By Ray Birch
LAKE FOREST, Ill.—Not since Congress passed the Truth-In-Savings Act in the early 1990s has there been so much change in the overdraft market as what has taken place this year, says one economist, who adds credit unions need to respond with big cuts to their own overdraft pricing and by making large improvements to operating efficiency—or watch Walmart walk away with members.
Michael Moebs, economist and CEO at Moebs $ervices and who has spent considerable time analyzing overdraft practices, noted that not only is the overdraft market seeing a potentially significant shift but Washington has its eyes on overdrafts, as well.
The Stop the Overdraft Profiteering Act was also recently introduced in the Senate.
“From Congress to consumers swiping debit cards across America, overdrafts are hot,” said Moebs. “PNC Bank led the way in April by introducing Low Cash Mode, an innovative payment feature allowing the consumer to choose which transactions to approve for overdrafts. And then, in early June, Ally Bank reduced their overdraft fee to zero.”
Two More Follow Suit
Moebs pointed out Walmart soon followed in late June by rebranding its reloadable MoneyCard as a new checking account, introducing one of the lowest OD fees in the U.S. at $15—or half of the country’s median overdraft price of $30.
“And then, on Aug. 2, Alliant Credit Union also dropped its OD price to zero,” noted Moebs. “Why are overdrafts so hot?”
Perhaps the biggest reason, said Moebs answering his own question, is financial institutions—especially the largest—have learned that cutting the price to well below the national median or even zero will not only improve the image of the organization as overdrafts come under fire from Washington, but, counterintuitively, the move will also drive more revenue for some.
The chart below shows how the major depositories are making big cuts, and how some are able to afford the change.
‘Kudos’ to PNC
“PNC Bank’s technological innovation gives the consumer more control over financial payments, which all depositories will hopefully adopt. Many kudos to PNC for inventing a major change in OD processing,” said Moebs. “However, PNC still views overdrafts as a penalty and charges a high OD price at $36.”
Moebs said his company has identified the average, “fully loaded” cost of an overdraft transaction is $13.
“ODs are the costliest and most labor-intense retail payment transaction,” said Moebs. “Yet, charging well above cost makes users hate bank fees. The PNC approach is like trying to soothe a baby without changing its diaper.”
The Ally Bank move to the zero fee is revolutionary, said Moebs.
“Ally Bank recognizes overdrafts are an error, not a penalty. Proper risk analysis can eliminate charging for the service. Other depositories should consider this process,” suggested Moebs. “As an online bank with no branches, Ally is more efficient than its peers. Ally’s low-cost structure is reflected in high assets per employee measurement, achieving less costly checking accounts. Also, Ally Bank has traditionally refunded overdraft fees and earns only one basis point of overdraft revenue to assets. Ally Bank can afford to zero the OD price. Free overdrafts are a smart, strategic move for Ally, but difficult to be replicated by other depositories without considerable loss of revenue lacking Ally Bank’s cost structure.”
A Rebranding
Moebs said Walmart is using its considerable marketing skills to rebrand its approach to consumer checking.
“Cutting the OD price in half is a huge move to bring in checking users. Most importantly, Walmart clearly and effectively tells consumers they have a $200 overdraft limit—something half the depositories refuse to disclose,” he said.
Moebs believes Walmart is a good choice for consumers.
“For Walmart, checking is costly—too many employees, their assets per employees ratio is very low,” Moebs explained. “Walmart’s OD design will win over consumers who are heavily transaction-oriented with low checking balances. The increase in transaction volume will produce more interchange revenue and prove Walmart a big winner in fees in the long run. Walmart’s marketing muscle, cash and capital will make it a huge competitor nationwide.”
Michael Moebs
Very Efficient CU
Similarly, Moebs noted Alliant Credit Union operates almost entirely online with no branch network.
“That, makes ACU extremely cost efficient,” said Moebs. “Alliant has also collected very little service charge revenue, and instead emphasizes relationships. Very few depositories can achieve the ACU, or Ally Bank, cost efficiencies to allow low- or no-fee ODs.”
Moebs said there are 20-million potential overdraft users at just those four depositories, or 5% of the nation’s checking account market.
“The consumer sees more value because the price comes closer to the benefit of incurring the overdraft,” said Moebs. “PNC Bank’s Low Cash Mode will change consumer OD behavior, but until PNC Bank changes its pricing strategy by realizing ODs are an error not a penalty, it will not gain much in checking market share. Ally Bank and Alliant Credit Union, as online financial service providers, have extremely low costs and can win over many checking account users, but not enough to make a dent in the national checking account market share. Offering free overdrafts is good for Ally Bank and Alliant CU, which very few other depositories can do.”
The ‘Overdraft Elephant’
However, the “overdraft elephant” in the room remains Walmart, warned Moebs.
“Walmart knows there are no free lunches. Living up to their new motto, ‘Save Money, Live Better,’” he ais. Walmart offers a national-low OD price, a transparent $200 overdraft limit, and has 4,783 stores or branches for consumers to do their banking. Walmart’s strategy will win consumer checking market share quickly by applying their save money and live better approach to checking accounts.”
As for many credit unions, they must become more efficient and cut their OD price in half as soon as possible, Moebs concluded.
“Otherwise Walmart will run away with their transaction accounts,” he said.