LAKE FOREST, Ill.—There is a significant difference in the number of banks and credit unions charging overdraft prices lower than $30 per item, a new report reveals.
About two-thirds, or 66.2%, of banks charge $30 or more per overdraft item, while 50.7% of CUs charge less than $30, the latest Moebs $ervices Overdraft Study shows.
Overdraft revenue for all depositories increased 1.2% from the first quarter to a total of $34 billion in the second quarter of 2017. The industry median OD price has remained at $30 per item since 2013.
Since 2013 overdraft revenue increased 10.1%, or a total of $3.1 billion. Prior to 2013, overdraft revenue fell 14.4%, or a total of $5.3 billion because following the Great Recession in 2008, the median OD price increased from $26 in 2009 to $29 in 2012, explained Michael Moebs, economist and CEO at Moebs $ervices.
“For the past three years, financial institutions that charge less than $30 per item are bringing in more fee income than those with a price of $30 or more,” said Moebs. “Many depositories struggle with the idea a lower price can generate more fee income. Yet, in the financial services industry when the overdraft price is lowered, the volume increases, making up the decrease in price, and increases overall income.”
Examining the overdraft price by asset size there are certain depository groups responsible for the recent increase in overdraft revenue, said Moebs. The overdraft price at community banks has remained constant at $25 per item for the past seven years. On the other hand, large credit unions have recently begun lowering their overdraft price and driving more revenue, he said.
As overdraft revenue and usage increase due to price sensitivity, the management of risk becomes critical, emphasized Moebs.
“Controlling the risk of overdrafts becomes essential to offer the best OD price,” he said. “Risk can be controlled by the use of FICO scores, where if used properly, the optimal overdraft price will emerge. To increase volume and strategically position your depository above the competition, a lower OD price is best. The consumer wants value and is willing to pay for any financial service if the price reflects the value of the service provided.”