LAKE FOREST, Ill.—A new study shows that financial institutions’ profit margins on overdraft services are significantly less than popularly understood when fully loaded functional costs are taken into consideration.
According to a Moebs $ervices Overdraft Survey & Study, thrifts, credit unions and Main Street banks are more efficient with OD costs at $12.50, or 50% of their median price. Wall Street financial institutions cost at $23.35 is more than 66% of their median price.
Michael Moebs, economist and CEO at Moebs $ervices, said the study of 2,806 banks, thrifts and credit unions analyzes cost using the “classical components of cost: direct, indirect, risk and overhead. Direct functional cost includes personnel directly involved with work ranging from sales to user service. Indirect functional cost includes direct support personnel, such as managers along with information technology software and hardware expenses. Risk cost is losses and fraud. Lastly, overhead cost includes support functions, such as accounting and human resources as well as managerial expenses and the building expenses.”
Often, only direct functional costs are used to measure financial Institution service costs, especially those services where the main revenue is fees, said Moebs. “Measuring overdraft costs using only direct functional cost is like measuring a car’s total performance by how much air is in the tires. All costs must be taken into consideration.”
Moebs explained that regulators, legislators and activists review financial institution pricing strategies on an ongoing basis. “Banks, thrifts and credit unions watch their competition. And the consumer looks at the marketplace when choosing their financial service provider. Benchmarks of the fully loaded cost of a good or service are another tool to assist with assessing the price of a good or service.”
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