Banks Could Make It Easier to Close Accounts

Closing a bank account in the twenty-first century, when a good portion of your banking is handled electronically, can be a cumbersome task. I created a bank switch kit earlier this year to help consumers organize their actions and take the correct steps to move your money from one bank to another without encountering any obstacles.

With this process, consumers can better understand the reality. Banking customers are ultimately in control of their actions. If you forget to cancel a direct deposit destined for your old bank account, the bank you left behind, most likely due to their high fees or unfriendly practices, might re-open your account and charge you new fees. You might not be aware of this “zombie” bank account until several months have passed. It’s yet another way for a company to easily take advantage of customers who aren’t incredibly diligent about managing their own money.

And it’s a good reason to keep your banking set-up as simple as possible. I may have opened dozens of bank accounts in order to review them on Consumerism Commentary, but I would recommend doing business with no more than two banks at a time. To work with only one would be even better.

Consumers Union is calling for banks to shoulder more of the responsibility when it comes to respecting customers’ wishes to move away from an institution. This wouldn’t put an end to customer responsibility for taking care of business accurately and completely when changing or closing bank accounts, but it would make this process easier for the customer.

At the same time, it would be more difficult for banks to automatically bring a closed account back from the dead in order to collect new fees.

The introduction of a new report from Consumers Union explains their objective.

In response to a volatile economy, taxpayer-funded bailouts, and new bank policies that increase the cost of basic bank accounts, more and more consumers have threatened to leave big banks in search of a better deal. But despite mass protests, widespread media coverage of bad bank practices and organized efforts like the “Move Your Money” movement, the bulk of consumers have stayed put, in many cases because of a perception that moving one’s money is a hassle.

Consumers Union set out to identify the bank policies that may contribute to a consumer’s decision to stay with his or her current financial institution, despite dissatisfaction. We conducted secret shopper investigations, solicited consumer stories, reviewed bank disclosures, contacted public relations representatives, and called customer service representatives at the ten largest retail banks in the U.S. to determine whether switching bank accounts at these institutions is truly a hassle, and if so, why.

We found that indeed it can be a hassle to move one’s money –- because, simply put, it takes time and money to move your money. The process takes several steps and banks don’t always make it clear how to close accounts. Consumers face many obstacles, such as: the transfer of automatic deposits and debits from the old account to the new account; wait times while automatic deposit and debit transfers are processed; fees for closing accounts or for certain methods of receiving or transferring remaining balances; risk of old accounts reopening; and inadequate information about bank account closing policies.

Here are the organization’s proposals and my comments.

Banks should bear the responsibility for transferring the automatic credits and debits from old to new accounts.

This proposal calls for banks to automatically route ACH activity from the closed account to a new account to be designated by the customer. This will ensure that no new pre-authorized activity will hit the closed account, and will help customers who forgot about an automatic bill payment or a direct deposit, as well as those who didn’t forget but whose businesses did not honor the request to change instructions within the time frame expected.

The only scenario I can imagine where one bank would willingly work with a competitor to transfer activity from a closed account is when banks are forced to do so through regulation. The bottom line is what is important to any financial institution, not convenience for a former customer.

Banks should provide same-day electronic fund transfers at no cost to consumers.

As a parting “forget you!” financial institutions are happy to charge exiting customers an account termination fee or an additional fee to transfer remaining funds out of the account. I’ve seen this with investment accounts more often, and it’s a good way to prevent customers from leaving for greener pastures. Consumers Union suggests the regulation should be re-written to ensure that banks can provide EFTs for free when an account is being closed.

Check hold times should be reduced so that consumers can quickly access deposits in their new accounts.

Banks vary in their policies, but new customers might find their initial deposits are unavailable to use for as long as two weeks. Even subsequent deposits can be held by the bank for as long as seven days. If the money is in an interest-bearing account, it must still earn interest while unavailable to the customer, but if an emergency arises and the cash is needed immediately, two weeks is too long to wait.

I keep my emergency fund in an online savings account, so I’m already aware of the limitations. If I were to need more than a few hundred dollars — an ATM withdrawal limit — in a personal emergency, I would need to wait several days to transfer the cash to a brick-and-mortar bank account and deal with any hold that bank decides to place on that money. This is a good reason to use a tiered approach when building your emergency fund, so at least a portion of cash is available without hassle.

The “new account period,” during which deposits may be on hold longer than seven business days, lasts 30 days. So for the first month of using your new account, you may not be able to access your deposits in any manner remotely called “timely.” Consumers Union proposes reducing this new account period to 15 days. The group also proposes increasing the threshold, so only deposits in excess of $10,000 are unavailable, rather than the current $5,000.

Banks need some protection to ensure new customers aren’t using their institution for nefarious purposes such as money laundering, but current policies seem to exceed what’s necessary/

There should be no punitive fees to close an account.

Termination fees are implemented with the intent of making a customer think twice about ending a relationship. A termination fee can be visualized as follows:

As you move to exit the bank branch, the manager stands between you and the door, baseball bat in hand, quietly but threateningly pivoting the bat in his left hand to repeatedly hit the open palm in his right hand. “Are you sure you want to do this?” he asks, taking two steps closer to you. The tellers surround you from behind. One offers a free bottle opener with the bank’s brand if you decide to turn around and quietly sit back down. The termination fee is the bump on the head you’ll receive when stumbling out the door. Oh, the bank will let you leave, but not without sending you a message.

Termination fees are scare tactics, a last-ditch effort to get money out of a customer who has already given up.

Banks should not reopen accounts after consumers close them.

Consumers Union wants regulators to consider creating an opt-in rule when customers close a bank account. If the customer agrees, a bank may re-open a bank account if any new activity comes in. The bank would then have to notify the customer immediately (not at the end of the statement period), reroute incoming funds to the new destination, and re-close the account. The account would be open just long enough to deal with the stray deposit.

I would prefer if banks were required to simply reject debits and credits destined for the old bank account after a transition period. Rather than re-open an account that has been closed for months or years, just reject the ACH transaction. This may cause the initiating bank or company to charge a fee to the customer for the incomplete transaction, but it is the customer’s responsibility to make sure all companies with the potential to initiate pre-authorized transfers have up-to-date banking information.

Account closing procedures must be disclosed and easy to locate and understand.

The process for closing account can vary, not only from company to company, but from state to state and branch to branch. I’ve found that closing a Bank of America account can be a hassle. Some people had success just walking into a branch and asking to close the account, while others were told they needed to follow the official rules by sending a letter to the bank and waiting for a check containing the remainder of the deposit balances.

While Consumers Union isn’t calling for a standardized procedure for closing a bank account, the group wants to see clear disclosures. The Consumer Financial Protection Board has done a good job of redesigning other disclosures to ensure customers can understand credit card terms, so a redesigned disclosure for account closing procedures and fees wouldn’t be too difficult.

Bank regulators should examine the feasibility of bank account number portability.

In the past, if you had a telephone number with one provider and wanted to switch service to a new provider, you would need to change your phone number. That comes with the added responsibility of telling everyone your phone number has changed. Phone number portability changed this environment. You can now cancel land-line phone service while porting your phone number to your favored mobile service, and you can use the same number regardless of how many times you switch cell phone carriers.

If consumers could also take their account numbers with them as they switch from one bank to the next, it might alleviate some problems with missed automated debits and credits. Your one account number would identify your account regardless of where you handle your banking. When you switch banks, you would not need to notify people and businesses of a new bank account number. I’m not sure this would be able to be implemented immediately, as routing (ABA) numbers are just as important as account numbers when creating transaction instructions. If, however, there was a universal system for creating account numbers, routing numbers, which identify the bank branch that owns the account, could become obsolete.

What do you think of these proposed changes to the banking system in the United States?

Photo: Ecstatic mark
Consumers Union