Skip to main content

The Top 10 Components of a Successful Overdraft Program

Overdrafts Are A 'Complex Jigsaw Puzzle'

LAKE FOREST, IIl.—Financial Institutions must pay attention to 10 overdraft “components” to offer a successful OD program, says Moebs Services, which believes overdrafts are the most complex financial service to offer.

Moebs Services’ latest overdraft study identified those 10 components, and the company is offering advice on how each can help or hinder the OD offering.

Feature OD Components

“Overdrafts are a complex jigsaw puzzle. Forming one picture is difficult to be profitable for all. Think of how long it takes to do a jigsaw puzzle,” said Michael Moebs, economist and chair of Mobes $ervices. “ODs are fees and balances put together in one price. Think of how long it takes to get an oil well working. Exploration, drilling to find nothing, then you hit a geyser. Now you get to build a pipeline to get it to a seaport. Then haul it by ship to another seaport. Then refine the oil then transport it to tanks at your favorite gas station. Overdrafts are the same.”

The 10 Drivers

According to Moebs $ervices, the following are the Below are that 10 key drivers affecting the effectiveness of overdraft offerings:

1. Price is Driven by Walmart, Which has 19.1% of the 600 million-plus National Checking Account Market. Walmart Charges $15 per OD Transaction

"Walmart has figured this out. Their price is well thought out and makes the company money,” said Moebs. “Credit unions pricing above Walmart will eventually lose market share to all those that have learned $15 is the effective price.”

2. Limits are the Supply Side of the Economic Price Equation. 

“Limits are the risk of funding the unsecured loan called overdraft. If limits are too high overdrafts lose money because the user cannot repay the funds. Too low and the FI loses a user to competition,” Moebs explained.

3. ODs are Credit and Not a Loan but a Deposit Service

“Overdrafts are regulated by Truth-In-Savings. Processing ODs as a deposit service is checking. The CFPB would like to change this to Truth-In-Lending,” said Moebs. “If done, substantial changes would be made to overdrafts. This could all happen in this election year.”

4. The Basis of OD Pricing is Vital—Balance or Transaction

“Priced as a balance is one workday charge, while transaction pricing produces many more OD charges based on OD individual volume. The choice is one price per balance or Walmart transaction pricing,” Moebs said.

5. There is Value in Waving Fees. No Charge is Valueless.

“Some outfits like Chime or Capital One will forgo OD pricing but go after customers who do not overdraw. This can hurt financial institutions by limiting users with low balances and high volume of charges,” Moebs said. “Charging for interchange becomes vital to have profitable checking accounts.”

Moebs Mike

Michael Moebs

6. NSFs, SPs, Transfers and RDIs are Part of OD Family

“The business of checking is really a family of overdraft related services. Some FIs will forgo an OD fee but charge high prices for other OD family services,” noted Moebs.

7. With Debit Scoring, Artificial Intelligence Decisioning, the Losses and Costs of ODs Have Been Greatly Reduced Vs. Judgment Decisions.

“More and more FIs are going to AI debit scoring to lower OD pricing which increases OD volume, thus maintains and eventually increases overdraft revenue,” stated Moebs.

8. “Overdraft Collections are Not Loan Collections–Treat Them Separately.”

“Most FIs make a big mistake by not treating overdraft collections entirely different than loan collections. Make OD collections different than loan collections,” Moebs said.

9. Deposit Agreements Need to be Tailored to the Individual FI

“Every FI is different. So, every deposit agreement must be different. Failure to do so will lead to costly lawsuits,” Moebs said.

10. Full Compliance Comes Only by Including All Regulations Both Federal, State and all Regulators

“Overdraft compliance is very tricky. This is because an OD is credit and should not be treated like a loan,” Moebs said.  

Comments

Popular posts from this blog

Open Banking To Hit $94B By 2029—But U.S. Lags Amid Global Surge

Watch our Video on Understanding Open Banking NEW YORK—By 2029, open banking is projected to surge globally to a staggering $94.14 billion in value. Yet despite its rapid evolution and expanding global footprint, adoption remains uneven—hindered by inconsistent regulatory frameworks across countries. According to GlobalData, this disparity poses a key challenge for the sector’s success, with the U.S. notably trailing behind global peers in embracing open banking. The U.K. pioneered open banking and continues to be one of the leaders globally. The country has seen the number of users increasing, with there being 12.09 million active users of open banking in 2024 and 223.9 million payments made. This is an increase of 72% compared to the year before. “As open banking continues to flourish, it is positive to see that the Financial Conduct Authority (FCA) and Payment Systems Regulator (PSR) have outlined how open banking can expand further in the U.K., and also be used in variable...

Sunday Reading - What is the Declaration of Independence?

What is the Declaration of Independence ? The Declaration of Independence is the founding document that formally announced the American colonies' break from British rule. It laid the philosophical and moral foundation for American democracy, asserting that individuals possess inherent rights and that governments must be accountable to the people ( read summary here ). Although Thomas Jefferson is often remembered as the sole author ( read initial draft ), extensive collaboration shaped the Declaration. Benjamin Franklin and John Adams made small but impactful revisions— including Franklin’s reported suggestion  to change “We hold these truths to be sacred and undeniable” to “self-evident”—before submitting the draft to Congress. On July 4, 1776, the final text was adopted and sent to printer John Dunlap, who produced an estimated 200 broadsides that night—but that wasn’t the actual day of American independence . Congress had voted for independence two days earlier, ...

Why Avoiding "I" in Marketing Presentations Matters

  Grant Sheehan, CCUE | CCUP | CEO NCOFCU  You know how things just stick with you? Well, many years ago, my marketing professor started off his class with the following, and it has never left me.  The Power of Perspective: Why Avoiding "I" in Marketing Presentations Matters In the world of marketing, effective communication is paramount. One valuable piece of advice that often comes from experienced instructors and industry veterans is the importance of avoiding the use of the word “I” in presentations and reports. At first glance, this may seem counterintuitive; after all, many individuals feel that personal anecdotes and experiences can enhance a message. However, upon deeper reflection, the reasoning behind this approach reveals itself as essential for achieving impactful communication. Building Objectivity When marketing professionals present their findings or insights, it’s important to establish credibility. Utilizing data, surveys, and feedback from cu...

๐Ÿ‘จ‍๐Ÿ‘ฉ‍๐Ÿ‘ง‍๐Ÿ‘ฆ You Need to Prepare Now to Compete for New Fed Gov’t Funded Savings Accounts for Children

WASHINGTON–Credit unions, which often talk about the need for younger members, will now have the opportunity to compete in a new arena for the youngest members of all, as the recently passed reconciliation bill includes language creating and funding for a new savings account for children, with a one-time deposit of $1,000 from the federal government for those born in 2025 through 2028. The new accounts are expected to create a new battleground of competition for credit unions as every provider from banks to fintechs to others seeks to capture the accounts.  The final version of the bill makes the tax-free savings accounts for minors, called Trump accounts, a form of individual retirement account (IRA) under Sec. 408(a), according to the Journal of Accountancy. Under the legislation, the accounts will be IRAs (but not Roth IRAs) for the exclusive benefit of individuals under 18.  About the Contributions “Contributions can only be made in calendar years before the beneficia...

Agencies Issue Exemption Order To Customer Identification Program (CIP) Requirements

WASHINGTON--The Federal Deposit Insurance Corporation, the Office of Comptroller of the Currency, and NCUA, with the concurrence of the Financial Crimes Enforcement Network, issued an order Friday granting an exemption from a requirement of the Customer Identification Program (CIP) Rule implementing Section 326 of the USA PATRIOT Act. The CIP Rule requires a bank or credit union to obtain taxpayer identification number (TIN) information from its customer before opening an account, and the exemption permits a bank or credit union to use an alternative collection method to obtain TIN information from a third-party rather than from the customer, the agencies stated in a joint release. The order applies to accounts at all entities supervised by the agencies. "Since the CIP Rule was issued initially in 2003, there has been a significant evolution in the ways consumers access financial services, along with a rise in reported customer reluctance to provide their full TIN due, in part, to...