For a number of years there has been a move towards consolidation in the banking industry; in 1997 there were 9,143 banks in the United States, now there are only 6,263.[1] This trend is predicated on several factors: many banks made bad loans and then either failed during the credit crisis or were bought out by competitors, while others have struggled to pay back loans from TARP (the Troubled Asset Relief Program) with the same blend of results.[2] However, there are less well publicized and more troubling reasons for the decrease in the number of lending institutions including the inability of many smaller banks to cope with the post-financial crisis regulatory environment. In a classic case of unintended consequences, the requirements of the Dodd-Frank Act, a bill designed to make the banking industry more stable, may be accomplishing just the opposite as small banks have been closing their doors or have been acquired by their larger brethren due to the costs of the additional regulatory paperwork. The smaller institutions lack manpower and automated systems and are thus less efficient and profitable, making it difficult, and often impossible, for them to remain competitive.[3] Additionally, in an interview given to CNBC on July 13^th, 2012, John Kanas, CEO of Bank United attributes the struggles of small banks to what he refers to as the “obsession with Keynesian economics” which are driving interest rates down to such low levels that making money the traditional way -making loans within the local communities and taking in deposits- is no longer possible.[4]

This does not appear to be a transient state of affairs as according to the FDIC 29 banks have failed so far this year and 180 have been absorbed through mergers and acquisitions. 418 fewer banks are projected to exist by the end of 2012 than existed when the year began. Additionally, fewer banks than ever before are making their way into the market. Again, according to the FDIC, applications for bank charters have plummeted since 2008, with only 37 applications being filed in the past four years, none so far in 2012, with the latter representing the lowest number since that statistic began being tracked in 1934. In comparison 164 such charter applications were filed in 2007, just prior to the onset of the credit crisis.[5]

All of this has led to an even greater concentration of assets among a smaller group of lenders as nearly two-thirds of all U.S. commercial bank assets are now housed at only five financial institutions.[6] There are fewer banks currently operating that are larger in size than before, a trend that some have described as oligopolistic; clearly banking activities and their associated interest rates are being dominated by a decreasing number of banks of greater size and influence.

The control of lending and interest rates by such a small number of large financial institutions is problematic for a number of reasons. The lack of small banks could hamper the ability of small businesses and entrepreneurs to gain access to capital; given that small businesses generate most employment growth in the United States, such a lack of capital could hinder economic growth.[7] The control of interest rates by such a small number of banks can lead to abuse of the power inherent to such exclusive influence as the ongoing LIBOR scandal illustrates quite clearly.[8] Additionally, although interest rates are at historically low levels, making it a borrowers market, this will not always be the case, and with so few lenders participating in the process of setting rates and offering loans, borrowers will have a correspondingly limited set of options available to gain access to capital.

In order for borrowers to have the greatest accessibility to the lowest rates there must be an optimal level of competition in the market. With an increasingly small group of lenders comprising that market it is questionable whether such optimal competition can exist. Without an efficient market, one that allocates capital to those best suited to employ it, economic growth will not be maximized. Without competition in the capital markets, in other words, the United States economy will have yet another headwind it can ill afford. The continued concentration of the finance industry through institutional consolidation and the lack of new entrants into the market is an issue that must be addressed in order to ensure that those seeking to borrow money do so in a market that sets an equitable rate, one that is not unduly influenced by a minimal number of massive banking institutions.

In early 2012, TIAA-CREF Trust Company launched an online bank which was only made available to employees. A very few unaffiliated individuals reported being able to open accounts on the site although most others reported being unsuccessful.

BestCashCow.com has now been informed that the online bank, called TIAA Direct, has quietly been opened up so that it is available to everyone, and as of July 2012, the online bank is offering a rate of 1.25%, placing it at the top of online savings rates.

TIAA-CREF, the bank's parent company, is an insurance provider, providing retirement accounts and disability insurance to employees in non-profit sectors, primarily academia. Neither TIAA-CREF nor its bank subsidiary is known for providing strong customer service.

EDITOR'S Note: On July 23, 2012, just days after opening its online bank to the public, TIAA-CREF announced that its online bank offers would not be available to new depositors.

There’s a new player in the online banking space, ableBanking.com. Launched in June 2012, ableBanking offers high yield online money market accounts and certificates of deposit, with a twist. It operates an interesting business model that limits the amount spent on traditional marketing and gives the savings to depositors to donate to any cause or charity. When a consumer opens an account with ableBanking, he/she receives $25 to give to any charity. After that, the bank will donate 0.25% of your average balance every year on your ableAnniversary.

According to Heather Campion, a co-Founder and the Chief Administrative Officer at ableBanking, the average bank spends 15X more on marketing than it gives to charity and donates 1% of pre-tax earnings. By cutting back on traditional forms of advertising and providing that savings to consumers in the form of money that can be donated, ableBanking expects that it will give the equivalent of 2.5% of its assets to charity. She calculates this is over 10x what a regular bank will donate.

The bet here is that consumers, given money by ableBanking to donate to their favorite charities and causes, will create buzz about the bank on social networks and become a more effective means of getting the word out about the bank than traditional forms of advertising.

Rates and Fees

Heather told me that because ableBanking is online and doesn’t have the cost of a branch network to maintain, it can offer consumers high rates on money market accounts and CDs. The bank is currently offering a 0.85% APY money market account which is one of the best rates in the country. Its CD rates are also competitive with the top rates of other online banks. These are not teaser rates either. According to Heather, ableBanking plans to stay competitive as part of their business model.

The money market account and the CDs have a $1,000 minimum balance to open with no fees.

Details on Donating to Causes

ableBanking has some nice features for those who like to contribute to charity or would like to contribute more often. ableBanking provides the $25 to donate and also the .25% every year and an individual can give the funds to any 501c organization. That could include a religious institution, a homeless shelter, a school, or more. Their online banking interface makes giving easy, and also keeps track of all donations made, handy for tax-time. Within their online banking interface, a user can search for a 501c, specify how much money should be sent, and then send the cash much like sending a bill-payment. ableBanking has done the work of loading the names and addresses of every 501c organization in the country. The interface also allows a user to search for causes and charities in his or her neighborhood.

A benefit of using the interface to make donations is that, unlike paying via a credit card, which takes 2-3% of the funds sent, the funds a transfer through ableBanking is free.

Account Opening Process

Opening accounts is done online via an online application. Like most of the more sophisticated online banks, it confirms a users identity by pulling a series of questions from credit reports. So, for instance, a user might be asked the amount of his car payment or some other credit related question. The application takes about 10 minutes. Once the account has been setup, it can be attached to a primary checking account elsewhere so that can funds can be transferred in and out. The account can also be funded via check.

About the Bank

ableBanking is a division of Northeast Banking, an FDIC-insured community bank based in Maine and founded in 1892. Northeast Bank’s FDIC insurance covers deposits at ableBanking. The bank has over 200 employees and operates 10 branches in Maine as well as a call center, which is also utilized by ableBanking. Financially, Northeast Bank has a Texas Ratio of 9.6% versus the national average of 19.96% (lower is better). The bank has approximately $890 million in assets.

If you’re looking for a competitive online savings account or online CD, and also want to make giving easier, then ableBanking seems to worth checking out. We’ll continue to follow the new online bank as it develops and will post information regarding any new changes or announcements.