In practice, given the enormous power of banks in small and fragmented markets, things can go very wrong. One recalls the classic picture of the mother down on her knees in front of her children while the big, fat, stogie smoking meanie from the bank forecloses on the farm. But it's because banks have a great deal of economic power that legislation protective of the borrower has gradually been built up and, in at least a considerable part, that you have central banks. Power has to be challenged with power. And one doesn't really have to deal with banks.
Many people do their banking with a co-op.