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 [pdf]
Published or updated June 6, 2012.
{ 15 comments… read them below or add one }
Closing an account at ING Direct is as easy as requesting a transfer for all the funds in the account. When that action is detected you get a special confirmation screen asking you to continue with the transfer or close the account and post the current interest. It’s so easy in fact, I did it accidently one time – oops.
That’s one of the reasons I’m still a fan of ING Direct. I’ve never really had a hassle with them, and they’ve never tries to extract fees out of me. I’m keeping me eyes open, though, since they’re now a part of Capital One.
I’m the same boat Flexo.. Love their simplicity, don’t quite put Cap One in the same level of trust… so far though, I haven’t noticed any difference.
I have noticed that the savings bank where I have an IRA now charges a $75 fee to transfer your money if you move the IRA to another institution. I think that this is outrageous. I could even understand a $10 fee, or something reasonable, but $75 is over the top. I will not open any new accounts at this place, that’s for sure.
I have seen some financial institutions that wave or reduce the account close fee if you had sufficient funds in your account. This was a few years ago and i don’t know if any still do this. I do like the idea of account number portability. That would solve so many transfer headaches.
I think that while all of these suggestions are good for the consumer’s convenience the additional cost would be passed down in the long run in the form of more fees. I think consumers should be able to move their money easily but if you’re moving to a good bank they should be able to work with you to get a lot of these things done with as little hassle as possible.
According to this article:
http://www.kpic.com/news/consumertips/Closing-bank-account-will-cost-you-group-finds–156053745.html
Closing bank accounts could also be cheaper… some charge up to $55 to close an account! That’s ridiculous.
With each one of these proposals, I could also make a request for additional responsibility on the part of the consumer.
For instance, check hold times should be reduced. They would be reduced if there were less attempts of fraud (from the consumer).
Banks should not reopen accounts after customers close them. Customer’s should not close their bank accounts in an attempt to not pay another company they’re disgruntled with.
Banks should bear the responsibility to transfer new ACH’s? When would it ever make sense or a company to make it easy to stop doing business with them?
These proposals are quite idealistic.
I’m all for additional responsibility on the part of the consumer, but your proposals don’t make a lot of sense. Let’s see. Any one consumer can’t control the actions of criminals attempting to defraud the banks. If there were less fraud in the world, the industry might reduce check hold times, but that isn’t a question of consumer responsibility. If the definition of responsibility is “not committing fraud” I think the vast majority of consumers already take that approach.
Are you saying that customers should allow banks to continue to charge unnecessary fees and provide poor customer service? And they should just stay in bad relationships other than shopping around so there is little incentive for banks to provide exceptional service and good deals? Good news, then. That’s what customers — again a vast majority — do.
And you’re right on your third point. No company whose focus is on the bottom line would ever make it easy to stop collecting profit from a customer… unless that customer is unprofitable anyway.
Lowering the anti-fraud measures has an averse selection problem. Credit card networks find it profitable to pay for fraud out of their own pockets (profits), perhaps because doing so makes consumers more comfortable using their cards more frequently and/or for bigger purchases. Banks seemingly don’t find it profitable to cover costs of fraud themselves.
Interesting. I haven’t thought about it that way. The difference lies in the profit picture. If retail banks had more profit to play around with, perhaps they would be more willing to expend on services that improve their reputation, but banks are more focused on shoring up balance sheets to meet regulations and make shareholders feel comfortable.
I’ve worked for a bank and been the customer of a bank so I’ve seen both sides of the coins. My comment wasn’t meant to get a reaction; I suppose I’m just frustrated with consumer groups and our government pointing their fingers at banks rather than taking any ownership themselves. I have too many thoughts to pour into a comment box in regards to this but I’ll soon be responding in greater detail on my blog.
To respond to your thoughts above:
– As you well know the definition of responsibility is not “not committing fraud” but the two are undeniably correlated when speaking of check holds specifically. You would be surprised just how many fraud attempts are found daily by people I would consider to be “normal.” This fraud doesn’t have to be counterfeiting checks but could be as simple as writing checks while knowing the money will not be there.
– I’m not sure what you mean by “unnecessary” fees. All of the freebies we have grown to expect from banks were subsidized by revenue streams such as interchange and overdraft. With the government (Durbin) limiting the money banks can make from these sources, obviously they will search elsewhere to make up this lost income; any business would.
Maybe it would be better for banks to charge one upfront fee for the products/services they offer rather than masking them paper statement fees, etc. but I don’t think the consumer would be happy about that either. I think banks devalued themselves by offering so many free services.
– I do think people should have a great relationship with their bank and should switch if they do not have that relationship currently. But here’s my concern: most banks operate the same way. If you have a problem with one bank, it’ll likely continue to be a problem with the next bank. I think a change in behavior may prove more beneficial.
– The charge to close an account is (if any are unnecessary) the worst. There’s no way I can justify this one.
Closing an account is a “service” provided by the bank. Many services, as you point out, are subsidized by other fees and charges. However when closing an account, the bank knows that no further subsidies will be forthcoming from that customer. Therefore, it only makes sense that the bank should charge an amount for the service that is commensurate with it’s cost plus an additional amount to cover the cost of collecting said fee.
Closing an account is more of a service to the bank than to the customer. Anyone closing an account will not continue to use the bank they are leaving. Some banks charge a monthly service charge for maintaining the account. This implies there is work involved in the maintenance of the account. By closing the account the bank is better off than by not closing the account. Think of the amount of work i am saving that bank over the course of my lifetime. The amount of work to close an account is minuscule compared to the amount of work saved. I propose banks should pay customers that close their accounts.
Take another view of this as supply and demand. The bank has a supply of one of the account in question for you. You no longer want to use the bank. Demand for your account is now zero. Standard supply demand economics dictates the value of the account has reached a value of zero. Just leave the account open and pay market value ($0) for the account.
There is a last thing you can do to close an account for free at just about anywhere. Just wait for a change in the terms and conditions. These seem to happen at least 4-6 times a year. Then you just opt-out of the changes and the bank will close the account on you. This also works on cell phone contracts. Both of these places change terms and conditions so frequently you could go in to cancel at almost any time stating “i do not agree to the recent change in my terms and conditions” and be within the time window to reject changes.
I have 4 “zombie” bank accounts,I forget to close these Accounts.