Covid-19 Breaks the Traditional Banking Model

The article entitled Traditional Banking Model - Checking & Savings introduced the concept that savings accounts often have withdraw limits, such as the maximum number of certain kinds of transactions per month.  In fact, prior to the Covid-19 pandemic, the restriction of six withdraws per month from a savings account was actually mandated by US federal law.

Federal Law 12 CFR Part 204

As one would expect, there are sections in US federal law that regulate bank and bank accounts.  One such law, recorded in the Federal Register as 12 CFR Part 204, distinguishes between "transaction accounts" (i.e. checking accounts) and "savings deposits" (i.e. savings accounts, credit union share accounts, passbook savings accounts, statement savings account, money market accounts, etc.).  Parts 204.4 and 204.5 of that law are often referred to as "Regulation D".

Regulation D Prior to Covid-19

Prior to the Covid-19 pandemic, Regulation D placed a limit of six withdraws per month from savings deposits.  Banks had to enforce that regulation, but could do so in several different ways, including but not limited to the following:

• Stopping or cancelling any attempted withdraws beyond six
• Imposing a monetary penalty for each withdraw beyond six
• Automatically downgrading the account to a transaction account instead of a savings deposit account if more that six withdraws occurred

Regulation D was actually aimed at the stability of the banking system.  Although consumers tended to view it as banks just trying to make money by imposing limits and fees, the reality is that it had more to do with regulating the amount of money that banks kept "in reserve" for various types of deposits.

Regulation D During Covid-19

The Covid-19 pandemic was starting to have world-wide affects in 2020.  People deemed non-essential were not allowed to go into physicals workspaces, and people were losing jobs in droves.  Most people are aware that the US government had started to issue stimulus checks and take other measures in order to maintain a viable economy during the pandemic.  Although it was overlooked by many, one or the more subtle measures was a change to Regulation D.

The government decided that the banking system was strong enough, and that it was more important to give people access to their money in a time of global crisis.  As such, the government changed Regulation D, effective April 24, 2020, to remove the six withdraw limit.  This change to Regulation D did not force banks to make changes to their systems to remove the restrictions.  Rather, it allowed banks to make changes to remove the restrictions.

Regulation D Going Forward

The government has indicated that it does not intended to re-instate the Regulation D six withdraw limit.  Some banks still enforce the limit, some banks have lessened the restrictions a bit, and some banks have fully removed the restrictions.

One of the reasons I really like SoFi Bank is because it has fully embraced the spirit of the changes to Schedule D.  From https://support.sofi.com/hc/en-us/articles/14242974933645-What-are-the-Checking-Savings-transfer-and-withdrawal-limits-

"At SoFi, we believe in better banking and helping you get your money right, which is why we have followed the Federal Reserve’s lead and allow for unlimited transfers and withdrawals from your SoFi Checking and Savings account."

I will get more into this more in a future post.  But, consider the impact of that statement.

If your bank has removed the savings deposit withdraw restrictions, they have essentially broken the Traditional Banking Model because you can now make payments out of your savings account, earning interest on bill payments up to the day the money is removed from the savings account.

Traditional Banking Model - Checking & Savings

Most people that have ever paid a bill or set money aside for future use are familiar with the traditional banking model. This model is conceptually very simple:

• Wages are deposited into the checking account
• Spending money (cash) is withdrawn from the checking account
• Bills are paid from the checking account using variety of techniques
• Checks
• Debit Card Transactions
• Electronic Bill Payments, sometimes referred to as ACH (Automated Clearing House)
• Extra money might be left in the checking account to pay future bills, or transferred to a savings account for future "rainy days" or major purchases

Basically, in this model, the checking account is intended for everyday spending, and the savings account is intended to squirrel money away for the future.  In fact, this intended behavior drives the way the bank treats the accounts.  Because, after all, the bank is in the business of making money using your money.

Checking Account

The bank assumes the balance of a checking is always in flux.  Paychecks come in a couple of times a month, and bills are constantly being paid out.  Because of this, the bank does not assume that it can use the money in your checking account for very long.  As a result, a checking account typically pays little or no interest, and sometimes even charges a monthly maintenance fee (which often can be waved if you deposit enough money or maintain some minimum balance).

Savings Account

The bank assumes the balance of a savings account is relatively stable, if not growing over an extended period of time.  The bank knows you will eventually use the money, but it will likely not be very soon.  As such, the bank assumes it can use the money in a savings account for a long time.  Thus, a savings account generally earns interest, and may even offer a better interest rate as the balance increases.  There might even be limits on the maximum number or amount of withdraws of various types within one month or statement period.  Sometimes the bank will charge maintenance fees if you do not maintain a certain balance.  Basically, the bank is trying to incentivize you to keep the money in the savings account for a long time so that it can use that money to issue mortgages, loans, and do various types of long term investments.

Covid-19

What most people do not realize is that, due to changes in technology and Regulation D during the Covid-19 pandemic, the traditional banking model used by your parents and grandparents is not necessarily the best banking model for you.  That will be the topic of my next article.  In the mean time, you may want to explore one of the modern banking platform such as SoFi Checking and Savings.  Heck, if the offer is still valid when you click on it, you might even earn $325 for signing up via that link.