Regional banks vs. national banks — should you move your money?

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Hello and welcome to Financial Face-off, a MarketWatch column where we help you weigh financial decisions. Our columnist will give her verdict. Tell us whether you think she’s right in the comments. And please share your suggestions for future Financial Face-off columns by emailing our columnist at lalbrecht@marketwatch.com. 

The face-off

Consumers have been shaken up by the collapse of regional banks Silicon Valley Bank and Signature Bank. Many found themselves wondering if their money was safe, even if they weren’t customers of those institutions. In response to the crisis, people pulled their cash out of regional banks and moved to big national banks like Bank of America
BAC,
+0.63%,
which saw an influx of $15 billion in new deposits over a few days. J.P. Morgan
JPM,
-1.52%,
Citigroup
C,
-0.78%
and Wells Fargo
WFC,
-1.04%
also took in new customers.

Are consumers better off parking their money in a big national bank or a smaller regional or community bank?

For reference, the biggest banks in the U.S. by assets are J.P. Morgan ($3.2 trillion), Bank of America ($2.4 trillion), Citigroup ($1.77 trillion) and Wells Fargo ($1.72 trillion). The Federal Reserve defines regional banks as those with between $10 billion and $100 billion in assets. Community banks have $10 billion and under. 

Why it matters

The recent banking turmoil has focused attention on the security of bank deposits. But your money’s safety is just one factor to consider when deciding where to bank, said Rachel Gittleman, financial services outreach manager at Consumer Federation of America.

When comparing banks, take a step back and think about whether a bank will serve your current financial needs; how it can serve your future needs and help you achieve goals; and how the bank would respond if you suffered a financial blow like sudden loss of income, Gittleman said.

“It’s really difficult to change banks. They don’t make it easy. So being as thoughtful and educated as you can before making this decision is the best course of action,” she said.

Gittleman recommended asking these questions when choosing a bank: 

  • How do you want to interact with your bank? Do you want to go into a physical bank branch — which have been closing at a fast clip — or bank mainly online or through a mobile app?

  • What fees does the bank charge if your account has insufficient funds or you bounce a check? (Several banks have eliminated or lowered fees; check out this chart for information on fees at the biggest banks.)

  • How much does an account cost? Are there monthly fees or minimum balances required to maintain a checking account, for example? 

  • What safety net, if any, does the bank offer if you overdraw your account? Will overdraft protection automatically protect you, or do customers need to opt in to that feature? If you fall on hard times, will the bank let you put a loan into forbearance or delay a payment?

  • If your income is volatile or you have trouble making ends meet between paychecks, does the bank have products that could be helpful, like small-dollar loans, or ‘buy now, pay later’ through a checking account, or early direct deposit?

Now back to the question of whether your money is safe. The key question to ask is whether your account is insured by the Federal Deposit Insurance Corporation. FDIC insurance covers up to $250,000 per customer per bank, though there’s been discussion recently about changing the system. Most people’s money is covered, given that the median combined checking and savings account balance was $5,300 as of 2019, according to the Fed’s Survey of Consumer Finances. 

A note of caution: if you’re using a fintech company to handle your money, it can be hard to tell whether your account is truly FDIC-insured. Some fintechs have used the FDIC logo even though they’re not directly covered by FDIC insurance. You can verify whether a financial institution is FDIC-insured here.

“Especially in light of the last couple of weeks, it’s even more critically important to make sure that you’re banking with an FDIC-insured bank,” Gittleman said.

The verdict

Smaller is better — in one sense.

My reasons

While national banks are most popular with consumers, especially people who earn six figures and above, smaller banks may be the better option if you’re looking to grow your cash, according to a recent study by DepositAccounts.com, a website that compares rates on deposit accounts.

It found that small banks had the highest average annual percent yield (APY) for checking accounts (4.6%) while large banks offered the lowest (0.02%). Small banks also had better rates than large banks on high-yield savings accounts (0.27% vs. 0.04%). Medium banks beat out large banks for the highest average APYs on 12-month CD accounts, at 2.03%. (It’s worth noting, however, that online-only banks had the best rates for high-yield savings accounts and credit unions beat out traditional banks and online-only banks for 12-month CDs.)

There’s another point in favor of smaller regional or community banks. Not only can customers get better rates at these smaller institutions, but there’s often more opportunity to negotiate with a branch manager about rates and other aspects of bank products, said Ken Tumin, founder and editor of DepositAccounts.com.

His readers have told him that they’ve been able to get their smaller banks to match a competitor’s better rates, or to eliminate the early-withdrawal penalty on a CD account. “Now with banks worried about maintaining their deposits, probably the power of that negotiation is enhanced from the customer point of view,” Tumin said. “Banks might be more willing to waive that early withdrawal penalty if it helps keep those deposits.”

Is my verdict best for you?

On the other hand, big national banks have a lot of resources, which means they may have better digital banking and of course, more physical branches and ATMs. If you travel a lot and it’s important to you to visit bank branches and ATMs in person, a national bank will probably be the better option, Tumin noted.

Larger banks may have more products and services to choose from, and those products and services may be better integrated into the overall customer experience. “Small banks often have to contract out some of these services and often those services aren’t as smooth and well integrated as you would find with a big bank,” Tumin said.

A final tip for researching banks: check out the Consumer Financial Protection Bureau’s complaint database, where you can see what customers at specific banks have complained about. “It’s a really good source of information about what issues are common at a certain institution or how their customer service might respond to an issue,” Gittleman said.

Tell us in the comments which option should win in this Financial Face-off. If you have ideas for future Financial Face-off columns, send me an email at lalbrecht@marketwatch.com.

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