Your Banker's 6 Big Dirty Secrets
Banks may believe "the customer is always right," but that doesn't mean they'll put your best interests ahead of their own. Here's what they're not telling you.
There is a fine line between telling a lie and avoiding telling the truth. It comes back to intentions -- you can be hurt by a clever omission as easily as you can by an outright lie. It won't come as a surprise, but there are some things your bank would rather not tell you. We'll look at six dirty secrets your banker has been keeping.
1. You probably don't need the insurance.
Banks offer insurance, sometimes marketed as "balance protection," on every debt instrument they offer. You can get insurance on a credit card, line of credit, plain vanilla loan and so on. In return, your payments are covered in certain cases and a death benefit is paid if you still owe when you die.
Going through the contract can be interesting and enlightening for consumers. Often many conditions have to be met to receive the "hardship" qualifications to cover payments. Even the death benefit can be capped at a maximum that may be much less than the value of the loan.
Your banker isn't to blame for that; the bank is. The banker's omission comes in when it doesn't advise clients that their life insurance policy may already be enough to cover the new debt -- and if not, adding life insurance coverage for the amount of the debt will be much cheaper in the long run than paying an extra percentage of the balance on top of interest.
2. Even if I like you, the system decides.
Many banks market the fact that you can go into any branch and have a productive conversation with their representatives -- the human touch. If you are looking for a loan, however, there's little human involvement in the decision process.
Large banks use a computer model that takes inputs such as income, current debt levels and assets, and uses those to decide whether you qualify for a loan -- and, if so, how much. For most people, this process is flexible enough that they don't notice. For farmers, entrepreneurs and business owners, though, the process can be enraging because it discounts elements of their business and often paints them as credit risks.
3. I'm a salesman.
There are many different terms for it -- complete banking, one-stop banking, holistic service -- but when it comes down to it, your banker is there to cross-sell you other products from the bank. Have a checking account? How about a savings account, credit card, savings bond, car insurance, retirement account and mortgage appraisal? Banks want to lock in a customer as much as possible.
4. We offer a complete package to get complete fees.
Once a customer opens an account, the pressure is on to open three more. Holding more of a customer's financial life at the same bank gives that bank the ability to nudge customers into more fee-bearing accounts without having to worry about the customer shopping around for a better deal. Your banker will never tell you that the bank down the road charges less in service fees and offers the same interest.
Instead bankers emphasize the ease of transferring funds between your accounts within the branch, the transfer fees they waive and the deal they have on balance-protection insurance.
5. We make more money from fees than from banking.
Banks have been pulling an ever-larger slice of their revenues from fees. The tipping point came in the late '90s, when fee income climbed to more than half of revenue at the largest banks. Most people, your banker included, will tell you a bank makes its money off the interest it earns from loans to customers. But, given how important fees are to revenue, it's easy to guess which direction they will be heading in the future.
6. You should check out a smaller bank.
The biggest secret your banker is keeping is that a smaller bank may be a better fit for you. Instead, your banker will focus on the convenience of having lots of friendly staff wanting to serve you. All those people and buildings cost a lot to keep going. This cost is one of the reasons banks need to tighten their lending models and increase their fees. By contrast, a smaller bank has a smaller market and less of an eye on expansion. This allows them to charge less in many cases, while also giving the customer more.
The bottom line
Your banker is there to protect the bank's interest, not necessarily yours. A banker is not bound by the same fiduciary duty that a financial adviser would be, so it's important to do some thinking for yourself. Tally up all your fees, add in the interest on any loans and compare them to the returns on your interest-bearing accounts. If you don't like what you see, maybe it's time to look into alternatives like a credit union or online bank. Just don't ask your banker for a recommendation -- that's another one of those things he just won't say.