Paul Meloan – Vested Interest

In this installment of Fundamental Fridays, I would like to continue to discuss the role of cash in our financial plans, this time focusing on banking and how to get the most out of your dealings with deposit-takers.

I don't remember where I first read the expression "3-6-3" banker: it means a banker who borrows money at 3%, lends money at 6%, and tees off by 3 pm each afternoon.  Like all good cultural stereotypes, it was patently false, except for the aspects of it that were true.  All banks were local.  Banking was done in person.  Interest rates (relative to inflation) were significant.  Most importantly, with little choice among providers there was little incentive to compete on price, and even less incentive to differentiate among offerings or invent new ones.

As banking evolved toward the end of the 20th century, bankers ran into forces they had no ability to predict, and even less ability to control.  In other words, they were just like every other industry at the time.  What emerged from the upheaval was an industry no longer product-centered but service-centered, at least as far as its relationship with its depositors were concerned.  Coupling that with a long-term decline in virtually all interest rates since 1982, and the old model was most assuredly doomed.

So what we are left with one decade into the 21st century is a service model: banks will hold your cash, make it available to you as you request it, send it where you want, and protect it from poachers.  They will do this at some cost to you, and what you as the investor need to decide is (1) how much service do I need? and (2) what is the total cost of ownership for this service?

If you didn't see it, check last week's piece on how much of your assets should be held in cash.  I will consider that question answered, and move forward from there.

Consider your list of services:

1.  Do you write checks? Just about everyone does at some point, but nowhere near as many as we once did.  Thanks to online billpaying services (more about that in a later post), my wife and I might write 5 physical checks per month.
2.  Do you need cash from an ATM?  If so, how much, how often, and where?  Just about everyone will be away from their home bank at some point, and getting cash from these "foreign ATMs" can be an expensive proposition, most fees these days are at least $3 per transaction.
3.  What ancillary services do you want? Banks still provide safe deposit boxes, travelers checks (remember those?) and can usually notarize your signature on a document if you need that.

Major banks that still want depositors have come up with a menu of offerings to satisfy those needs, and a menu of costs for the depositor to pay.

Having gone through that, I came up with a banking provider that I believe offers the lowest total cost of ownership: USAA.  I fully recognize that not everyone can use USAA, as its structure is available to military active-duty members and their dependents (as the offspring of a former Army officer and USAA member I became eligible), but the world of virtual banks like USAA is growing all the time, and I believe more banks will adopt their model sooner rather than later.  USAA has made much of their banking services available to non-military members already.

Key attributes:

1. No fees for basic services: deposits, checks, and ATM withdrawals.  USAA participates in most major ATM networks, so when I need cash I go to the Capital One Bank ATM in my building's lobby and get cash.  The fee charged by COB is rebated to me by USAA, which they do each month up to a maximum of $15, which I have never come close to hitting.

2. No branches: the best thing I could ever say about visiting a retail bank branch was that it was boring.  The worst thing I could say would be a choice among annoying, maddening, and stupefying.  USAA has no branches within 1000 miles of where I live, which means there are no overhead costs (building, employees) to pay, and thus pass along to the customer.   Like most people, my wife's and my pay is direct-deposited in our account by ACH transfer.  I get cash from ATMs.

3. What about deposits?  What if Aunt Gertrude writes you a $10 check for your birthday?  Technology to the rescue!  USAA has an app for my iPhone that permits me to log into my account, enter the deposit amount, and then zap images of the check (both sides) with my phone's camera.  After the scanning software accepts the image, the deposit is complete and I can throw the check away.  The software will even remind me exactly how to endorse the check with my USAA account number.  Only two months ago I showed this to the people who worked in my local PNC Bank branch in Bethesda: they had never heard of such a thing.

4. Mobility and connectivity.  USAA has taken the lead in internet- and online-access with a terrific web site, as well as mobile apps for iPhone, Android, and other mobile smartphones.  Virtually any information I want on my account, including images of checks cleared, is available 24-7 along with the ability to transfer money between accounts (USAA also has terrific offerings for kids, so I have set up my teenage children's accounts there as well).  It also enables me to connect my brokerage account at Schwab via ACH transfer to move money between the two using my phone or going online.

In short, USAA gets four stars from me in that I am able to do everything I want to do with the absolute lowest cost in terms of time, hassle, and out-of-pocket cost.  What I hope to establish is a list of other providers who attain similar levels of excellence in value they offer their customers.  Contact me here or leave a comment if you know of another bank worthy of consideration.

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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