Study Shows Overdraft Revenue Has ‘Crashed’ - Michael Moebs, Economist and Chair of Moebs $ervices

LAKE FOREST, Ill.—Overdraft revenue among all depositories has “crashed,” according to a new study that compares total overdraft dollars through Q2 2024 to the peak of OD income ten years ago.

The report also shares reasons for the decline.

During the Great Recession of 2007-2014, overdraft revenue hit its peak, short of $40 billion in gross income for all financial institutions in the nation, explained Michael Moebs, economist and chair of Moebs $ervices. COVID-19 hit the U.S. in June 2019, and the pandemic ended in May 2023. For the first half of 2024, overdraft revenue was $13.3 billion annualized, reported Moebs.

“This is a crash,” said Moebs, “$21 billion in OD revenue has been eliminated – almost 67%.”

Moebs acknowledged that overdraft revenue is cyclical.

“This means when economic times are good, OD revenue rises, while in difficult economic times, OD revenue falls,” Moebs said. “This seems counterintuitive. Should it not be bad times drive more OD revenue and good times less?”

Frugal Consumers

Yet, as Moebs $ervices research has shown, difficult times make consumers frugal.

“For example, when money is tight, people eat more at home, while good times spawn dining out,” said Moebs. “Also, consumers make more checking errors in good economic times, thinking, ‘I’m making more, so I can pay for it.’”

Michael Moebs

Moebs identified the primary reasons driving the plunge in overdraft revenue since 2014:

• Free Checking declined from over 70% of all FIs to less than 18% today
• Regulatory reforms increased OD transparency from statements showing YTD OD charges to opt-in requirements
• Consumers consolidated checking and savings as Fed Chair Jerome Powell eliminated savings restrictions
• Transactions have become digital; more electronic payments are approved, declined, and settled in real-time
• Stimulus funds: $1,200 (3/2020), $600 (12/2020), $1,400 (3/2021); excess checking balances, less chance of ODs
• Many FIs stopped charging for overdrafts – for example, Capital One
• Walmart dropped OD prices to $15, driving down OD prices nationwide; Walmart has 119 million checking accounts
• Congress passed the Check 21 Act in 2003, eliminating paper float on transactions. Now, it’s digital data. What’s float?
• FIs reduced the number of consumer checking accounts offered from five to three.
• Most overdraft family charges were eliminated: NSF, stop pay, return deposited items, LOC, and deposit transfers.
• The emergence of fintechs who want no ODs yet took millions of checking accounts from depositories.
• Artificial intelligence surfacing to become half of the underwriting since COVID.
• OD Limits skyrocketing to $2,000 and more as inflation eats at the American consumer household.

Credit Union Performance

Moebs said credit unions lost more than banks during the sharp drop in overdraft revenue.

“However, CUs have always been greater risk takers on overdrafts than banks. Credit unions were the first to begin using artificial intelligence to set overdraft pricing and much higher limits,” noted Moebs.

Moebs added, however, that credit unions have done well with overdraft revenue per account.

“CUs using AI risk for limits have over four times more OD revenue per account,” said Moebs.

Moebs emphasized, too, that many CUs should restructure their deposit agreements to avoid “Navy FCU’s huge pitfall. It’s an ‘A and A’ problem. No AI risk analytics plus improper agreements spell accident.”