By Ray Birch
LAKE FOREST, Ill.—A new study that says it is the first of its kind reveals financial institutions have not made many recent changes to how they price their fees, a decision the study suggests hurts not only consumers but the institution’s bottom line as well.
A new report from Moebs $ervices—which uncovered one FI that hadn’t changed its fee structure in 13 years—shows many banks and credit unions have not changed fee prices in over a year, with many not making any fee adjustments for more than two years. The analysis reveals, however, credit unions are more likely to reprice fees than banks to address economic changes and consumer needs.
“Fee prices are like any other financial service price--changing price reflects market conditions and consumer needs,” explained Michael Moebs, economist and CEO at Moebs $ervices. “The lack of changing price disregards the dynamics of the marketplace. Yes, a financial institution can disregard this, but what about the FI’s bottom line, capital position and growth? Fees are needed to support the ongoing institution.”
Additional Findings
The Moebs report shows 59% of all banks, credit unions, thrifts and fintechs change their fee prices once a year—41% don’t change their fee prices more than every two years or longer.
The timeframes for fee changes revealed in the study range from one month or less to every 13 years.
“Yes, our new study of 3,309 financial institutions found one FI that last changed its fee prices 13 years ago—an FI with assets of more than $100 billion,” Moebs said.
Moebs said the findings are surprising, especially with the pandemic. As CUToday.info reported, many credit unions waived fees during the health crisis. However, data show not many changed them to more accurately reflect the times, Moebs explained.
“Most definitely the infrequency of rate change surprised me. This was the time for financial institutions to help those financially affected by COVID. Obviously, 41% did not do this at all during COVID,” Moebs said of the data’s findings. “A credit union or bank is a financial intermediator between those who need money and those who want to save money. Changing fees less than once a year says fees do not matter. This is short-sightedness which can limit the essential role fees play to the bottom line. Without fees, many credit unions and banks would go out of business.”
First of its Kind
Moebs pointed out the “first fee change study in U.S. history” found asset size does not matter regarding how often financial service fees change. Deposit fees change, on average, about every 18 months, the report shows.
“Fees on loans change more frequently, but not much more,” noted Moebs. “Deposit fee pricing is often viewed as a penalty. This means fees are not a way to boost revenue, but rather a method to stop financial behavior. Therefore, fees are often set at the highest possible price to discourage the user from behaving a certain way.”
Moebs said overdraft fees, which are coming under fire from the CFPB, which is promising more scrutiny, are the best example of penalty pricing.
“If a consumer makes a mistake with their transaction account by overdrawing the balance, FIs will often penalize the consumer, much like the police issuing a ticket for speeding,” he said. “Speeding ticket prices are substantially increased in school and construction zones to deter motorists from hitting a child or worker and promote public safety.”
FIs that take years to change fee prices often do so because they view fees as a way to penalize the user and change their behavior, reiterated Moebs.
“Is the consumer who makes an error on a transaction account or any other deposit going to change their ways? As with speeding tickets, this behavior is often not malicious but caused by busy schedules and honest errors. This behavior, whether speeding or overdrawing, does not change and even can become recurrent,” Moebs asserted.
Any Consequences?
Are there consequences for not changing fees at least yearly?
“If all fees were eliminated entirely, about 50.1% of all banks, credit unions, thrifts and fintechs would lose money,” said Moebs. “If only deposit fees were stopped the bottom line would be negative for 26.4% FIs. About half of all fee income is from deposits and the rest loans. So, fees are very important to FIs making net income to support capital growth. Fee income will not go away.”
Michael Moebs
Moebs noted that the COVID-19 drove down the overall FI fee-income-to-assets ratio by 26%.
“The major reason is the consumer is not spending their stimulus funds, and thus overdrawn balances are less frequent,” Moebs said. “As COVID declines FIs need to change their fee prices frequently to represent errors not penalties and keep prices aligned with current conditions.”
A Reminder
Moebs reminded that fees for all banks, credit unions, thrifts and fintechs are very important to the bottom line.
“Changing fee prices varies based on a financial institution’s regard to the fee as a penalty or error,” concluded Moebs. “As COVID passes, changing fees is an opportunity for FIs to stay abreast of consumer needs and influence their own bottom lines.”