How to Avoid Becoming a Target of Regulators

By Ray Birch

LAKE FOREST, Ill.—A “new era” in checking—and overdrafts—is upon financial institutions, and those that adopt the new ways of the market will prosper, while those that don’t will lose money and will likely become a target of regulators, one economist is stating.

“What is the new era of checking? Checking has always been unprofitable,” said Michael Moebs, economist and chair of Moebs $ervices. “The Great Recession era from 2008 to 2014 finally made this obvious to users, regulators, and Congress. COVID, from 2019 to 2022, made it a an even clearer issue today.”

Profitable checking is the key to driving deposit funding for loans and investments, reminded Moebs.

“There are about 9,000 financial institutions that offer checking,” stated Moebs. “This number will fall dramatically in this decade due to unprofitable checking. Credit unions could outdistance their competition by making all CU checking reasonably profitable.”

Moebs argues that by making the checking product profitable, FIs will need to rely less on high overdraft charges, which is the model that many regulators are now targeting.

More Volume

As CUToday.info recently reported, the CFPB is zeroing in on overdrafts with a new proposal that recommends fees should range from $4-$14. And, as CUToday.info reported, NCUA chairman Todd Harper said the agency will be more closely scrutinizing CU OD programs this year.

“Prices for all fees, whether for deposits or loans, are too high,” said Moebs. “Reducing fees to a reasonable price will get much more volume. Volume is key. Lower price produces high volume and revenue will increase. CUs will become more than a target from regulators but also from competitors like Walmart and Chime, and many will have to seek merger or liquidation if they stay with a high overdraft charge, which today is anything much above $20.”

Difference Between NCUA and CFPB

Michael Moebs

Citing the comments made by NCUA’s Harper on the agency’s increasing focus on overdrafts, Moebs said, “(The) CFPB’s issues on ODs are not the same as NCUA’s. CUs often do not have much say with IT systems without heavy expense and often with no optional choices. NSF pricing is falling to zero fast. Charging for a denial with no available balance is problematic, because this raises the question of who should pay for the cost of the system that does and reports the denial: the consumer, merchant, credit union, or a combination? So, who should determine the OD price—CFPB, NCUA, state and national (associations), credit unions or members? The easy and simple answer is the marketplace.”

What Must be Recognized

Turning to the new checking era Moebs said is here, the economist emphasized credit unions must recognize consumers have moved to three major sources of checking accounts during COVID.

“Namely, Walmart with 116.5 million accounts with an OD price of $15, Bank of America 69 million accounts and a $10 OD charge, and Chime with 13 million accounts and no overdraft charge. This is 32.5% of the over 610 million consumer checking market, or one out of three Americans,” said Moebs.

The Forecast

Moebs is predicting the following will take place in the market in 2024:

• The consumer will have more flexibility with their financial behavior
• With more flexibility the consumer will not be punished for making errors
• FIs will experience a falloff in OD revenue
• Revenue will rise as the consumer experiences errors that cost less than a parking ticket.
• Walmart’s philosophy of more for less will spread, as their $15 OD fee for $500 is less than the payday lender fee of $110 for $500.
• Prices for the OD family of services--stop payment, NSF, transfer fees, and RDIs--will drop to zero.
• De minimis transactions and balance will rise, fee caps will fall, and grace days wo;; go up furthering volume.
• More FIs will experience profitable checking even as consumer fee prices fall

The New Era

The result, Moebs said, will be the “new era.”

“Most banks, credit unions, thrifts and fintechs must change their overdraft programs,” concluded Moebs. “OD prices in the $10-$15 range or less will make the overdraft service consumer friendly. The consumer will respond by using the overdraft service more, yet less in total price cost.” 

What if an FI does not change?

“The era of just ‘stop by and our FI will get you in the right checking account’ is over. Why? Walmart, BofA, and Chime have only one account,” Moebs said. “In ‘A Christmas Carol,’ Ebenezer Scrooge transformed his ways and moved from greedy to generous. The same is necessary for financial institutions to assuage their regulators.”