TL;DR: Aim to have three accounts at different banks.
"How many bank accounts should I have?" is a common question among entrepreneurs. Recent liquidity problems at Silicon Valley Bank and issues at Credit Suisse, increasingly stringent KYC for immigrants, and lackluster services from legacy/established/SIB banks make this question even more critical.
In this piece, we explain why it's better to bank with multiple institutions. Although we focus on entrepreneurship and business growth, this advice is also highly relevant for individuals and families.
You can never be sure
Let's address the obvious argument first. The primary function of a bank is keeping your funds secure. No single bank can guarantee that. If there is anything we can learn from history - even the biggest can fall.
"The bigger they are, the harder they fall"
Redundancy and diversification were always the best solutions to mitigate the risk. Don't think you are the best stock picker out there. The Great Financial Crisis almost took down well-known banks like Deutsche Bank, which most treated like an invincible monolith. Even though the concepts of "too big to fail" and Systematically Important Banks were introduced - you never know what tomorrow will bring us all.
Splitting funds across several banks dramatically increases your chances of staying liquid. This way, if one account gets into trouble, your entire cash isn't at risk.
Time is money
Talking about liquidity. Sure, most governments offer deposit insurance. But if a bank fails, accessing your insured money can take a while. If you rely on a single bank and it fails, your business can halt while waiting for your money.
A liquidity crunch can freeze some businesses and paralyze operations. Customers won't be able to pay as you don't have an emergency account to receive the funds. You will run to an established bank to urgently open an account there. Still, the account opening time will increase by ten times as other affected entrepreneurs will do the same.
You can waste precious time and money losing a bank account. Instead of opening any account under stress, do it beforehand.
There is always a bigger fish
The above were negative macroeconomic scenarios, but you can get your account closed for a million reasons that have nothing to do with the government, the economy, or your trustworthiness.
Nowadays, banks use automated black box systems to spot possible fraud. These systems can mistakenly flag legitimate transactions, causing accounts to be frozen or closed. Once a bank closes your account, it can be tough and time-consuming to get it reopened.
Banks are direct subordinates to central banks and state regulators. They will question the rules or fight the authorities. In the base case scenario, it's easier (and cheaper for a bank) not to touch questionable accounts than to spend time and investigate.
Banks never listen
Yes, you can prove your innocence and have all the supporting documents, but who will listen? Banks are very secretive about their internal policies and afraid to appear discriminative, so they won't share any details on the motives and reasons for the account closure.
"Due to the change in the internal policies, which we can't share due to our internal policies... we can't continue providing you the service. Thank you for being our customer!"
Good luck getting through customer support and bank clerks in attempts to reactivate the account. At the very minimum, it will take weeks and dozens of documents you have never heard of.
⚠️ Keep calm. Banks won't seize your money and will ask for account details to transfer your funds.
You can have the story. The problem is that no one will listen to it.
Financial pyramid
A plethora of challenger banks built great product offerings, have better-than-nothing customer support, and move faster than in weekly increments. The problem is that most customers don't perceive them as safe as bigger, older banks.
Meanwhile, bigger older banks have nothing of the above except for the fleur of safety and their own banking license. How do you choose?
You don't. Here is the banking pyramid you should consider:
Foundation. An account at an established top 5 bank in your region. This is your safety net. Keep some funds here for emergencies. It will function like an emergency security deposit, storing some funds for you. You will primarily use it for intracompany transfers between your other accounts. However, don't over-index the size of funds saved here, as established banks usually provide the lowest interest rates.
Operational middle. A challenger neobank with a comprehensive product offering. You can get a flexible card suite, faster wires, better customer support, and democratic KYC. Use it as a main account for most of your business transactions. Receive new customer payments, pay random vendors, and open sub-accounts for delayed tax filings.
Joker on the top. This account has two functions. The primary - is a second reserve account if one of the accounts above is closed, so you always have two accounts. But it might as well be useful. It can help you with a specific business function that it does better than any other account. Here are two examples. If you have international customers, you can find a financial institution that provides multi-currency accounts and good FX rates. Or if you have a lot of free cash that won't be used for a while (e.g., you are a venture-funded startup) - you can find a high-yield savings account.
Temperance is a virtue
At this point, why not have 5-10 accounts for any occasion and ultimate resiliency? Well, the best strategy when dealing with financial institutions is being reasonable. This is relevant to topics like tax optimization, but I digress.
Too many accounts can make you look suspicious and lead to more problems. Having two bank accounts is completely reasonable and even endorsed by any financial advice. Having three accounts is less regular but still okay and perfectly explainable.
Also, you will have to cover too many banking fees, and your head can explode when managing 5+ banking relationships. Don't overcomplicate an already super complicated subject.
Fear nothing, hit first
After years of disruption by venture-funded startups, the banking industry is still discriminative and hostile. Don't wait for problems to find you. Prepare in advance, and you won't lose sleep because some professional financists couldn't manage risk.