LAKE FOREST, Ill.—For the first time since the Great Recession, overdraft revenue increased in the first quarter from the previous year-end quarter, in part due to pricing changes, a new report indicates.
According to the latest Moebs $ervices overdraft study, total overdraft revenue increased $268 million, or 0.8%, from the end of Q4 through Q1, totaling $33.6 billion for all banks, thrifts, and credit unions.
“Since the recession started, we have seen the first quarter revenue dip about 4.2%, on average, from the year-end quarter. However, in 2008, when the revenue increased the last time in the first quarter, there was a much larger increase of 2.2% from the previous year-end quarter,” said Michael Moebs, economist and CEO of Moebs Services.
Price And Volume
Several factors contributed to the expanding overdraft revenue, said Moebs.
“An increase in revenue is directly correlated to price and volume. The overdraft price has remained the same since 2013, which indicates that volume has continued to the increase,” said Moebs. “When comparing year-to-year, overdraft volume has seen its largest increase since pre-recession.”
Moebs explained that in many cases, a depository’s volume increases when overdraft limits are adjusted and raised to fit their consumer’s needs while simultaneously assessing the risk involved.
Michael Moebs, Moebs $ervices
“Although the national overdraft price has remained constant at $30 per item, about 11% of depositories changed their price from the previous year, with a growing 34.9% who decreased their price,” Moebs said. “A decrease in price typically signals an increase in volume, and in effect, an increase in revenue.”
Overall, banks are leading the way with 37.2% of those who changed price decreasing the price, while only 25.9% of credit unions who changed price decreased it, the report shows.
Moebs said the study shows OD price is no longer “inelastic.”
“In the past depositories increased their overdraft price in order to see an increase in volume – often called price inelasticity,” Moebs said. “Today, overdraft prices that are $30 or greater actually reduce the demand or volume and reduce revenue. Consumers who frequently overdraw are seeking other sources of temporary cash in shadow banking companies like payday lenders.”
Thinking Change
Bank and CU executives need to change their thinking on overdrafts, asserted Moebs.
“The best option for a depository is to reassess their overdraft program,” said Moebs. “Reducing the overdraft price can increase volume and revenue. Adjusting overdraft limits can also have a big impact on consumer demand and volume. Overall, a win-win situation for both the consumer and the depository.”