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Monday, March 7, 2011

Advantages of Interstate banking for personal accounts

Interstate banking provides financial security, increases banking services, and provides more efficient, cost effective banking to clients with personal accounts. Moreover, advantages of interstate banking emerge out of increased competition and effectiveness among banks that have utilized interstate banking privileges and competitive financing options for consumers.

Improved and efficient interstate banking advantages was the reasoning for interstate banking back in the 1980's when banking deregulation was taking its early steps.(1)  By 1994, interstate banking had become a legislative reality with the passing of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. (4)

Interstate check deposits


Before interstate banking was allowed, interstate banks owned by the same company had to be subject to interstate agreements allow acquisition of the out of state banks, and  individuals could not make check deposits despite the interstate bank ownership.(2) Moreover, this restricted individuals from making deposits into their personal accounts at bank branches that did not have an interstate agreement even if they were owned by the same firm according to the St. Louis Federal Reserve Bank. Interstate deposits allow business people, travelers,  and people who work and live in different states more convenient banking options.

Competitive interest rates


With interstate banking comes economies of scale, combining of banking assets for increased loan activity, and more competitive interest rates due to the cost savings banks incur from profitably expanding their operations across state lines.(3) In other words, when banks are able to lower their costs by efficiently branching out management across state lines the costs can be passed on to consumers through interest rates that attract more profitability for the bank and better returns for clients.

More banking locations


A clear advantage of interstate banking is the number of possible branch locations at which banking services can be rendered to clients.(2) This convenience not only can increase banks revenue but also better facilitates interstate banking activities that can grow consumer wealth. For example, individual proprietors that can spend less time making deposits and taking care of personal/business banking transactions can also increase their efficiency, and potentially their profitability as well.

Increased service options


Another advantage of interstate banking is increased services. These service can arise out of more resources that become available to the bank through interstate banking acquisitions and branches. (3) Additionally, a wider range of clientele also puts increased pressure on banks to provide a greater range of services. Examples of enhanced services may include personal account electronic banking, expanded loan products, and more voluminous transaction types.

Financial security


In his book 'Banking Across State Lines' Peter Rose asserts Interstate banking can benefit consumers by improving financial security regarding funds within their personal accounts. More specifically, Rose claims that the consolidation of banks to form larger corporations tends to have a stabilizing affect on bank assets thereby better protecting consumers from bank insolvency. Even though bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), having to claim such insurance against lost assets is generally not a slight inconvenience, but rather potentially financially debilitating to banking customers who rely on one bank for all their banking needs.

Sources:

1. http://bit.ly/4xOpuh (Time)
2. http://bit.ly/dhZSRs (St. Louis Federal Reserve Bank)
3. http://bit.ly/c1I1pJ (Rose: Banking Across State Lines)
4. http://bit.ly/b2yGXU (FDIC)