04/08/2024 09:04 pm
By Ray Birch
LAKE FOREST, Ill.—The trend lines don’t lie: Financial institutions charging high overdraft fees will likely face operating challenges in the near future and may even be forced to merge if they don’t follow the market trend of lowering their OD charge.
Michael Moebs, economist and chairman of Moebs $ervices, is offering that forecast following his company’s new overdraft study, which has found overall net OD revenue for 2023 was down 5.7%, with banks dipping by 8.1% to $31.4 billion, thrifts falling by 28.6%. and credit unions actually increasing net revenue 2.2%.
The study further reveals the median actual overdraft price across the nation, among all FIs has fallen to its lowest level in 30 years at the close of 2023, while transaction volume has increased. Total overdraft transactions at the end of last year stood at 1.237 billion, a 6.2% increase over 2022.
“The most significant reason for the volume increase is more FIs are lowering OD prices,” said Moebs.
The Prediction
Moebs is predicting the revenue the actual median OD price will be even lower when the study is conducted again next year.
Michael Moebs
“The actual OD price per transaction will fall below $20 by 2025,” predicted Moebs. “Want to keep the high price of $30? Then, switch processing from price per OD transaction to one charge per day based on end of day balance like USAA. Or, exit the overdraft business by not charging at all like Capital One. Finally, be like BofA and waive OD fees for customers with car loans or mortgages—or possibly a combination of several of these options.”
The Other Option
Of course, institutions do have one other choice, according to Moebs.
“You can do nothing and wait for hundreds of FIs to take steps before you. If so, what are your merger plans?” he said.
As Moebs has explained in previous CUToday.info reports, the “old method” for determining the median overdraft price among FIs surveyed only the price for institutions offering checking.
“The new method weights the OD price by the number of checking accounts at each financial institution, which truly gives the most accurate picture—the actual price the average consumer is paying,” he said. “Think of this OD pricing measurement approach as a market of 10 providers of checking. Nine of these depositories charge $30 per OD transaction, while one charges $10.
“The one charging $10 has 75% of all checking accounts in the market, while the other nine have 25%. The old-fashioned way calculates the market price as $28 an OD, while it in fact is closer to $10.”
Led by Bank of America’s dramatic overdraft fee price drop to $10, other FIs are returning to basic economics, stated Moebs.
“Lower price makes volume go up,” said Moebs, who has stressed that point in previous CUToday.info reports. “BofA moved to relationship OD pricing, thus losing more OD revenue but increasing profit from other services. The CFPB—the junkyard dog of banking—continues to attack the overdraft marketplace, but the results are not what they hoped.”
Some, like Capital One and Citibank, have eliminated overdraft fees, closing their doors on OD users, noted Moebs.
A New Model
“Others, like USAA, have switched their OD price protocol, moving away from charging per transaction to only one OD charge per overdrawn daily balance, thus rejecting the ‘junk fee’ premise of the junkyard dog altogether,” Moebs asserted. “As one BofA customer said, ‘Why would anybody call an OD fee of $10 junk when this price is really low, helping me manage money better?’”
Moebs said credit union OD revenue climbed slightly in ’23 because CUs, overall, lowered price more than banks and have greater website transparency on OD pricing, which helps consumers make decisions on overdraft use.
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