LAKE FOREST, Ill.—Overdraft revenue among all depositories has “crashed,” according to a new study that compares total overdraft dollars through Q2 2024 to the peak of OD income ten years ago.
The report also shares reasons for the decline.
During the Great Recession of 2007-2014, overdraft revenue hit its peak, short of $40 billion in gross revenue for all financial institutions in the nation, explained Michael Moebs, economist and chair of Moebs $ervices. COVID hit the U.S. in June 2019 and the pandemic ended in May 2023. For the first half of 2024, overdraft revenue was $13.3 billion annualized, reported Moebs.
“This is a crash,” said Moebs, “$21 billion in OD revenue has been eliminated – almost 67%”
Moebs acknowledged that overdraft revenue is cyclical.
“This means when economic times are good OD revenue rises, while in difficult economic times OD revenue falls,” Moebs said. “This seems counterintuitive. Should it not be bad times drives more OD revenue and good times less?”
Frugal Consumers
Yet, as Moebs $ervices research has shown, difficult times make consumers frugal.
“For example, when money is tight, people eat more at home, while good times spawn dining out,” said Moebs. “Also, consumers make more checking errors in good economic times, thinking, ‘I’m making more, so, I can pay for it.’”
Michael Moebs
Moebs identified the primary reasons driving the plunge in overdraft revenue since 2014:
- Free Checking declined from over 70% of all FIs to less than 18% today
- Regulatory reforms increased OD transparency from statements showing YTD OD charges to opt-in requirements
- Consumers consolidated checking and savings as Fed Chair Jerome Powell eliminated savings restrictions
- Transactions have become digital; more electronic payments approved, declined, and settled in real time
- Stimulus funds: $1,200 (3/2020), $600 (12/2020), $1,400 (3/2021); excess checking balances, less chance of ODs
- Many FIs stopped charging for overdrafts – example: Capital One
- Walmart dropped OD prices to $15 driving down OD prices nationwide; Walmart has 119 million checking accounts
- Congress passes Check 21 Act in 2003 eliminating paper float on transactions. It’s digital data now. What’s float?
- FIs reduced the number of consumer checking accounts offered from five to three
- Most overdraft family charges eliminated: NSF, stop pay, return deposited items, LOC and deposit transfers
- Emergence of fintechs who want no ODs; yet took millions of checking accounts from depositories
- Artificial intelligence surfacing to become half of underwriting since COVID
- OD Limits skyrocketing to $2,000 and more as inflation eats at the American consumer household
Credit Union Performance
Credit unions have lost more than the banks during the sharp drop in overdraft revenue, Moebs said.
“However, CUs have always been greater risk takers on overdrafts than banks. Credit unions were the first to begin using artificial intelligence to set overdraft pricing, along with much higher limits,” noted Moebs.
Moebs added, however, credit unions have done well with overdraft revenue per account.
“CUs using AI risk for limits have over four times more OD revenue per account,” said Moebs.
Moebs emphasized, too, that many CUs should restructure their deposit agreements to avoid “Navy FCU’s huge pitfall. It’s an ‘A and A’ problem. No AI risk analytics plus improper agreements spell accident.”