With ODs Scrutinized, A Point to Leverage

By Ray Birch

LAKE FOREST, Ill.—With new data showing credit unions have lost the white hat on overdraft pricing to fintechs, what can CUs do to put it back on their heads?

One economist says the answer lies in overdraft limits.

“Credit unions have the best limits. Fintechs’ limits are tiny. Thrift’s kill their limits with the highest OD price. And credit unions tower (28%) over bank limits. It’s time credit unions begin promoting their overdraft limits,” advised Michael Moebs, economist and chair at Moebs $ervices. “This is a big benefit to consumers that allows them to use the service more for everyday needs. CUs must tell the United States this.”

The recommendation comes at the same time credit unions are under increasing scrutiny on overdraft pricing, in addition to non-interest-income pressures as other providers cut their overdraft fees.

The latest Moebs $ervices study shows the median overdraft limit for credit unions is about $700, which is about the same for thrifts.

“However, thrifts have a much higher OD price,” Moebs said. “Banks and fintechs have substantially lower limits. So, credit unions should put the white hat back on for having the highest limits."

For FIs overall, 17.5% set their limits below $500, 31.7% set them at $500 and 50.8% set them above $500.

Lost Advantage

As CUToday.info recently reported, data show CUs have lost their overdraft price white hat to fintechs. At the close of 2023, fintechs charged an average OD price of $12.52, banks $25.12, credit unions $25.71 and thrifts $30.44.

“Credit unions have three times the limit of fintechs and the same as thrifts,” Moebs said. “CUs’ limits produce significant revenue, attracting users who cannot get credit but need grocery money before payday.”

Moebs pointed out that fintechs, while having the lowest average price, are not proponents of overdraft usage, and, therefore, have very small limits.

“Fintechs really do not want to do overdrafts,” Moebs said. “Their limits are very low, and many do not charge for an OD. So, if a fintech user overdraws frequently, their transaction account will be closed. Fintechs only want profitable users.”

An Essential Factor

Moebs emphasized that limits on overdrafts are essential to offering checking and charging for overdrawn transaction accounts.

“Limits vary greatly,” noted Moebs. “An example of this variance is Walmart, which has a $200 limit. Bank of America has $5,000 and one large credit union has $10,000. Yet all financial institutions strive to make checking profitable—many factors determine limits.”

Moebs offered additional advice on setting limits effectively.

“Limits are risky,” he said. “Yet the credit union movement has used AI more than anyone else to control losses and establish proper limits. It is time for CUs to tell consumers they have the best limits and that they are built for their members’ needs.”

Two Ways to Set Limits

Moebs said OD limits are set, mainly, in two ways: ad hoc or via artificial intelligence (AI).

Michael Moebs

Ad hoc overdrafts are judgmental, he stated.

“A centralized underwriter, loan officer, or branch manager decides to pay or not, and the decision is still subject to Truth-In-Savings. FIs using ad hoc, really, downplay ODs and decline debit card overdrafts. A formal limit may be done but may not be conveyed to users.”

AI, such as debit scoring, is used to maintain standards and avoid the “human interface,” Moebs explained.

“AI integrates a broader array of limits based on user risk assessment,” he said. “AI is more efficient and mitigates compliance risk. Costs are lower since AI requires no payroll expense.”

A Great Story to Tell

Moebs emphasized that risk is a big piece of ODs.

“Trying to collect on unpaid, overdrawn transaction accounts is as big a cost as fraud,” he said. “OD limits are the main component of checking. Most people believe the OD price propels checking. Yet, if checking profitability can be achieved, it is the overdraft limit, adjusted for risk, that makes the biggest impact to the bottom line.”

And for those who possess the best limits, Moebs said, “They have a great story to tell.”