LAKE FOREST, Ill.—A new study shows that overdraft revenue among all financial institutions could hit $40 billion annually by 2020—a 23% increase from $33.6 billion today.
But the Overdraft Behavior Study from Moebs $ervices indicates that big increase won’t occur unless banks and credit unions change their overdraft pricing to meet consumers’ changing demands. The report also states that if banks and credit unions don’t step in with improved pricing that upstart small-dollar and payday lenders are poised to do so.
Michael Moebs, economist and CEO at Moebs $ervices, said consumers now want a reliable overdraft service that acts like a safety net with friendly features.
“This means freedom from penalty prices and a service recognizing everyone makes a mistake from time to time,” explained Moebs. “Overdraft revenue could exceed $40 billion by 2020, but only if banks and credit unions understand the checking demands of the modern consumer.”
The Moebs Services study of approximately one million consumer checking accounts shows overdraft behavior has dramatically changed in recent years.
“Overdraft behavior was traditionally dictated by the paper check and its processing time or float,” noted Moebs. “Today, overdrafts are driven by electronic transactions managed by savvy consumers who have their checking accounts available at their fingertips via mobile phone.”
The consumer today expects more from their overdraft service than just covering a transaction and charging a fee, said Moebs.
“The consumer wants a Huntington Bank 24-hour grace period when a mistake is made. They will also use the overdraft service more if you charge a lower price for debit card overdrafts than paper check ODs, like Philadelphia Police & Fire Credit Union does. Institutions need to make their overdraft features friendly. This means no overdraft fees charged with a low overdrawn account balance of less than $10 or if they reach a daily cap on ODs.”
The mentality of treating overdrafts as a penalty is a dying strategy, insisted Moebs.
“Overdraft consumers are people who have difficulty with their finances or need to access short-term cash from time to time. The financial institution that recognizes this and creates a dynamic service with fair prices will win with much more fee revenue,” Moebs said.
As technology makes it easier for the consumer to weigh their options, other avenues for short-term cash needs are being utilized, said Moebs.
“Payday lenders are attempting to capitalize on this upcoming opportunity to gain more revenue. As the overdraft price has steadily increased to $30 per item over the past several years, the payday lender’s fee has remained consistent at $18 per $100 borrowed. About two decades ago, payday lenders served around 10% of the overdrawn households. Today, payday lenders serve more than half of the overdrawn households, primarily because of low price.”
The Moebs study shows the keys to overdraft business are a price less than $20 and friendly features like caps.
“The consumer’s need for short-term cash and overdrafts will never go away,” said Moebs. “The overdraft business will remain strong as long as there are financial institutions that recognize the changing needs and wants of the modern checking user, and restructure their overdraft program to meet their needs.”