The debate over overdraft programs offered by financial institutions has mainly revolved around the issue of price, but volume is another, more important, factor involved that often gets overlooked.
The debate has been fueled by reports of the $35 cup of coffee and has targeted institutions that charge what are deemed as outrageous fees to unsuspecting consumers. Financial institutions have defended their programs by saying it is service that many consumers enjoy using as a cost benefit to having their checks or charges returned. However, data collected by Moebs Service, an economic research firm and overdraft program provider, showed that volume plays a more important role than price in dictating overall overdraft fee income.
The data collected by Moebs Services, depicted in the chart on page 22, shows that credit unions that charge an overdraft fee in the range of $10 to $15 have an overdraft income of around 0.21% of assets. Credit unions that charge an overdraft fee in the range of $40 to $50 have an overdraft income of around 0.35% of assets. Mike Moebs, economist and founder of Moebs Services, pointed out that the overdraft income of credit unions that charge $40 to $50 should be three to four times more than those that charge $10 to $15. But the data he collected showed that is not the case. At that high pricing level, Moebs said, the credit union should be bringing in overdraft income at around 0.75% of assets. On the other hand, credit unions charging $10 to $15 for an overdraft should only be obtaining one-quarter of the basis points in income that the credit unions in the higher price range are seeing, but they are seeing much more income than that.
The research spotlights the programs at two credit unions located in West Palm Beach, Fla. Six Thirty Federal Credit Union, an $11 million credit union, charges a below average overdraft fee amount $9. PBC Credit Union, a $105 million credit union, charges a fee of $38. Both credit unions have above average fee income when it comes to overdrafts, and Moebs said there was no statistical difference in revenue amounts, but one charges a quarter of the price of the other.
Richard King, CEO of Six Thirty FCU, said the credit union determines the price of its overdraft fees not by looking at volume, but by striving to be member friendly.
"We're a small credit union, so we know our members, and it doesn't feel good to charge a $35 fee on a $25 check. It's more of a philosophy."
A higher volume of overdrafts can exist, King said, because people are not paying attention to their spending in light of the low fee, but it is not across the board.
"People may say to themselves, 'It's $9, so I'll just write the check.' They may not if the fee is $35, but it's hard to tell."
There have been members that abuse the overdraft fee service, but those accounts eventually are closed because they run into the problem of always spending money they don't have, and it becomes like payday lending, King said.
John Deese, CEO of PBC Credit Union, said the credit union determines its pricing based on the relationship the member has with the credit union. The more relationship the member has, the less he or she pays in fees. Deese also said the credit union has tight parameters in place for the overdraft program. The member has a 30-day window to pay back the overdraft and the fee, and the credit union is strict about implementing the policy to make sure the member is not becoming detrimental to him or herself.
In the pipeline, PBC is looking to develop what Deese called a serving-the-underserved-type loan to fill the gap some members use overdraft programs to fill. If a member is using the courtesy overdraft program excessively, Deese said, he will call the member himself. Some of the feedback he's received was that members realize they are paying a fee for the service, but they budget for it because it is less expensive than using a check cashing service.
"We also look to council members and see if there is something else we can do such as a small signature loan, but some members don't want the obligation of loan. They prefer a short-term fix," Deese added.
The upcoming regulation requiring consumers to choose to opt-in to an overdraft program rather than automatically be put into an overdraft program will have an impact on PBC's budget, but Deese said it won't be significant because of the credit union's existing restrictions on the program.
King said the opt-in regulation will have an impact on his credit union as well, but "that's just the way it is."
Marc Paine, executive vice president, director of marketing and alliance partners at overdraft program provider Strunk and Associates, said credit unions that sit back and see how the pieces fall and then charge the few members that use the overdraft program more will be making a big mistake.
Paine said that Strunk is recommending clients with fully disclosed programs concentrate on that program.
"If the program was working before it should work going forward," he said.
The regulation passed on overdrafts will change the entire overdraft landscape, Moebs said, but it won't get rid of overdraft programs completely.
"The two credit unions in West Palm Beach are an example of that. They represent credit unions at the highest and lowest ends of the fee spectrum, and they are both surviving," he said.