What is a bank?
A bank is a place where you keep your money so that if your house goes up in flames, at least your money is safe and you can buy a new house.
It’s also a place where you can go and borrow money to buy something you can’t afford.
That’s basically it. Let’s look at those two things in closer detail:
A PLACE TO KEEP YOUR MONEY
My apartment is not the best place to keep my money and also, that would be a lot of $100 bills so I decide to put it in a bank.
Let’s say I have $11,000 in cash and I go to a bank and ask them to pretty please hold my money for me.
$10,000 I probably won’t touch for a while, so I’ll put it in a savings account.
The $1,000 I’ll need to access to pay for things until my next paycheque comes in, so it goes in a chequing account.
The majority of banks in Canada will do the following:
- pay me no interest while holding my $1,000 in a chequing account
- charge me at least $4/month just to hold my money in a chequing account
- charge me a deposit fee for depositing my $11,000
- pay a very small amount of interest on my $10,000 – maximum $5/month
- allow you to withdraw(your own money!) from savings only once per month then charge you up to $5 to take out any more if you need it
- allow you a limited amount of “free” transactions with your low monthly fee and then charge you the equivalent of the monthly fee for every transaction that goes over that limit
A PLACE TO BORROW MONEY
Let’s ignore any frivolous borrowing for this example and focus on situations where people really need to borrow money:
My friend needs $10,000 to pay for school because he wants to educate himself to make more money so that he doesn’t have to go to banks to borrow money.
The bank just got $10,000 from me and I’m not needing it for a while, so they decide to lend it to my friend. The majority of banks in Canada will charge my friend anywhere from 3% to 10% to borrow the money I just gave them.
That’s $300-1000 a year, or $25-80 per month. To be clear, these are the lending rates when the bank is being nice. If you have credit card debt, they are making 15-25% in interest.
PAY OUT A LITTLE, CHARGE A LOT
This illustrates the basic concept of a bank.
They take your money, pay you a little, lend it out to someone else, and charge them a lot.
As you can see, the spread between the $5 a month I get on my $10,000 savings and the minimum $25 a month my friend will pay in interest is huge.
So why all the extra fees? Why do I have to pay to access my own money?
I gave them my money and they gave it to someone else and charged them. Why do I get so little of that interest?
What about my chequing account – why is it so different when I can easily transfer funds between chequing and savings?
Without me the bank wouldn’t have the money to lend and they would make nothing.
I’ve spoken to several bank managers about this and they always point to the costs of running the branch. Guess what, my bank doesn’t have a branch, and most of the people I know have no need for a branch.
All banking is done online: bill payments, transfers, investments. Cash is withdrawn from an ATM. They could close all the bank branches in the city and I wouldn’t even notice.
Maybe you are not like me, and you need your bank branch, and perhaps that need justifies the high bank fees that you are paying. But if you are like me, and you are still paying bank fees…
THERE IS A BETTER WAY
I bank with Tangerine. They are my only bank.
I have a chequing account, savings account, RRSP account(Tangerine’s Balanced Growth Portfolio) and the new Tangerine Money-Back credit card that pays me 1-2% cash on every purchase.
The only fees I ever pay are the $1 per Interac e-mail money transfer(because it’s run by Interac and I’m paying for the luxury of an instant transfer) and $10 for a bank draft(because it’s something that is actually printed and delivered to me).
Otherwise, I can pay as many bills as I want, use my debit card as many times as I want to withdraw money, or deposit money, or pay for things at stores. No fees at all for that stuff.
There is no monthly fee for me to get free transactions.
THEY PAY ME INTEREST ON MY CHEQUING ACCOUNT BALANCE!
Sorry to yell, but I need this to be crystal clear.
The majority of banks don’t even see this as a possibility.
Hey, it’s not a lot, but there is something nice about knowing that they will pay you some money on any money that you give them, even though there is the understanding that you will probably use that money at any given time without notice.
Just in case you’re not with me yet, here’s a comparison:
|Tangerine Chequing||RBC “No-Limit” Chequing|
|Monthly Fee||Tangerine don't know these words you speak.||$10.95|
|Debit transactions||Always unlimited.||Unlimited(but not really, because you are paying $10.95)|
|Interest||0.25%(hey, better than nothing!)||Interest in what?|
|Interac email money transfers||$1.00 each (but I should mention that I can also transfer money for free, it just takes a few days. Interac instant transfer is a luxury I will pay $1 for.)||10 free per month, then $1.00 each( but, again, please refer to the monthly fee)|
|Minimum balance required||What is this crazy talk?!||No minimum balance required!(if you pay $10.95 per month)|
|Bank Draft||$10(Fine, you win this one, RBC). But it includes a courier to your home if you want it.||$7.50 but you have to go to a branch to pick it up.|
STOP LYING TO CUSTOMERS
Ok, here’s a marketing tip for the banks out there:
If you say something is FREE and then on the same page say that you’re charging $10.95 a month for the privilege of getting those FREE items, that is called LYING.
So stop lying and, instead, say that for $10.95 a month, you get a certain amount of things.
And then help your customers make an educated decision by asking them how many email money transfers they plan to initiate per month.
Is it 10?
How many 25 year-olds send 10 email money transfers per month?
There’s a pretty large chance that they may only have one transfer per month: for rent.
Unlimited debit? For $10.95, what’s the cost per debit transaction?
Personally, I use my credit card for all transactions(because it pays me 1-2% cash every time) so my debit transactions are infrequent. No matter, debit transactions should be free.
All this stuff should be free, and it is, if you pick the right bank.
Take your $10.95 a month back from the banks and put it into a TFSA. In 25 years you will have $6,000 and you can go on that trip to Kenya. Would you rather give $6,000 to a bank that already makes billions, or keep it for yourself?
You have the power to choose. Choose wisely.