Big banks were at the epicenter of the worst financial crisis in the U.S. since the Great Depression. It cost billions of taxpayer dollars to keep some of those banks afloat. Today, those institutions appear to have made a full recovery. In fact, they’re thriving. Figures released by the Federal Reserve show that the four biggest banks in the U.S. have gotten much bigger since the crisis ended.
Big Bank Branch Growth: 2006 – 2015
|March 31, 2006||March 31, 2015|
|Bank of America||998,466||1,517,375|
|J.P. Morgan Chase||651,522||1,528,986|
The economic ordeal had created a kinder, gentler banking system, with improved fee transparency and a humble recognition that customers bailed out banks. But with increased profits come complacency. Banking fees are rising and are increasingly opaque, frustrating customers.
With the financial crisis and the Occupy Wall Street movement still fresh in their minds, more millennials and others are looking to online banking and alternative forms to manage their money. Companies like Paypal, Venmo and TransferWise are moving onto the turf of traditional banks, offering alternatives at a lower cost.
These alternatives might still only be in their nascent stages, but David Hardin, president of Hardin Financial Group in Troy, Mich., issued this warning: Banks “need to evolve or they will go by the wayside. The dilemma is how to compete with models that have far less overhead and expenses and still give customers what they want.”
Consider these five alternative forms of banking, which might force financial institutions to rethink their traditional business models.
1. Digital Wallets
A digital wallet is an electronic device that allows you to make a transaction online or by using a smartphone. eBay, parent of Paypal, is currently a major player in this space. According to Forbes, Paypal moved $180 billion in 26 currencies across 193 countries last year. Its revenue grew 20 percent to $6.6 billion.
Last year, Apple introduced its own digital wallet in its iPhone 6 and smartwatch. Users can pay for their purchases using their smartphone or watch instead of a credit card or cash. According to Gartner, the research firm, mobile payments will top $720 billion a year by 2017. Now the digital wallet revolution is heating up with Amazon, Google, Square, Visa and MasterCard joining in to capture the market.
Venmo, an app that makes it easy for people to send payments through the web, is expanding. The app allows friends to split a restaurant bill, for instance, by pulling money from your bank account or credit card and depositing it directly into your friend’s bank or credit card account. Now, Venmo wants consumers to replace using checks and cash in these instances with the app. Mike Vaughan, Venmo’s general manager, told Time magazine that by making it easier to transfer money, online banking apps like Venmo, which is owned by PayPal, could take more business away from traditional brick-and-mortar banks.
This international money transfer platform allows you to exchange and transfer money internationally at a lower and more transparent cost than traditional banks. Joe Cross, general manager of TransferWise USA, said his company is “eight times cheaper than banks” in the U.S. TransferWise was launched three years ago after its founders said they were tired of being charged huge hidden fees to send money abroad.
The conversion rate of dollars to pounds plus additional fees charged at both ends of the transaction made the process a very expensive one. Last year, Richard Branson joined investors and put $25 million behind the mission to make money transfers a fairer place.
2. Online Banking
Online banking offered by institutions with no physical locations typically offer better interest rates on deposits and loans because they have lower overhead than traditional banks. Deposits are FDIC-insured. However, you’ll want to confirm that an online bank is legitimate and that your deposits are insured.
Online banks such as Ally Bank, Bank5 Connect, Discover Bank, GE Capital Bank and Synchrony Bank offer alternatives to traditional brick-and-mortar banks and much more attractive rates for savers and investors. Traditional banks have moved into the online banking space, and they all offer their own online services — but often at less attractive rates than fully online banks.
Related: 10 Best Online Banks of 2015
3. Autopay Options
Today you can set up automatic pay options online to make recurrent or singular payments for rent, car loans, utilities and other expenses. Autopay is offered by most banks and eliminates the need for customers to go to the branch location. There are no additional charges for setting up and using autopay as long as you have money in your account to cover your payments.
4. Mobile Deposits
To deposit a check into your bank account, customers can use their mobile phone to take a photo of the front and back of the check using the bank’s app. The rest is automatic. Many online and traditional banks make funds that are deposited through mobile phone apps available for withdrawal within a day or two. Check your bank’s terms if you are new to mobile depositing. Some banks can hold funds hostage for much longer.
5. Online Banking Apps
With online banking apps, you can bank from home or virtually anywhere without the need to visit a branch location. You can pay bills, transfer funds and check account balances from your mobile phone. Just about all banks have now entered this space in an effort to attract and retain customers.
Even with all these changes, Hardin said to prepare for more. “The current model for the banking industry will completely be overhauled in the next 10 years,” he said.