interest rate than holders of standard savings accounts to adhere to this withdrawal restriction. For example, a bank that offers a 0.10 percent interest rate on normal savings accounts may offer a 0.25 percent interest rate on money market accounts.
Money market accounts typically have other restrictions along with the monthly transaction limit, such as a required minimum starting deposit or a necessary minimum balance. If a minimum balance requirement is in place and the account falls below, the account holder may get only the ordinary. The lesser interest rate is offered on regular savings accounts; however, certain banks may also levy a penalty fee. Before opening a money market or other alternative account, carefully read the fine print of your agreement to ensure that the account is free of any restrictions and is not subject to any fees.
Conclusion
There are undoubtedly alternatives to the classic passbook savings account that provide a higher rate of return on your money. They may lack the liquidity of a savings account and may impose restrictions ranging from minimum balances and monthly transaction limits to the absence of federal insurance. However, depending on your financial condition, they may be appealing.
There are numerous alternatives to traditional banks, many of which offer some or all of the financial services you'd expect from a brick and mortar institution, but at a reduced charge or with additional features. Depending on specific needs, one or more of these banking alternatives may enable you to handle your money more conveniently and pay less in the long run.
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