By Ray Birch
LAKE FOREST, Ill.—Among banks, thrifts and credit unions, it was only credit unions that posted an increase in service charge revenue during the first quarter of this year.
Overall, service charge revenue inched up by 0.6% to $40.7 billion in the first quarter of 2021, a total that is still down 8.9% from December 2019, right before the start of the coronavirus pandemic, a new report reveals.
While banks and thrifts saw fee income decline, the study shows credit unions’ service charge revenue markedly increased—due in part to more checking charges.
“Most important, service charges declined -0.2% for banks and -0.8% for savings banks, while credit unions were a furlong ahead at 4%,” said Michael Moebs, economist and CEO of Moebs $ervices, which conducted the study. “Overall service charge fees at CUs bottomed out in the second quarter of 2020 and have been rising since, while banks and thrifts have had ups and downs.”
What’s largely responsible for the credit union fee income growth, stated Moebs, is overdraft fees.
“Banks are more inclined to have a high overdraft price and low OD limits. This is second millennial thinking of penalty pricing and fear of unsecured lending,” said Moebs.
Overdrafts Not Alone
But overdraft income isn’t alone in increasing at credit unions, noted Moebs.
“Fees are rising at credit unions with the demise of free checking,” said Moebs. “This includes charges for falling below minimum balances and basic charges for just having a low balance and high volume transaction or checking account.”
Moebs pointed out more than 75% of all financial institution service charge revenue comes from overdraft fees. Similar to overall service charges, OD revenue for the first quarter of 2021 changed: -0.1% for banks, -0.6% for savings banks and up 4.2% for CUs.
“As with all service charges, CUs outdistanced banks and thrifts. However, this was a pyrrhic victory for all depositories. The number of users of overdrafts fell, driving down the overdraft volume as measured by ODs per checking account per year,” explained Moebs. “This measurement slipped to a 30-year low of 2.4 overdrafts per account per year, and down from 2.5 at year-end 2020.”
Michael Moebs
Viewed as a Penalty
Moebs contends that most financial institutions believe an overdraft should be penalized.
“In addition, many FI executives also believe pricing for overdrafts is inelastic, meaning the higher the OD price, volume will only rise and never fall,” he said. “Since overdrafts are no longer tied to paper checks but are a result of debit card transactions, overdrafts are an error, not a penalty. Plus, the data brought out by the coronavirus shows the high overdraft price is reducing usage and volume. Financial institutions need to change their approach toward ODs or face less and less revenue in this fee category.”
Also influencing OD revenue are limits, or the amount the user is allowed to overdraw their transaction account. Moebs OD surveys at the end of 2020 show the average limit on overdrafts is $500.
“This limit remains unchanged for the last 20 years,” said Moebs. “Falling volume is the result of too restrictive, low limits and less users also flee the high price,” explains Moebs.
An Increasing Concern
According to Moebs, the potential decline of overdraft revenue has been a significant concern of financial institutions over the last few years, especially with the CFPB and Congress eyeing the charges.
“Service charges and overdrafts are coming under heavy scrutiny and criticism by senators, representatives and consumer advocates,” said Moebs. “Yet, banks and credit unions with overdrafts less than $15 per OD transactions meet the short-term cash needs of the consumer at a lower, fair price. At the same time, FIs with lower fee prices make substantially more revenue and sign up more new checking accounts than the vast majority of financial institutions. Lower OD prices have proven the following: avoid congressional criticism, make more revenue than high-priced penalty approaches, and provide the consumer with a reasonable fee for making an error and dealing with the hardships of the coronavirus.”