By Ray Birch
LAKE FOREST, Ill.—A new study suggests if banks and credit unions don’t increase their overdraft limits, more consumers will turn to payday lenders and FI overdraft revenue will markedly fall.
The new report from Moebs $ervices finds overdraft limits are not rising with the cost of living.
“Since 1998 the median overdraft limit has not changed and is still at $500, while the median OD price has increased from $18 to $30. Something has to change very quickly, or depositories will face huge declines from their main source of fee income—overdrafts, and a loss of accounts,” said Michael Moebs, economist and CEO at Moebs $ervices, who noted payday lenders loan limits are typically at least $2,000.
The Proof
The proof, said Moebs, is overdraft revenue has been flat for 10 years, in a range of $30 billion to $34 billion.
“When I can walk into a payday lender and get $100 for an $18 charge, the same price as banks and credit unions charged 21 years ago but are now charging $30, and the limit at depositories is the same as 21 years ago, there is something very wrong in the financial institution overdraft business. Since 1998 the U.S. Department of Labor shows the following price changes:
- The Consumer Price Index for all basic goods has increased 56.8%.
- Gasoline has gone from $1.03 per gallon to $2.72—a 264% increase.
- The price of a six pack of beer has increased 156%.
- Only the price for milk and overdraft limits have stayed the same.”
Additional Findings
The Moebs overdraft study—which surveyed 2,906 depositories and more than one-million consumer checking accounts—shows the median overdrawn balance in checking accounts is about $40 for an overdraft user. The study confirmed for each year in the past 21 years, overdraft limits are locked at $500.
“More importantly, the study revealed 33.5% of the depositories surveyed use discretionary limits which are generally capped at $500 and often even less,” said Moebs.
Moebs stated risk is the key in setting overdraft limits.
“Banks and credits unions incur half the losses of payday lenders, but this is from adopting a traditional, risk-averse approach to ODs and unsecured credit in general,” said Moebs. “The FIs’ lower limits will curb losses, but they also restrict volume, impede revenue, and provide no meaningful value to households with financial difficulties.”
The Size of Market
Michael Moebs
Moebs said the market for overdrafts is about 12% to 15% of the population of the United States.
“The overdraft business is a function of risk, and limits need to be increased to provide real value to consumers with short-term cash needs,” he said.
Moebs contends limits can be increased, and the overdraft price reduced leading to more revenue and checking account growth.
“This action will strengthen relationships and offer fair pricing while undercutting the competition—mainly payday lenders,” explained Moebs. “The median mortgage loan payment, according to the cost of living index, is about $1,200, or near the low end of a recommended OD limit from the Moebs OD study. Apartment rents are about the same as mortgage payments.”
Moebs contencs that a bank or credit union charging less than $20 per overdraft transaction with limits greater than a rent or mortgage payment can make substantially more revenue—usually 33% to 50% more, according to the Moebs study.
“Also, this overdraft approach brings new checking business to the financial institution. Everyone wins by adjusting OD limits higher and lowering the overdraft price,” said Moebs.
Recommended Adjustments
As strategic plans and budgets for 2020 are being prepared, Moebs suggested FIs make some adjustments:
- Reassess overdraft decisioning, judgmental or automated, by including limits to comply with different risk levels
- Increase overdraft limits to meet the modern needs of active overdraft users, not the needs of users 21 years ago
- Limits need to vary based on user performance and risk
- Control risk and proportion price simultaneously with multiple tranches from $100 to over $25,000
“Most import, make changes today to capture the rest of the 2019 overdraft season and head into 2020 with a risk reinforced overdraft fee strategy on your checking account,” said Moebs.