How to Choose the Right Bank For You

March 2, 2004 -- With a recent onslaught of banking mega-mergers and the continued expansion of a new breed of financial institutions, deciding where and how to bank has become increasingly difficult.

According to SNL Financial, a financial research firm, there were more than 4,800 bank mergers from 1990 through 2003. The Federal Deposit Insurance Corporation reports there are currently 10,271 FDIC-insured institutions in the United States. So how do you know which one is right for you?

Pick a Flavor

When considering which type of bank is best for you, you should first consider your needs as a customer. There are three primary categories of banks — big national banks, regional banks and Internet banks — each offering a variety of services at different cost points.

Big national banks, such as Citibank, Fleet, Wells Fargo and Bank One (in the midst of an acquisition by JP Morgan Chase), have ATMs and branches across the country, which is particularly useful if you travel frequently. They also provide the ease of one-stop-shopping for all your financial service needs — through a big bank, you can often invest in mutual funds, buy insurance, get a credit card, get a mortgage, take out student loans, and more. In addition, big banks tend to be the leaders when it comes to introducing innovative technologies, and if you happen to be wealthy, they offer an array of specialized services along with a personal banking representative to assist you.

One of the biggest assets of big national banks is their online accessibility and offerings. For example, Bank of America and Citibank now offer their customers free online bill paying services, while others, like Charles Schwab, charge a small monthly fee of $6.95.

Online bill payment is an excellent way to keep track of your finances and an efficient way to balance your checkbook.

While regional banks may lack a national presence, they are often more flexible and offer greater incentives for smaller accountholders. Specifically, compared to their larger competitors, regional banks typically offer a more personal level of service and have lower fees. In addition, regional banks are able to avoid the bureaucratic machinery of larger banks, making it easier to adapt to the needs of their community.

Unlike their brick and mortar counterparts, Internet banks offer ease without high fees. For example, according to a survey on, to avoid fees, the average minimum balance on an interest-earning checking account at an Internet bank is $1,088 while the average at a traditional bank is closer to $2,627. In addition, Internet banks seldom charge their customers a fee for using another bank's ATMs.

No Fees Please

Although a bank may advertise "free checking," be sure to read the fine print to ensure you do not need to maintain a certain amount to avoid fees. For example, many banks require a minimum balance of $1,500 to qualify for free checking and customers who fall below this balance are assessed a charge. However, those banks which do not require a minimum may try to recoup the lost fees in other ways. For example, overdraft fees are a real source of recurring income for banks and as such, some banks look for ways to create these situations by processing checks in a manner to maximize the likelihood of overdrafts. That said, be sure to understand the requirements of all potential accounts (i.e., checking, savings, money market) and ask about fees related to minimum balances, deposits, withdrawals, check-writing and direct deposit.

Economies of scale do not seem to apply when it comes to the size of a bank and the amount of its fees. In fact, according to the Federal Reserve's 2003 Annual Report to the Congress on Retail Fees and Depository Institutions, banks who do business in multiple states often have higher fees than local banks. According to the Independent Community Bankers of America, consumers could save between 18 and 42 percent in checking and savings account fees by banking with small banks instead of large institutions. At medium-sized banks, their savings ranges from 1 to 20 percent.

Services Versus Service

Large, national banks offer additional services, but not always the personalized customer service. Typically, regional banks get much better scores for customer service, whereas big national banks typically have a better product suite to offer. Providing a nice array of products, hours and strong service tends to be the recipe for the best banks. In addition, another important aspect is the number of ATMs offered. According to, if you use another bank's ATM, you can expect to pay an average surcharge of $1.40, up 57 percent from the average of $0.89 five years ago.

When to Bundle, When to Shop

For the sake of convenience, it often makes sense for customers to find a bank that has the ability to provide one-stop-shopping, such as checking accounts, savings accounts, annuities, etc. However, in some cases, it is better to separate your banking services to get the most for your dollar. For example, since the largest cost for many consumers is their mortgage, it is important to find the lowest rate, fees and terms, regardless of where that mortgage is being originated or serviced. Keep in mind, do not rely solely on your regional bank for the lowest available mortgage rate — there may be better deals outside of your region.

Switching Costs

The cost of changing banks is minimal in dollars, but significant in time. Therefore, most consumers switch banks only due to life change events (marriage, change in residence, change in job). The common giveaways of toaster ovens and stuffed animals have been replaced with more expensive gifts like free theater tickets to encourage customers to make a switch. The actual process of closing an account and opening one with a new bank is not difficult. However, the more banking services you use and the more active you are with your account — i.e., paying your bills online, direct deposit of your paycheck, etc. — the greater the inconvenience. Furthermore, you should be wary of any incentives and be sure to understand the benefits and costs of any new bank you are evaluating.

Right for You?

If you are a young family with two children, a big, national bank may be right for you. You are likely confronting life's big issues — buying a home, saving for your children's education, saving for your own retirement and possibly financing your own business. A national bank offers a myriad of products, from credit cards to IRAs, which address all of these needs. In addition, the option of online bill payment may be the perfect solution for your hectic schedule. Although the fees may be higher, the major conveniences may be worth the cost.

If you are a retired couple, a regional bank is most appropriate. If you are retired, you are probably not as concerned about saving for education, securing a new mortgage or saving for any of life's early situations. You are likely going to value the personal service you can receive at your local branch. In addition, you are less likely to need all the services of the bigger national banks, including the access to online bill payment.

If you are single, young college grad, an Internet bank may be your best choice. Typically, young college graduates have more debt than assets, so a bank with a low minimum balance requirement is a good place to start. According to, Internet banks require less than half of the balance that brick-and-mortar banks demand to avoid monthly service fees. Also, college grads rely heavily on ATMs. Internet banks seldom charge their customers a fee for using another bank's ATM and also often reimburse their customers for any charges incurred from another bank.

If you are a double-income couple with no children, either a regional or national bank may be right for you. It is more a function of your time, which is a key determinant for your choice. You may be willing to take the additional time to search for the best price on individual financial products and could therefore benefit from a regional bank.

On the flip side, your work life could be very demanding, requiring you to travel and leaving very little free time for making some time-consuming financial decisions. Therefore, a big national bank may be the best choice.

E-mail Mellody with your personal finance questions.

Mellody Hobson, president of Ariel Capital Management ( in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.