After the 2008 financial crisis, 465 banks failed between 2008 and 2012. Only 10 banks failed in the five years leading up to 2008. Over 10 years later, the big banking industry hasn't collapsed, but public trust in the sector has been irrevocably damaged by the institutional failure of the financial crisis.
As an alternative, customers are turning to mobile, fee-free banking services like Chime and Empower. The appeal of these neo-banks derives from traditional megabanks tricking customers into paying hidden fees. According to Chime, banks collected over $38 billion in fees in 2017.
Andrei Cherny, the founder of Aspiration, which boasts over a million customers, says, "In consumer banking, you have what is one of the largest industries in the United States, in terms of profits, and at the same time one of the least disrupted industries, and the most unpopular with consumers. Those three things create a perfect storm for disruption."
Also known as challenger banks, these services are helmed by entrepreneurial industry disruptors and well-funded through venture capitalists. In 2018, neo-banks received four times more funding than they received the year before. Young customers who are new to private banking are especially comfortable with the concepts of online banking, money transfers, and digitally cashing a check.
However, neo-banks take their own risks. Competing megabanks have unrivaled budgets to rebrand and expand their services. Additionally, the basic checking and savings accounts offered by neo-banks are not profitable on their own; expanding with loans and credit services is the key to becoming more established.
Still, some reports estimate that the top 10 banks will lose $159 billion to their smaller competitors this year. Lindsay Davis, a financial analyst at CB Insights, says, "Everyone is looking at cards and bank accounts as the next battleground." Chime has already received $105 million from investors. One of the service's benefits over competitors is that the company does indeed collect a fee–from Visa. Every time a customer uses Chime's debit card, they collect the fee from Visa rather than the customer.
"If you look ahead five years, there's no way there will be a financial services industry that is charging consumers $30 billion a year in overdraft fees," said Chris Britt, the chief executive of Chime. "We aim to shake that up, and I think a lot of other consumer companies will be doing the same thing." While traditional banks have supported their local branches with fee revenue, some companies like JP Morgan Chase and Goldman Sachs have launched apps to compete with neo-banks, like Chase's Finn and Sach's Marcus.
Currently, between megabanks' hidden and predatory fees and neo-banks' limited services, there's room in the industry for both big and small companies. If these fee-less services find a way to expand and stabilize, however, then only the largest and most powerful banks might be left standing.
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When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.