How Total OD Revenue Can be Misleading Indicator

LAKE FOREST, Ill.–The controversy accompanying a new report showing the income earned by certain CUs in California from overdraft and NSF fees—as the CFPB renews attention to ODs and NSFs—is largely misplaced, according to one expert, who says the institutions that make the most money from overdrafts are those with the lowest prices.

A new Moebs $ervices Study of more than 455 million checking accounts found the average price for an overdraft charge fell to $20 per transaction, a 6.7% reduction from year end 2022.

“Overdraft prices haven’t been this low since 1999,” stated Michael Moebs, economist and chair of Moebs $ervices. “Yet those depositories that do the best are the ones with the lowest price. The survey found those FIs that charge less than Walmart ($15 per OD) make more money than those like Chase Bank ($34 per OD).”

The report shows, for example, institutions charging $14 for ODs generate income of $160 on a checking account annually. Meanwhile, those charging $21 lose an average of $177 each year on each checking account.

“It’s clear. Overdraft transactions rose to 1.4 billion from 1.3 billion at year-end 2022. Consumers use overdrafts more with lower OD prices,” Moebs said.

Unprofitable checking accounts typically have a 50% higher overdraft price than profitable checking, the study shows.

An Important Note

“It is important to note the higher price actually results in a loss due to far lower volume,” explained Moebs. “The price difference lies in how to measure profitability. The bottom line comes from volume, risk, revenue—in this case fee revenue—cost to do and speed. Leave out any factor and the proper price will not be achieved.” 

Moebs said examples and experience provide a roadmap to profitability.

“If volume is very low, don’t charge for overdrafts, since the FI is probably not into consumer checking,” Moebs explained. “Risk can be measured by FICO scores and historical credit usage. Net OD revenue less losses is reported weekly or daily to control risk. Costs are mainly compensation to provide and collect the credit, yet overhead cannot be forgotten. Unsecured lending is unique from secured lending since transactions require 24-hour review—not weekly or monthly—as secured is managed. The result is a lower price, which increases usage and higher volume, producing more revenue and profitable checking.”

What California Report Reveals

As CUToday.info reported, a strongly worded opinion piece published in Politico stated, “There’s a new predator making money off overdraft fees: credit unions.”

https://www.cutoday.info/Fresh-Today/In-Publication-With-National-Reach-Credit-Unions-Called-Predators-for-Their-Alarming-OD-NSF-Practices

The piece, published by Politico under the headline, “Credit Unions Are Making Money Off People Living Paycheck to Paycheck,” was authored by Aaron Klein, the Miriam K Carliner chair and senior fellow in economic studies at the Brookings Institution. Klein served as deputy assistant secretary of the Treasury from 2009 to2012 and as chief economist of the Senate Banking, Housing and Urban Affairs Committee from 2004 to 2009. 

The article follows the release of the first annual report from California’s financial regulator following a law requiring data be published showing how much institutions are making from overdraft fees and NSFs, as CUToday.info reported here.

https://www.cutoday.info/Fresh-Today/First-Ever-Report-Offers-Details-on-OD-NSF-Income-Among-California-s-State-Chartered-CUs

The article states a number of CUs would not have been profitable without OD fees.

Michael Moebs

Not Something New

Moebs said this situation, among all Fis, is not new.

“This is very common for most banks, credit unions and thrifts, especially since the Great Recession years of 2008-2014,” explained Moebs. “In 1983, the FI agenda then was to pay as little as possible on deposits and charge the most on loans and invest in high interest Treasuries. The net interest margin agenda is now much more market driven for both deposit rates and loan rates driving down the net interest margin. Fees then become very important to the bottom line.”

Moebs stressed credit unions across the nation that have had falling net interest margins have had to rely more on fees.

“Ultimately the real problem for CUs is too many employees and too high non-interest expense,” Moebs asserted, adding that those who contend CUs are ignoring their mission of serving members with the high prices are wrong. “Credit unions are just trying to adjust to the new reality of financial services following the pandemic. Again, their inefficient operating model is forcing most of them to charge higher fees.”

Checking as a Strategic Initiative

Moebs stressed the importance of making checking profitable, saying it must be a “strategic initiative.”

“Citibank has purged two-million unprofitable checking accounts. Walmart has taken the pole position in national checking market share with over 115 million checking accounts because it has a profitable checking portfolio,” said Moebs. “Yet, all 8,286 banks, credit unions, fintechs, and thrifts can be winners by making checking profitable and it starts with reducing the overdraft fee to $15 or less making the consumer win too.”