Michael Moebs - “A overdraft perfect storm” has swept over the U.S.

By Ray Birch CUToday

Michael Moebs

LAKE FOREST, Ill.—For the first time in 23 years, overdraft limits are finally moving higher, according to a new study that shows credit unions are leading the way with the increases—including one CU with a $10,000 OD ceiling.

The decision to raise limits is critical, according to Michael Moebs, economist and CEO at Moebs $ervices, who noted the adjustments are taking place at the same time the marketplace has really started to evolve and several government agencies have announced they intend to bring new scrutiny to overdrafts and NSF fees.




Moebs emphasized the moves are a “total change” in overdraft thinking and policy

“The average American household pays a bit over $1,500 a month for housing and transportation according to cost-of-living index stats. OD limits need to match these monthly costs,” he said, adding the increases will help many Americans “get past COVID.”

Moebs explained overdraft limits have been stagnant at $500 since 1998, but the latest Moebs $ervices survey of 3,309 depositories shows an OD restructuring is taking place, with limits for CUs increasing to $700, banks to $600, thrifts remaining at $500 and Walmart at $200.

Moebs pointed out that overdraft limits are not a line of credit, a transfer from a deposit account, or a loan; they are the amount a financial institution is willing to allow the transaction account balance at the end of the day to go negative.

“The consumer will make errors with their mortgage and vehicle payments, which every month range to $2,000 or more subject to the market,” said Moebs. “Larger limits allow the errors to be paid. This is a total change in overdraft thinking and policy.”

CUs Lead the Way

Moebs said credit unions are leading the way with an average 40% increase to a $700 median limit.

“Banks increased 20% to a $600 median limit, while thrifts let speed bumps keep their limits at $500,” explained Moebs. “Fintechs dramatically lowered their limits, as Walmart introduced a $200 limit, while simultaneously reducing its OD price from $25 to $15 per transaction.”

Moebs explained that data show FIs that track fee behavior, adapt to market changes, and change their OD price at least annually are more successful.

“Our research shows credit unions in 2021 are leading the way and winning the T-account business while enjoying higher fee revenue,” said Moebs. “Credit unions lead in increasing limits, having prices below $20, or lowering the price below $20 during COVID. Consumers facing hardship were actually aided when COVID hit—as more FIs lowered their fee to below $20 and increased overdraft limits. In return, the consumers rewarded these FIs with increased usage or moved their checking business to these institutions. Our data show that a credit union has the highest OD limit in the nation at $10,000, and an overdraft price in the teens, and they are doing very well with this pricing.”


Michael Moebs

‘Perfect Storm’

In addition, Moebs asserted an “overdraft perfect storm” has swept over the U.S., noting that five factors have produced the storm:

• “The Federal Reserve made a major monetary structural change adding savings and MMDA accounts to T-accounts in M1, eliminating withdrawal limits, and stopping reserves. This is forcing FIs to shift transaction approaches,” explained Moebs.
  
  
• Over 70% of consumer stimulus funds have not been spent. Larger OD limits retain consumer transaction business.
  
  
• Checks are dead and currency is dying. “Debit cards are king. Interchange is growing. ODs and debit cards are linked,” said Moebs.
  
  
• Congressional focus is on overdrafts. “ODs are the unvaccinated financial service for the White House and Congress,” said Moebs.
  
  
• “The biggest factor is Walmart’s move into transaction accounts with a $15 OD and a $200 limit. As Ford challenged Ferrari and won, it is Walmart vs. banking, and with stores open 24/7 – 6 a.m. to midnight—who will win this race?” said Moebs.

The Team to Beat

“Walmart is the team to beat in this endurance race,” said Moebs. “Walmart will more than likely have more T-accounts than any depository or fintech by the end of this decade. Therefore, financial institutions should concentrate on Walmart’s major weakness—low limits. Vary limits by risk with a base limit to cover the consumer's core monthly expenses. Establish high error usage not penalty limits. Link debit card volume to fee waivers. Equally important is to establish limits analytically, not discretionary. Since overdrafts are credit but not a loan, the analytical engine will win the limit race.”