By Ray Birch
LAKE FOREST, Ill.—The depository world will see “unprecedented change” in the next 18 to 30 months, predicts one economist, who says the Federal Reserve and Walmart are changing the checking game entirely.
That “unprecedented change” will lead to significant movement of money, a big decline in overdraft charges, and the need to alter and redesign many of the accounts credit unions and banks offer.
“The Fed has made all checking accounts, savings and money market deposit accounts (MMDAs) into M1 T-accounts—no more reserves or withdrawal limits. Checking accounts need to be redesigned into T-accounts. Low-priced ODs will become common,” stated Michael Moebs, economist and CEO at Moebs $ervices. “Savings has always attracted low-income households and Social Security recipients. With the elimination of paper checks starting with the Check 21 Act of 2003, coupled with the government forcing direct deposit, savings became the vehicle for these depositors. With the Fed making savings a T-account financial institutions need to put debit cards in the hands of these savers.”
Moebs pointed out MMDAs in recent years have attracted investors and savers who sought a temporary parking lot for money headed to certificates of deposits, the bond market or stock market.
“Limiting withdrawal to six a month shackled this service,” said Moebs. “With the Fed removing limits, this market is now open to high-speed transaction use via online banking and even debit cards. This means more transactions in savings and MMDAs, increasing payment system volume and errors by the user.”
Walmart’s Example
Moebs pointed out that Walmart, which is now offering a full checking account with a $15 overdraft fee, will be mining bank and credit union savings and MMDAs for new checking accounts.
https://www.cutoday.info/Fresh-Today/Walmart-Expands-Financial-Services-Options-Available-Via-Its-MoneyCard
“Walmart is attempting to come out of the COVID-induced economy with gold, and it may well do that,” said Moebs.
Moebs explained that savings and money market deposit accounts are now really checking, according to the Federal Reserve.
“In March 2020, the Federal Reserve, in response to the coronavirus, temporarily ended the reserve requirements of T-accounts, thus making T-accounts non-reservable,” explained Moebs. “In addition, the Fed removed the restrictions on withdrawals for all non-reservable accounts (M2—savings and MMDAs). In August 2020, in line with the Fed’s restructuring of monetary protocols, these temporary changes were made permanent.”
The Features
Michael Moebs
Moebs emphasized that Walmart has restructured its prepaid Money Card to be a full T-account. Its features include:
- No monthly fee with direct deposits of $500 per month
- $15 overdraft fee
- No charge for the first 24 hours of a negative balance
- No overdraft fee with $5 de minimis transaction amount or less, and/or $10 de minimis balance amount
- Monthly cap of five overdraft fees
“The most important thing Walmart did is cut the overdraft price in half to $15 from $30. This price is even lower than what payday lenders charge,” said Moebs.
Fees Being Cut
Overdraft pricing appears to be declining, as well, with a number of institutions announcing OD price reductions, including Ally Bank, which announced it is eliminating overdrafts. Moebs, in a previous report, said Ally’s move would not have a big impact on OD pricing, as long as other FIs “don’t blink.”
More recently, as CUToday.info reported, UWCU in Madison, Wis. recently cut its overdraft price to $5 from $30.
The Walmart overdraft limit is $200—below normal bank and credit union limits of $500. This means Walmart is going after the infrequent user who is price sensitive, explained Moebs.
“If you had two overdraft transactions with Walmart’s Money Card, the consumer would be charged $30,” said Moebs. “At a payday lender the charge would be $36 ($18 per $100), at a community bank $52, at a credit union $60, and at a big bank $72. Walmart knows better than to price ODs at $0.”
The Recommendations
What do credit unions need to do to respond to Walmart and the changes from the Fed, and keep some of the transaction account funds that will likely be moving soon?
Moebs said they need to adjust their transaction accounts and pricing. He recommended credit unions:
- Reduce the number of T-accounts offered. “Bank of America moved from 11 T-accounts to one and gained market share,” said Moebs.
- Price transaction accounts correctly finding out how many members with savings and MMDA accounts increased transactions > 40 in 2020; Determining how many of the old M1 T-accounts maintained balances above break-even, and measuring members who are occasional and frequent OD users in 2020.
- Establish new OD limits with a base of $2,000, and employ tiers.
- With the new T-accounts from savings/MMDAs, for existing T-accounts and OD users cut OD price in half and pay interest.
The Keys
“Volume and speed are the keys to T-accounts,” said Moebs. “The new T-account is based on transaction volume dominated by debit card usage and interchange fees. “Profitability will be determined by streamlining the number of T-Accts offered and capitalizing on interchange fees. This profitability in return needs to be shared with the consumer by cutting the OD price in half, as well as minimizing other charges to maintain the account. And timing is essential—the new T-account and pricing needs to be fully available no later than Columbus Day or you risk losing a lot of accounts and money.”