Why local banks are (almost) always better than mega banks

Investing in your local bank provides loans and capital to underserved individuals in YOUR community.

“Mega banks” is a term we use occasionally, and if you’ve done any research on community banking, you’ve probably heard it from other places as well. mega banks are the huge institutions which dominate the banking industry and control many more assets than most banking institutions. The four which overwhelmingly have the most assets in the U.S. are JP Morgan Chase (more commonly known as just Chase Bank), Bank of America, Citigroup (or Citibank), and Wells Fargo. All of these banks have at least $1 trillion in assets, and the fifth largest bank, BNY Mellon, doesn’t even come close, with $356 billion in assets.

There can be advantages to banking at these enormous banks. For one, they may have the resources to offer banking products that others do not. For example, someone reached out to us recently looking for a bank that would process foreign checks, and while we were able to find one institution in their area, it is a larger (though not “mega”) bank than we typically recommend. While most banks and credit unions offer online banking services, larger banks may also offer mobile banking options, as well as having longer customer service hours on their phone help desks. mega banks and larger banks simply have more resources to provide service to their customers, in more ways and at more times.

But your deposits there will not help build local economies or proactively serve low- and middle-income customers.

There is a misconception that mega banks are cheaper and safer than smaller banks because of the enormous amount of capital they hold. This is far from the truth, as larger banks typically charge a fee for holding a checking or savings account if you don’t meet a daily minimum balance. Overall, larger banks are more likely to have fees for basic accounts, and if you’re looking for a fee-free option, credit unions may be your best bet, as they’re inherently nonprofit. Additionally, as all banks and credit unions are insured for up to $250,000 by either the FDIC or the NCUA, there’s no risk of losing your assets if the bank closes unexpectedly, as long as your account has less than a quarter of a million dollars.

Larger banks, overall, have disappointing statistics, especially when it comes to housing lending and small business lending. The four mega banks mentioned above have particularly abysmal stats: not only do they do a minimal amount of housing lending, with an average of only about 20% of their housing lending going to low-and-moderate-income housing, they also are minimally loaned out, with an average net loans to deposits ratio of about 60%. This means that they are either sitting on or speculatively trading a large percentage of their assets, which doesn’t directly contribute to growth in the physical economy the way housing and small business loans do.

With smaller banks, not only is the money you have in your accounts going to lending rather than trading, you can target the neighborhoods and communities you want to invest in. For example, if you’re looking to invest in Asian immigrant populations in Philadelphia, Asian Bank is a great choice. If you have your money at Chase, however, the small percentage that’s being loaned could be anywhere in the world. By moving your money to your local community bank, you can know most of it is going to underserved populations in the area you choose.

Ultimately, the best banks aren’t measured by size; they’re measured by how much the bank is contributing to its community and/or low-income communities where people most need housing and small business loans. Smaller community banks are designed to keep money circulating in their communities, and CDFIs specifically serve low- and middle-income communities. They have the most impact, and by choosing these Better Banking Options, your money is going to have the most impact as well.