LAKE FOREST, Ill.—It’s becoming clear how the new overdraft battleground is shaping up, and it’s going to have a big effect on financial institutions’ ability to keep and attract new checking accounts, according to one person who said the lead credit unions once held has disappeared.
While credit unions and the rest of the financial services industry have largely been battling on overdraft pricing-- with the median fee dropping to $15 from $25 in 2022, CU leaders must now refocus their attention to OD limits, says Michael Moebs, economist and chair of Moebs $ervices.
Moebs pointed out OD limits are already rising sharply among checking account providers nationally, and suggested FIs with low limits will soon have to make changes or risk losing checking market share.
Playing Poker
“This is going to be quite a different risk game than just cutting the overdraft price,” said Moebs. “When playing OD poker from here on out you must look at the eyes of the competition, for they reveal the new table stakes limits. And this is no longer playing OD poker with a few of the local financial institutions on a Friday night—we are now in Las Vegas with big-time stakes.”
All this signals a big change in the checking world that no longer just changing overdraft price is going to be enough to keep checking business, stated Moebs.
“And the battle lines here are drawn and they are clear,” emphasized Moebs, “Overdraft charges should not be greater than $19.99. Walmart controls almost 20% of checking accounts and their price is $15. Bank of America is second in market share with 12% and their price is $10.”
Beyond the Obvious
Moebs said many more institutions are now raising overdraft limits for more than the obvious reason.
“On the surface it appears as a compliance move to avoid the CFPB. But behind this it’s really a move to preserve OD revenue, which can easily be done by increasing the OD limit,” said Moebs. “You have to ask yourself, ‘Can I raise the limit past $2,000 and do I know how?’”
Moebs told CUToday.info the era of discretionary OD pricing and limits ended with COVID.
“Overdraft limits and price are now ruled by analytics, AI and debit scoring,” he said. “The limit is a function of risk in multiple tranches.”
What the Future Holds
What might the competition look like when the OD limit battle becomes widespread nationally?
“Bank of America is at $5,000 and Utah First Credit Union is at $10,000. They are the tip of the OD limit iceberg,” said Moebs. “As far as credit unions overall, in mid-2022 they were at the head of the OD limit herd; now they have quickly fallen far behind.”
Michael Moebs
Moebs said his firm has deep data on the impact raising OD limits have on the bottom line.
“For over 25 years, every Moebs $ervices client who raised the limit to $2,000 and more and dropped their OD price to less than $20 has had a minimum increase in net revenue of 50%, and most have had 100%, and are growing net revenue constantly,” shared Moebs.
Additional Consequences
There may be consequences for FIs that simply focus on dropping OD price, versus dropping price and raising limits.
“This is like the transition of the automobile. Henry Ford invented the Model T and then General Motors and Chrysler grabbed a chunk of Ford’s market share with color for cars instead of just black,” said Moebs. “Then, the Japanese took a huge portion of the American car market with fuel economy cars that were smaller and weighed less. Now, the Germans are taking over from the Japanese with more fuel efficiency and cars lasting well past 10 years.”
Moebs offered some examples of how FIs can learn from the past.
“Overdraft came into a purposeful revenue position with FIs by the 1980s, with a price of $10 or less and limits of $100,” he recalled. “Then the 1990s, fueled by free checking, the OD price more than doubled and limits went to $500. In 2003 Congress eliminated float from check transactions with the Check 21 Act and the OD price soared to $30 as the consumer made more errors without float, but limits stayed the same at $500 yet OD revenue soared with the higher price. COVID happened and the OD price started to fall. Post-COVID limits are soaring due to debit scoring and AI, and those who do this are gaining net revenue.”
‘Need to Decide’
The evolution of overdrafts to a low price with high limits makes this a viable service to help consumers who make errors or incur temporary budgeting shortfalls, Moebs believes.
“Every financial institution needs to decide whether they want to be on the high-speed OD train of low price, controllable risk, and high limits, or take the bus—with its outdated, clunky high prices and old-fashioned, riskless limits—which just takes consumers down the wrong financial road,” Moebs said.