CHICAGO—It’s Leap Day today, those extra 24 hours in February that arrive in most years divisible by four. But what does it mean to credit unions? To members? To you personally?
CUToday.info persuaded a team of economists to break down the financial impact of Leap Day for both consumers and FIs. And while advantages and disadvantages often didn’t add up to large sums of money, there are—as always—winners and losers.
The winners are lenders, chargers of fees, wage earners, renters, transportation pass holders, and fitness club members who get an extra day to burn off calories with no extra cost.
Losers are borrowers, payers of fees, salaried employees, and “everyone who has to pay for lunch and gas,” said Michael Moebs, economist and CEO at Moebs $ervices in Lake Forest, Ill. “Spend your Leap Day wisely and make the most of your bonus day in 2016,” he said.
FIs Win
Moebs said Leap Day interest is a win for financial institutions–most of the time–as most use simple interest methodology on a daily basis to calculate loans and deposits.
“This means consumers will pay more for a loan that goes long enough to encompass one Leap Day. For example, on a loan with a $10,000 principal and a 4% interest rate, the financial institution earns $1.10 a day for 365 days,” Moebs explained. “Therefore, in 2016 you will earn $1.10 more. However, some loans calculate using a basis of 360 days. This means every month is 30 days, including February during a leap year.”
Moebs added that although the borrower might win if the loan is being calculated on 360 days, the majority of loans use simple interest, which means that the lender most often wins in this scenario.
Michael Moebs, Moebs $ervices
Minimal Impact
The impact of the Leap Year on financial accounts is actually minimal, but fun to talk about, said Bill Handel, SVP of research at Raddon Financial Group in Lombard, Ill.
“For example, someone with a $10,000 savings account earning 1% interest would earn $0.28 more in interest in a Leap Year assuming interest was paid on 366 days rather than 365,” Handel said. “So the impact is negligible from a practical perspective. From the financial institution’s perspective, the impact is likely to be equally uneventful.”
When it comes to fees charged by banks and credit unions, Leap Day is a win for FIs, said Moebs.
“If your financial institution charges a daily or periodic fee, then Leap Day is similar to interest,” he said. “This results in a win for the FI and a loss for the member or customer. Could it be worse? What if your FI will refund a Leap Day fee? Can they wait until Leap Day 2020 to refund you? Most states have provisions in usury laws, which state that fees have to be paid or refunded on either Feb. 28 or March 1 in a Leap Year. This legal provision also pertains to consumers, too.”
Salaried Staff Lose
Turning to employee income, salaried employees always lose, said Moebs.
“The normal work year has 261 work days, excluding days that are paid to employees, such as holidays and vacations. In a Leap Year there are 262 work days,” explained Moebs.
Bill Handel, Raddon
“So, if you are Jamie Dimon, CEO of Morgan Chase Bank, who just got a 35% raise in January to $27 million, his daily salary goes from $73,972.60 to $73,770.49 in Leap Year or $202.11 less per day. Poor Jamie after such a good raise.”
Handel pointed out that salaried employees earning $55,000 per year are “effectively” donating approximately $211 in “unpaid labor” to their employer in a Leap Year. “We all have one more day to work—for free.”
Moebs and Handel both said hourly employees win, picking up another day of income. Those who rent their home or apartment get one free day of rent, added Handel.
“If you ride public transportation and buy a monthly pass you get a free day of transportation,” said Handel. “If you like to ski and you buy a ski pass you get an extra day of skiing for free. And if your job happens to be in sales you have one more day in February to meet your sales quota.”
Little Economic Impact
Looking at the U.S. economy, Perc Pineda, senior economist at CUNA, said that “in theory” an extra day in February would be equivalent to a 0.27% increase—from 365 to 366 days—in economic activity.
“February 29th, however, is not associated with a national holiday that entices people to shop, unlike Thanksgiving, for example, and does not have a direct and quantifiable impact in terms of retail sales,” Pineda said.
Pineda said it is also important consider “frequencies.”
Perc Pineda, CUNA
“For example, wages are calculated by hours per week worked,” he noted. “Regardless of a Leap Year, there will still be 52 weeks in a year. We also track our economy’s performance on a monthly basis—for example the unemployment rate, inflation, home sales—and on a quarterly and annually basis—gross domestic product or GDP. The simple 0.27% factor just doesn’t translate neatly when we look at economic activity on aggregate.”
Although most financial transactions can be done electronically, what’s especially exciting about an extra day this year is that it is a weekday, said Pineda.
“Credit unions get an extra day to serve their members. Based on our 2015 estimates, credit unions served 422,892 members and originated 130,000 loans per business day,” Pineda explained. “Credit unions are well regarded for excellent service to their working class members. An extra day this year is a positive for the credit union movement.”
Leap Day Holiday?
In the end, the economic and financial impact of February 29 and the Leap Year is not all that significant, but it certainly is a great watercooler topic, said Handel.
“If we wanted to make it a meaningful economic event, there is one surefire way to do it—make Leap Day a national holiday. The economic impact of increased travel and spending, like Super Bowl Sunday, could indeed be significant.”