LAKE FOREST, Ill.—Only 18% of financial institutions operate “efficiently,” according to a new report that offers insights into what the most efficient FIs have in common.
A new Moebs $ervices Checking Account Costs study shows that efficient financial institutions’ checking costs are about half of those that are inefficient.
“Interestingly, the FIs that operate efficiently, according to their expenses, have an average checking cost of $175 per account. Those FIs that operate inefficiently have an average checking cost that is almost double, at $314 per account. This trend is consistent with all asset size cateogires,” said Michael Moebs, CEO and economist of Moebs $ervices, who added the study also shows that the number of checking accounts and transaction volume increase with the size of the institution.
“The cost of a checking account (see graph) stays somewhat consistent for FIs below $25 billion, with the exception of those between $5 billion to $10 billion in assets. The lower average cost for a checking account among FIs from $5 billion to $10 billion in assets stems from the number of efficiently run FIs within that asset size category, where nearly half operate at an efficient expense level,” explained Moebs.
Opposite Ends
Looking at the opposite ends of the asset spectrum, very large FIs above $50 billion, especially the too-big-to-fail banks, have and average cost of around $400 per checking account, while those below $100 million in assets average about $300 per checking account, the study shows. The cost of trying to maintain a large number of branches and sustain market share leadership causes large FIs to have a checking cost 35% more than community banks and credit unions, said Moebs.
Moebs explained that the study takes a “Service Costing” approach, which considers the number of accounts as well as the transaction volume.
“Whereas, many depositories still use manufacturing cost or activity based costing approaches,” said Moebs.
Overall, Moebs said cost is defined in four basic service categories:
- Direct checking costs – administration and production of services
- Indirect checking costs – software, equipment, and related administration
- Risk based costs – overdraft losses, unpaid closures, fraud, etc.
- Overhead costs – buildings, utilities, etc.
Big CUs Stand Out
Large credit unions stand out for having a low checking cost, said Moebs, noting most of those large CUs fall into the $5 billion to $10 billion asset category, where the most efficient FIs are found.
“One credit union based in San Francisco reflects this group best. Star One Credit Union has very low checking costs, which is due to their efficient operations and is reflected in low prices with their overdraft program: $15 per OD, $30 de minimis balance, and up to $2,000 in OD limits,” said Moebs. “Star One operates at their economy of scale (EOS). Other banks, thrifts and credit unions, which also operate at the EOS, provide extremely competitive pricing on their checking accounts. Overall, having a low checking account cost allows financial institutions to have more pricing flexibility and relationships where all of their services are profitable. This is the future.”
Michael Moebs, Moebs $ervices
Checking account transaction volume has changed significantly in the past 20 years, said Moebs. Today, the complexity of checking accounts allows consumers to use their checking account in more ways and more often.
“Some days, a single consumer may have anywhere from two to three transactions or more, pushing payment system volumes up dramatically,” said Moebs, who added that along with transaction volume, the total number of checking account types also greatly affects checking profitability.
Reduce Number Of Accounts
Moebs said a good way to control checking costs is to reduce the number of checking accounts but still offer the same service level by consolidating checking features among the remaining accounts.
“Hopefully in the next five years, more financial institutions will make their checking account portfolios a more efficient and profitable service,” said Moebs.