By Ray Birch
LAKE FOREST, Ill—While overdraft revenue among all depositories grew to $34.4 billion (annualized) during the first half of the year, Moebs $ervices is cautioning that the same pace of growth may not be sustained in the year’s second half as the economy starts to falter.
Total annualized overdraft revenue, which remains a vital source of income for many CUs, hit $34.4 billion in the first six months of 2022, up $1 billion from year end 2021, the Moebs $ervices study shows. OD volume dipped below one-billion transactions in 2021, but has since rebounded, hitting 1.1 billion earlier in 2022. The median overdraft price at $30 has not changed since 2013.
“Overdraft revenue has fallen from a peak in 2009 of 27 basis points to assets to less than half at 13 BPs for all depositories,” stated Michael Moebs, economist and CEO at Moebs $ervices. “Overdrafts have become a way of life for Americans. ODs are the seatbelts of American consumer financial behavior.”
Why did overdraft revenue up grow so during the first half of 2022? Moebs explained a great deal had to do with consumer behavior, but the changing nature of overdrafts also played a role, as did what’s taking place in the economy.
“When times are good the consumer overdraws more. When times are bad overdrafts happen less,” said Moebs. “In the past 25 years overdrafts have averaged 3.5 times for each checking account annually for all checking. Pre-COVID, the average was 3.0. Today it is 2.0 after hitting an all-time low of 1.9 in 2021.”
Balances Getting Thinner
Moebs explained that consumers’ checking account cushions, built up by government stimulus, are getting thinner.
Michael Moebs
“People are still holding their government funds but starting to use them,” said Moebs, noting the smaller balances are leading to more overdrafts. “Their usage is with repairing their cars, getting a new or used vehicle—mainly used—and doing remodeling of their homes. Travel is still limited.”
And, as a potential recession looms and consumer balance sheets become more challenged, evidenced by the large growth in credit card balances in recent months, Moebs said it is difficult to predict how overdraft revenue will fare in the second half of 2022.
“Walmart now leads all checking providers with more than 101 million checking accounts. As Walmart goes so does the checking nation,” Moebs said.
Changes Taking Place
Moebs outlined what is changing in overdrafts, and fairly rapidly due to the COVID health crisis:
- “Installment lenders are taking over overdrafts by meeting the short-term financial funding needs of consumers. Their number one target is credit union members.
- “Installment lenders use to be called payday lenders. Their business has changed because ACH payments have replaced paper checks, thus reducing collection costs and losses. Installment lenders now adhere to Truth-In-Lending and provide a vehicle to surpass overdrafts. Installment lenders target credit unions with lower prices.”
- “OD pricing is not inelastic as most financial service executives think. Lower price builds more revenue. Walmart at $15 was $25 per OD transaction, and Bank of America at $10 was $35, each will make more OD revenue going forward.”
- “ODs are now a way of life. Overdrafts are digital and driven by debit cards. High-priced penalty pricing no longer works. However, those who make OD decisions for their depositories still will penalize their grandmothers and moms who overdraw with sky high prices.”
- “Unsecured fear. This is still taught at lending schools. Unsecured lending is not to be feared if priced correctly. The secret to effective and profitable checking is including risk.”
- “Risk for overdrafts is difficult. Often discretionary or judgmental overdrafting leads to high losses and low revenue. Analytical decisioning has proven to reduce losses and increase revenue. Discretionary overdrafting rarely exceeds $1,000 OD limits while analytical decisioning often has OD limits exceeding $2,000. The key is FICO as a process, not a tool of underwriting. Current analytical decisioning produces over half of OD revenue and is heavily used by installment lenders to gain market share.”
- “Government interference in overdrafts causes free market problems. In the past numerous elected officials had to close their checking accounts because of excessive ODs that were never repaid. Noble Prize winning economist Milton Friedman said it best, ‘Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.’”
CUs Urged to Pay Attention
Moebs urged credit unions to pay attention to the big threat from Walmart to checking business and payday lenders to the OD market.
As Moebs has previously stated in CUToday.info reports, credit union’s overdraft pricing must fall in line with Walmart’s and others that have dropped their charges.
“Over 94% of FIs still have unprofitable checking,” said Moebs. “FIs need to have profitable checking or they will not be in the business of checking. Lowering OD price produces more OD revenue, and will drive up OD revenue not only as a percent of assets but also as a percent of non-interest income.”
Who Else to Watch
CUs cannot overlook what payday lenders are doing, as well.
“The most important point is payday lenders, or instalment lenders as they preferred to be called, are using analytical decisioning,” said Moebs. “They have almost stopped doing human judgement and let FICO processing call the shots. Secondly, at $18 for $100 for two weeks is a lot more attractive than $30 per transaction and pay off in 24 hours. Profitable checking is crucial and this comes from proper overdrafting of price and limits.”