Overdraft Revenue Declines, Study Finds
Credit unions lost $1.4 billion in overdraft revenue in 2011 due to a bank-initiated overdraft price increase and the increasing popularity of alternative short-term loans, according to a new study from Lake Bluff, Ill.-based research firm Moebs Services.
The Moebs study said the national median overdraft price increased by $2.50 per transaction from June 2011 to November 2011, but credit unions did not contribute to the change. The median CU overdraft price remained steady at $25 per transaction during this time period, Moebs Services CEO Michael Moebs said. Meanwhile, banks’ median overdraft price is $30 per transaction, he said.
The results are based on surveys the firm conducted with more than 2,500 financial institutions, including approximately 1,300 credit unions.
According to Moebs, the FDIC’s new overdraft guidelines for banks, which went into effect last year, are to blame for the overall overdraft price increase of $2.50 per transaction. The guidelines require banks to crack down on habitual users of overdrafts, such as by setting a daily limit on customer overdraft fees and offering alternative programs to consumers who overdraw more than six times in a year.
To compensate for the inevitable costs of the new regulations, banks raised their overdraft prices, and the average increase of $2.50 per transaction hypothetically translates to an additional cost of $2 billion per year for consumers who overdraw their checking accounts, Moebs said.
How can credit unions benefit from the overdraft price increase brought on by banks? Scoop up new overdraft business by lowering their overdraft prices to less than $20 per transaction, Moebs said.
“We’re seeing credit unions sit on the sidelines of the overdraft business when they could be getting into it,” Moebs said. “If they lower their prices, the result will be an increase in checking account holders, which will raise their overall profitability.”
The study also found that the average number of overdrafts per household was 6.7 in 2011, an 18% decrease from 2010’s average and a 31% drop from the peak average in 2009. This demonstrates that consumers are not only reacting to higher priced overdrafts but are leaning toward alternative short-term lending solutions, Moebs said.
“Since the economy has been difficult for consumers since 2008, the need for short-term unexpected funds has not ceased,” Moebs said. “They have simply opted to seek funds from alternative sources such as family, pawn shops, friends, payday lenders and loan sharks.”
Collectively, banks and credit unions lost $3.6 billion in overdraft revenue in 2011. This is a 10.9% or $7.6 billion drop from the overdraft revenue earned in 2010 and a 20.5% reduction from 2009, the firm said.
In his contemplation of how credit unions can build their checking account business, Moebs said he feels that a repeat of Bank Transfer Day, this time without the mention of banks, could do the industry good.
“Bank Transfer Day was a good idea, but it was not executed correctly,” Moebs said. “My suggestion is they do it again, but call it Checking Account Freedom Day. Leave the term bank out of it, and imply that the credit union is the low-cost provider, the safety net.”
“Credit unions can’t afford to lose that $1.4 billion,” he added. “They need to lower their overdraft prices, or get away from making direct attacks on banks.”