Michael Moebs, Moebs $ervices
LAKE FOREST, Ill—A new study shows that financial institutions are starting to charge different prices for overdrafts depending on whether they stem from checks versus debit cards.
Credit unions that adopt a similar pricing strategy will earn more fee income than those that do not, according to a new Moebs $ervices report.
Ultimately, the true test of any price is to produce the desired income, said Michael Moebs, economist and CEO at Moebs $ervices. Credit unions that split their OD price make substantially more in fee income than those that do not. Nationally, credit union fee income to assets is 0.60%. However, those that split their OD price make on average 0.90% in fee income to assets, he said.
“Less than 1% of financial institutions are splitting their overdraft price,” added Moebs. “They are doing so to satisfy consumers, as well as earn greater revenue.”
The Moebs study reveals that the average price difference for those FIs that split price is about $6 per overdraft, with about 53% charging more for a debit card OD.
“Interestingly, the study found those FIs who split the OD price make on average 0.33% in fee income to assets, which is greater than the 0.24% national average,” said Moebs. “Those that charge more for paper check ODs make on average 0.37% in fee income to assets, and those that charge more for the debit card ODs make on average 0.29% in fee income to assets—in either case, making more than the national average.”
Debit OD Charges Higher
Splitting OD prices between channels can be beneficial for the consumer and the institution, if done correctly—which means lowering the overdraft price, increasing overdraft limits, and providing easy banking access for the consumer, such as through mobile apps, Moebs explained
Moebs said that a majority of the thrifts that split their OD price charge more for an OD using the debit card than a paper check.
“Effectively this is similar to high or penalty pricing,” said Moebs. “Since the transaction business is moving towards a higher volume of electronic payments, charging a higher price for a debit card overdraft is designed to ultimately discourage this behavior by the consumer. Therefore, the FI either does not want the transaction business or is attempting to create more fee income from the higher price.”
In conjunction with the split overdraft prices, credit unions generally offer ODs at a lower price, said Moebs.
“The lower price generates more volume, and in return creates more fee income,” explained Moebs. “Having a variety of OD prices gives the consumer more choices to manage their finances, and overall is a more consumer-friendly option.”