What Bank Acquisitions Mean for Customers

Updated on October 10, 2008.

ADDING FURTHER UPHEAVAL TO the rapidly-changing banking industry, Wells Fargo (WFC) says it will buy Wachovia (WB) in a deal valued at $11.7 billion.

The acquisition trumps Citibank’s (C) $2.2 billion offer to buy the beleaguered bank, which has been reeling from losses associated with its purchase of troubled California mortgage lender Golden West Financial earlier this year.

The move follows several turbulent weeks for the banking industry. In the largest bank failure in U.S. history, federal regulators seized Washington Mutual (WM) in September after customers disturbed by news of its shaky financial footing withdrew some $16.7 billion. J.P. Morgan Chase (JPM) immediately took over operations from regulators, and in doing so became the biggest U.S. bank in terms of deposits.

Bank of America (BAC) announced it would purchase Merrill Lynch (MER) , creating the world's largest brokerage when the deal goes through in 2009. And the last big investment banks, Goldman Sachs (GS) and Morgan Stanley (MS) , became bank holding companies to build consumer deposits and avoid Lehman Brothers' bankruptcy fate.

"There is definitely a sea change going on in the financial industry," says Edward Kountz, a senior analyst with market research firm Jupiter Research. "It's the end of an era." But though bank mergers and acquisitions may help financial institutions make it through the market crisis, industry consolidation isn't all good news for consumers.

"I don't think consumers are all that well served by these mega-banks," says Linda Sherry, a spokeswoman for Consumer Action, a consumer advocate. "The idea of them getting bigger is scary to me."

Here's what to expect amid bank consolidation:

Mergers shore up financially shaky banks, says Sherry. The influx of assets should serve as a safety net to offer more interest- and fee-generating loans. While there's no guarantee the deals will be better for consumers, the enlarged banks that emerge from this consolidation period should be on solid footing.

"Whenever you have fewer businesses in an industry competing for consumers, they can inflate prices," says Sally Greenberg, executive director of the National Consumer League, a consumer advocate. Even in "free" accounts, ATM and overdraft fees have crept upward over the years. With fewer big players in the market, expect such fees to rise. That makes it more important to shop for a bank with an eye to penalties for everything from maintaining a low balance to using another bank's ATM.

As traditional banks and brokerages merge, it's going to be easier for consumers to house everything from their checking account to stocks under one bank umbrella. Of course, while some folks may like the ease and speed of transferring assets from one account to another, others may be uneasy putting all their financial eggs in one basket after so much uncertainty over bank stability, says Jim Bruene, publisher of Online Banking Report, an industry newsletter.

If you're not regularly depositing five-figure sums, big banks offer some of the weakest yields around. Look to online-only offerings as well as community banks and credit unions, suggests Bruene. Regular consumers may see better deals and more favorable terms of service.