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Want to Switch Banks? Here’s How to Do It.

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There’s lots of talk lately about people switching banks. An announcement by Bank of America that it would charge customers $5 a month to make purchases with their debit cards (though they and other banks have backpedaled recently), coupled with increased attention to the Occupy Wall Street Movement, has focused a spotlight on growing outrage over the fees charged by some of America’s largest banks.

All that discontent may culminate on Nov. 5, which some activists have declared will be a national “Bank Transfer Day.” Organizers hope that many consumers will decide to remove their money from major banks such as BofA, Chase and Wells Fargo, and open new accounts with smaller banks and credit unions.

“I started this because I felt like many of you do. I was tired—tired of the fee increases, tired of not being able to access my money when I need to, tired of them using what little money I have to oppress my brothers & sisters,” according to a statement by a woman named Kristen Christian, who says she founded the bank transfer movement. (Incidentally, Christian will be a guest on The Credit Line radio show hosted by Credit.com chairman and co-founder, Adam Levin this Saturday Nov. 5 at Noon ET/9 a.m. PT, streaming live on Los Angeles’ KFWB 980 AM.)

But switching banks is not as simple as marching into your local branch and demanding your money. Especially when so many people have their paychecks deposited automatically into their accounts, and use bank web sites to pay their bills, transferring to a new bank takes a bit more planning now than it used to.

“Banks want consumers to come back weekly instead of monthly,” says Mark Schwanhausser, a senior analyst at Javelin Strategy & Research who focuses on the banking industry. “It does make it harder to disentangle.”

That increased hassle makes it more important than ever that consumers weigh all their options. And if you do decide to switch, make sure you’re ready.

“Be prepared. Know what you need,” Schwanhausser says.

So we at Credit.com decided to offer this all-in-one tip sheet to take you through the entire process, from deciding whether to switch, through setting up your new bill payments and closing your old account. The process breaks down into three major decisions:

  • Should I switch banks?
  • Where should I go?
  • How do I switch?

Should I Switch Banks?

We asked Carol Kaplan, a spokeswoman for the American Bankers Association, whether people should switch to a smaller bank or credit union on Nov. 5.

This put Kaplan in a tricky spot. Her association represents banks of all sizes, including the biggest ones. And since the movement to switch banks is rooted in widespread public outrage at rising fees and other bank practices, Kaplan doesn’t want to come out and endorse the idea. Nor does the association want to alienate consumers, even though the trade group repeatedly argues that customers upset over rising bank fees shouldn’t blame greedy bankers, but instead should direct their anger at Congress, which recently passed laws limiting how much banks can charge for debit card swipe fees.

Kaplan said, however, “We agree consumers should choose the banks that will best serve their needs. We may not always agree with their positions, but we definitely agree with their right to express them.”

Consumer advocates don’t mince their words, however.

“We think it’s a good idea for people to close their accounts with large banks,” says Linda Sherry, spokeswoman for Consumer Action. “I don’t think larger banks really have the customer’s best interest at heart. We citizens bailed them out during a difficult economic time, and how do they pay us back? By suddenly slapping all these new fees on our accounts.”

Meanwhile, credit union advocates make a pretty convincing case for switching your money to save money. In 2010, consumers spent $6.3 billion less on financial services—checking accounts, mortgage loans, credit card fees, etc.—by using credit unions than they would have getting the same services from banks, says Patrick Keefe, spokesman for the Credit Union National Association. That translates to $132 in savings a year per member household.

“A lot of journalists roll their eyes when I say this, but it’s actually true: Credit unions exist to provide services to their members,” Keefe says. “We actually deliver on that promise.”

Still, you need to figure out if switching banks makes sense for you. As you try to decide, here are things to keep in mind:

Switching banks is a pain.

Transferring your paycheck and all your online bills may be a daunting task. Besides, nearly half of all people who try to open a new bank account online fail, according to a new report by Javelin Strategy & Research, in most cases because they couldn’t figure out how to get their new bank’s website to complete the process.

“We found one out of four people saying ‘This is too complicated, it’s not working for me, I give up,” says Schwanhausser, who wrote the report. “Sometimes divorce is a little messy.”

This failure rate suggests that for all the anger directed at banks right now, large institutions like Chase and Bank of America may have little to worry about.

“I am skeptical about how many people will turn their outrage into action,” Schwanhausser says.

Maybe Your Current Bank Isn’t That Bad?

Kaplan does offer some questions you may want to ask yourself before making a switch: Are its branches and ATMs conveniently located?

“Before people actually switch institutions, they should do some shopping within their own bank first,” Kaplan says. “Banks have several different types of accounts to choose from, so there may be a product you’re not aware of to better serve your needs.”

How Angry Are You?

If you’re angry about the considerable lobbying sway the large banks wield in Washington, then details like whether you can make deposits using cell phone photos of your checks may not matter. According to Schwanhausser, anger over fees is always a big reason why people choose to switch banks, second only to relocation to a different part of the country.

“A lot of it has to do with the arrogance of the big banks,” Sherry says. “They don’t have the sense to serve customers anymore.”

Where Should I Go?

Once you decide to switch banks, a slew of decisions confronts you. Should you go with a traditional bricks-and-mortar bank, or one that operates only online? How do you compare offers?

Here Are a Few Tips For This Second Phase of The Process

How Do I Shop for a Bank?

Finding a smaller bank or credit union near you is surprisingly easy. The “Move Your Money” campaign, founded by Arianna Huffington and Dennis Santiago, co-founder and CEO of Institutional Risk Analytics, a bank risk ratings company, created a great online tool that helps people search for small-ish institutions near their home. Just type in your zip code, say whether you want to search for banks, credit unions or both, and off you go.

What Features Are Most Important to Me?

Smaller banks and credit unions don’t have as many branches and ATMs as behemoths like Bank of America, and they may not have all the mobile banking services that some customers have come to enjoy, says Keefe.

On the other hand, about 3,000 credit unions have joined together to offer a network of 28,000 ATMs nationwide, including machines located in Walgreens and 7-11 stores.

“Credit unions are leveraging their cooperative way of doing things so they can match big banks,” Keefe says.

Making the Switch

So now you’ve decided to transfer your money to a smaller bank or credit union. Congratulations! The actual process of switching can be tricky, however. Here are some things to keep in mind.

Open your new account. This may be harder than it sounds, especially if you choose a bank that exists entirely online. According to Schwanhausser’s research, 60 percent of people who try to start a new banking relationship entirely from scratch using the Internet fail. Some are rejected because of poor credit histories or other financial issues, but many simply find the online process too complicated.

“There can be lots of frustrations” when opening accounts online, Schwanhausser says.

Reduce those frustrations by doing research beforehand to figure out what documents you’ll need. Don’t just find a bank that looks good and click “Apply.” Read about their application process to find out what documents you’ll need, including your drivers license, existing bank statements, credit card statements, etc. Maybe you discover that you’ll need a document notarized, which requires going offline.

“Before you open the application, have the paperwork ready,” says Schwanhausser.

Order new checks and a new debit card immediately. It sometimes takes banks more than a week to send out checks and ATM cards to new customers, so apply for them as soon as possible.

Switch your automatic deposit. Once you have a new account open, ask your employer to switch your paycheck to your new account.

Switch over your automatic bill pays. This may be more difficult than it seems, especially if you have some bills that withdraw on a quarterly basis. Comb through your bank statements from the last six months, looking for anything that might be paid automatically. Then go online and switch them over to your new bank, usually by entering your new account number and bank routing number.

This step is critically important to do right, because missing even a small bill could cost you lots of money down the road.

“Some of these payments may be presented after you close the account, which can result in fees and could affect your credit score,” Sherry says. “I tell people to look back over all their payments for the entire half a year.”

Cover it. If an automatic withdrawal or a check is coming out of your old bank account soon, make sure to keep enough money in the account to cover it.

Move the rest. Once all your bills and checks have been paid, go online and switch the remaining money from your old account to your new one. “You have to do this yourself, and not rely on the bank to do it,” Sherry says.

Print a record. Before closing out the old account, go online or to a branch and request a report that shows all the account activity for the last six months. This gives you proof of which bills have been paid, and a cheat sheet for setting up new automatic withdrawals form your new bank.

Close the old account. Usually you can do this online, too, but some banks still make you do it over the phone with a teller.

Phew! Now you’re done! Whether it was a political act or a simple financial decision to avoid fees, you’ve completed something that big banks work to avoid: Switching to new, smaller bank.

“Believe me, banks are trying very hard to remain competitive,” says ABA’s Kaplan. “We don’t want people going someplace else.”

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  • Roger

    Good article. One thing many people fail to do is leverage their total bank relationship. Banks consider the mortgage balance you carry with them an asset; therefore, they’ll likely waive checking account fees etc. So if you have a mortgage at wells, citi, chase, etc. and are looking to switch checking accounts, be sure to check out what your mortgage lender has to offer on a checking account. If your mortgage and your checking acct are at the same bank, and you’re being charged bank fees, call to be sure the accounts are “linked”.

    If you have a bunch of excess cash sitting at the bank, you may want to move the savings balance to online places like ING, HSBC, CapitalOne, etc. that tend to pay much higher interest rates on savings (since they don’t have the same brick & mortar costs to pass along to you). My opinion, though I’m not an expert.

    Great article Mr. Maag, interesting stuff!

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