'Bank Transfer Day' Won't Hurt Big Banks -- Why You Should Switch Banks Anyway

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

Updated with clarification of OWS connection to 'Bank Transfer Day.'

NEW YORK ( TheStreet) -- The "Occupy Wall Street" (OWS) movement has expressed support for "Bank Transfer Day" on Nov. 5, the day by which Americans are supposed to have transferred their deposits to community banks. OWS has supported many causes, but one of the issues protesters have complained about is the new $5 per month debit card fee announced by Bank of America ( BAC) and similar fees by others.

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I am not a big fan of the Too Big to Fail (TBTF) banks. But, it might be good to understand what has happened here. In the Dodd-Frank legislation, Congress authorized the Fed to set limits on debit card "swipe" fees which were averaging more than 40 cents. The Fed set the maximum at 21 cents beginning on Oct. 1 (that was higher than the original desired level of 12 cents).

Bank of America

During the legislative discussions, Congress was warned that they cannot legislate economic results, and that the TBTFs would find offsetting revenue sources. The debit card fees, then, are nothing other than an unintended consequence of misguided legislation. The beneficiaries of the "swipe" fee limits are America's retail businesses. Those with the highest transaction volumes, like the WalMarts of the world, are the biggest beneficiaries. Because consumers do not understand this process, don't expect big business to give the difference back. So, net, net, the TBTFs are revenue neutral, businesses are ahead, and, as usual, consumers wind up paying more. Given this, perhaps the OWS crowd should be occupying Washington, D.C., not Wall Street. Switching Won't Hurt TBTF

Back to "Bank Transfer Day." Before you decide to switch from the nasty TBTF bank, don't think for a single moment that you will be hurting that bank by moving your account to a Community Bank (CB) or Credit Union (CU). Deposits represent about 50% of TBTF funding, and consumer deposits represent a very small fraction of those deposits.

Today, all TBTFs currently have huge excess cash in the form of reserves at the Fed, federal funds, and cash. So they won't have to replace consumer deposits that leave. Furthermore, if they did want to replace those deposits, they can borrow at near zero percent interest rates directly from the Fed, or in the fed funds or money markets. Third-quarter results for Bank of America show that it is shedding "non-core" assets, indicating that some TBTF banks may welcome the opportunity to "shrink" as that improves their capital ratio.


Don't Switch For Spite

So, if you are mad enough at your TBTF bank to switch, do it because it will benefit you, not for spite. For example, if you use automated bill pay services, you will likely have to re-specify all of your vendors if you switch, and you will lose automated history. If you have direct deposits, you will have to contact all of the originating entities, sign the appropriate documents, and then jump through any other hoops that are imposed. Finally, if you have a loan with a TBTF bank, if you switch, you may lose a rate concession based on your consumer banking relationships. If you still want to pursue switching, some CBs and CUs have people and instructions that will make it easier for you to switch. Be sure to ask your local CB or CU if they have such help.

There is no doubt that, as a general rule, the CBs and CUs are more consumer friendly than the TBTF. But banks come in many shapes and sizes. Some of the larger regional banks aren't really too different than TBTF in their treatment of consumers. And, there are also some TBTF branches that have personnel that really care about the clients and act on their behalf. But, by and large, the rules and policies imposed by the TBTF institutions on their employees make such branches the exception. So, if you are not getting the service you want or feel you are paying too much, here are some things to look for at a CB or CU:

1) Choose a bank where the tellers will know you by name, and you won't be charged extra to use the tellers.

2) Look at the services you use, and make sure the CB or CU has the same or similar services. As a general rule, nearly all of the services used by consumers are offered at CBs or CUs, but at lower prices.

3) Most CBs and CUs have credit and debit card services and have joined a national ATM network to allow you to use your debit card to get cash almost anywhere. Ask the CB or CU you are considering if they will refund all or part of the fees charged by most ATM vendors.

4) The biggest headache at the TBTF banks is getting something fixed, or finding the right department, or getting through the automated phone tree. Make sure that the service the CB or CU offers is personalized, and performed by a local real person who cares and to whom you have easy access.

5) Ask what the policy is on check holds. An archaic 1988 law allows banks to "hold" checks for up to 14 days in some instances. Because they don't "know" you, the TBTF banks are more likely to put "holds" on your deposits if they contain other people's checks. That 1988 law should be repealed because today, electronic clearing occurs overnight for 99% of all checks. But you already know that the U.S. Congress never repeals anything, no matter how archaic or silly it may be in today's world.

6) Every bank has to process checks. But, how they process them is key, and the answer you receive from this question is a good indicator of how consumer friendly the CB or CU really is. All TBTFs process debits (your checks) first in the order of highest to lowest amount. They process deposits last. By doing this, they maximize their insufficient fund fees, because, by charging the big checks first, they increase the number of "insufficient" fund or "bounced" check fees they can impose if you have several smaller items clearing that same day. And you get the insufficient fund charges even if you made a deposit that day that would cover the checks - because it is processed last. Small banks do just the opposite. They process deposits first, then your checks in the order of smallest to largest, thus minimizing "insufficient" fund fees.

The table below shows an example of this process. The consumer began this morning with a $1,000 cleared balance and the following checks are in the queue to clear: $30, $80, $5, $950, $100. The consumer also deposited $250 in cash the minute the bank opened for business in this morning. The bank charges $20 as its "insufficient funds" fee. (Most TBTF banks charge more than that!) The first table is the way the TBTF banks operate; the second table shows the same set of transactions cleared in a consumer friendly way:

Note the following: Both banks are clearing the exact same set of checks and deposits. Note that the consumer ends up $80 poorer under the process used by the TBTF institutions. Also note that because the consumer friendly banks use the lowest to highest check amounts, if the deposit made in the morning had only been $150, the consumer would have only had one "insufficient fund" fee at the consumer friendly bank instead of the four fees imposed by the TBTF.

Conclusion

There may be many good reasons to switch. But don't do it for spite. Do it only if it makes economic sense for you, personally, and that you end up with real economic benefit.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.