By Ray Birch
LAKE FOREST, Ill.—The pace of overdraft price cuts by financial institutions could quicken, according to new data that show the big players are forcing down the price of the service at a record pace.
In releasing its findings, Moebs $ervices pointed out there is a difference between the median “list price” for overdrafts—the typical measurement used in OD surveys—and the median “actual price” being paid by consumers across the nation.
“If financial institutions see this clearly I believe many more will cut their prices, and some maybe even further than they already have,” said Michael Moebs, economist and CEO at Moebs $ervices.
Moebs $ervices data through June 2022 show what is happening. In the past year not only has the median list price for overdrafts fallen from $30 to $25—the biggest one-year drop since Moebs $ervices has been studying overdraft charges—but the median actual price is now $22.52.
“Overdrafts dominate depository fee revenue. Over 80% of all service charges come from consumers and businesses having debit charges greater than deposit balances in transaction accounts (T-accounts),” explained Moebs. “A depository’s overdraft list price is the price disclosed in consumer account agreements and fee schedules. However, the actual overdraft price is the stated list price multiplied by the number of checking accounts. The actual price is a much better gauge of the market because it considers the number of T-accounts at each financial institution and is not skewed by small groups of depositories charging very high or very low prices.”
Michael Moebs
Old Vs. New
Moebs cited an example he provided in a previous CUToday.info report.
“The old method determining the median overdraft price among FIs surveyed only the price for FIs offering checking,” Moebs explained. “The new method weights the OD price by the number of checking accounts at each financial institution, which truly gives the most accurate picture—the actual price the average consumer is paying. Think of this OD pricing measurement approach as a market of 10 providers of checking. Nine of these depositories charge $30 per OD transaction, while one charges $10. The one charging $10 has 75% of all checking accounts in the market, while the other nine have 25%. The old-fashioned way calculates the market price as $28 an OD, while it in fact is closer to $10.
The Tide is Turning
Moebs said the tide is turning for overdraft fees.
“Customers and members are concerned about higher interest charges on auto loans and mortgages, as well as the price of gas and groceries along with fees charged by depositories,” said Moebs. “Knowing how to price, not what to charge, demonstrates when interest rates are rising it is time to lower fees.”
What should CUs do to make their overdraft pricing decisions?
“Overdrafts are like a tent sale for cars. CUs can test the lower price over the holidays and see if it works. It works by making the same amount of money with more usage,” said Moebs. “If it works keep the lower price. In all cases remember it is not just the OD price but also the interchange revenue coming from more debit card transactions.”
Not a Four-Letter Word
Moebs reminded that fees is not a four-letter word.
“Current results show banks, credit unions, thrifts, and fintechs are reducing their fee prices substantially. Overdrafts are the seatbelts of the T-account business and provide a valuable budgeting tool to consumers ravaged by inflation,” said Moebs. “Bank of America with a $10 OD fee and Walmart with a $15 fee are leading the way using low-priced overdrafts, and this helps the consumer.
“The marketplace works, regulation does not,” added Moebs about the CFPB’s interest in overdraft charges.
“So, when Bank of America lowered its price from $35 to $10 the bank knew revenue would go down but would eventually come up because customers would do more debit card transactions since an OD is 71% cheaper,” concluded Moebs. “Like the tides heading out in the morning, the OD price is fading. Yet, as the tides return to the financial shores they bring with them even higher revenue due to greater volume.”