By Ray Birch
LAKE FOREST, Ill.—A new study predicts that if the federal government steps in to control overdrafts many consumers will leave the traditional banking market, nearly half of credit unions will go out of business, and thousands of FI employees will lose their jobs.
“For credit unions, this is as big or bigger than the taxi medallion loan problem or the mortgage crisis, if the CFPB gets their way,” suggested Michael Moebs, economist and CEO of Moebs $ervices, citing data from the latest Moebs $ervices Overdraft Study of over 3,100 banks, credit unions, thrifts and fintechs surveyed at yearend 2021. “If overdrafts were eliminated, 4.7% of banks—primarily community banks—and 43.5% of credit unions would not have bottom-line net income and soon go out of business.”
Moebs said in total 90,000 employees could lose their jobs.
“This job loss for (a) zero overdrafts (policy) could be 30,000 bank employees and 60,000 credit union employees,” he stated. “This is how important overdrafts have become to the average consumer. This assumes the record number of deposits in checking accounts, especially at banks, from the stimulus funds do not leave, or more financial institutions could go broke.”
More Stimulis? Fewer FIs
Moebs estimated that if those stimulus funds roll out, an additional 200 depositories could go broke—about an additional 20 banks and 180 CUs.
“Consumers make financial mistakes. Most are just ordinary errors while some are intentional and even fraudulent,” said Moebs. “Checking accounts, or transaction accounts, as the rest of the world calls them, suffer the brunt of these errors. The leading cause of these mistakes, or 77.4% of all service charges on deposits, are overdrafts.”
Moebs noted the view within the financial services community that overdrafts are unauthorized, unsecured credit and should be treated as a penalty, is changing.
“Some regulators view overdrafts as a $15.5-billion business, which is just big bank oriented, with a mean charge of $35,” said Moebs. “Yet, for all depositories, overdrafts are a $33.4-billion business with a median OD charge of $30 and median OD limit of $600, which also includes community banks, credit unions, and fintechs.”
Michael Moebs
Sending People to Payday Lenders
Moebs further stated that if overdrafts were eliminated by all financial institutions, many debit card transactions would be declined and numerous ACH payments returned for non-sufficient funds.
“To offset these transactions not being authorized or when consumers experience a funds shortfall, they would have to resort to payday lenders, especially outside of the United States, or black-market funding,” stated Moebs. “Consumers will leave traditional depositories.”
Depositories will not only lose money from customers and members who depart, but also from lost fee revenue from those who remain.
“Payday lenders provide $100 for a $18 price, and this is good for 14 days, not 24 hours,” noted Moebs. “This can satisfy more than half of overdraft users, since the national median overdrawn price at the end of the day is $40. The consumer can pay cash and avoid the banking system, as about 10% of the American working population does. Beyond this there is the shadow banking system which collects, if necessary, with rubber hoses. Is government intervention really necessary when Bank of America now charges $10 for an overdraft and provides limits up to $5,000?”
CUs at Greater Risk
Credit unions are at greater risk, contended Moebs, because CUs are more consumer-oriented than the banks, and they also rely on fee income more so than banks, which have turned to relationship pricing for checking, as opposed to many free accounts offered from cooperatives.
Moebs outlined facts his company’s latest Overdraft Study reveals:
- In the evolution of debit cards, paper checks faded, overdrafts became an error not a penalty
- Transaction accounts, in total, are not a profitable service for financial institutions, with few exceptions
- Using the Consumer Price Index (CPI) and the Cost-of-Living-Index (COLI), with a base of $10 per OD, 1990-2022 ends with only a $25 OD price
- The current OD price charged by community banks and similar size credit unions is $25–same as CPI/COLI
- 31.1% of 525 million transaction accounts are provided by Bank of America and Walmart charging $10 and $15 per OD
- If the current median and average OD price of $30 was lowered, OD revenue would increase.
- The risk of overdraft limits is driven by FICO scores. Higher FICO scores produce higher limits and vice versa
Solutions Added
The Moebs OD Study offers the following solutions:
- Two overdraft approaches are developing: charge per transaction or charge per end-of-day balance
- Charging per transaction should be in the Bank of America/Walmart $10-$15 range
- Charging on end-of-day balance can be above $20 and will mitigate class action OD lawsuits
- Transaction account profitability is achievable by reducing to one account with balance tiering using fees and/or rates
- Move OD risk limits to $1,500 or more to account for household mortgage/rent/auto monthly payments