LAKE FOREST, Ill.—Credit unions continue to outperform banks when it comes to overdraft income, a new report shows, with the analysis forecasting some institutions will lose revenue in 2019 due to their pricing.
A new overdraft study from Moebs $ervices reveals year-end 2018 data mirror what was seen at the close of Q3 last year—credit unions are increasing their OD income while the same revenue at banks and thrifts has fallen.
Overall, total FI overdraft revenue increased in 2018 by 0.50% to $34.5 billion.
Michael Moebs, economist and CEO at Moebs $ervices, told CUToday.info that revenue for banks declined (-0.73%) in 2018 and thrifts (-1.83%), while credit union OD revenue soared 5.72% to $6.9 billion from $6.5 billion.
The overall revenue uptick was caused by banks increasing OD price to $32 from $30, and CUs increasing to $30 from $29, said Moebs, referring to his company’s latest overdraft report.
In line with price changes, overdraft transactions decreased 6.93% for banks and 0.53% for thrifts, said Moebs. CU transactions increased 2.19%, enough to stimulate an overall increase, he said.
‘No Longer True’
“Depositories have thought the elasticity of overdrafts, or price changes vs. volume changes on ODs, was inelastic—no connection between price and volume, yet this link is no longer true,” asserted Moebs, author of the Moebs $ervices latest Overdraft Revenue Study. “Depositories with an OD price greater than $19.99 will lose revenue in 2019.”
Moebs said the key to overdraft revenue and profitability is risk.
“Since 1998, the average overdraft limit on a checking account has been $500. The lack of expansion of the OD limit exemplifies the underwriting fear of unsecured credit,” Moebs said. “The average loss on overdrafts is 11%, going as high as 20% in some markets such as Miami. So, restricting the limit and maxing the price has become the typical underwriting way to deal with unsecured credit to control risk.”
The Problem
The problem with this method, said Moebs, is ultimately the user moves on.
“The Moebs OD Revenue Study for 2018 found, eventually, the consumer finds the price too high for the low limit provided,” Moebs said.
According to Moebs and FDIC studies, the median overdraft of all transactions in a day is $40.
Michael Moebs
“So, the consumer decides—should I go to a credit union or bank and pay $30 for each transaction and have to pay back in 24 hours, or go to a payday lender, pay $18, get $100 and have 14 days to repay? The answer is simple,” Moebs said. “This is why the Moebs Overdraft Study found there are 18-million people who do overdrafts at banks, thrifts, and credit unions annually, and more than 23 million people who go to payday lenders.”
Other Conclusions
Moebs said his study concluded the method of underwriting risk for unsecured credit needs to change.
“Our overdraft study concludes current underwriting practices for ODs are outdated, and in fact are taking an opposite approach to current practices, which work much better,” Moebs said.
Moebs said increasing overdraft limits and reducing OD price is being used by more and more financial institutions. The result is the consumer uses the higher limits especially with lower price, risk is controlled by multiple limits, and the bottom-line increases.
“Unsecured lending can be controlled with varied prices and limits,” said Moebs.