By Ray Birch
LAKE FOREST, Ill.—Inflation may have surged in 2022, but the median overdraft price tumbled more than 25%, as financial institutions moved to keep up with other players in the market and also avoid regulatory scrutiny.
But those decisions have also benefitted FIs of all sizes, as overall OD volume soared last year by 40.2%, a new study from Moebs $ervices reveals.
Michael Moebs, economist and CEO at Moebs $ervices, said data show that cutting price—and by the correct amount--leads to more business. The move also can instill greater confidence and trust among account holders—something financial institutions need now as confidence in the banking system has been shaken, according to Moebs.
“The median overdraft price fell 25.2% in 2022 while volume increased 40.2%—almost cancelling the price fall,” explained Moebs, citing his company’s survey of 3,600 FIs in January 2023. “Annual OD revenue fell $1.7 billion last year, which is not a large number. Overall overdraft revenue will start climbing in late 2023 and early 2024.”
Federal Reserve data, and Moebs $ervices surveys of more than 3,600 of the more than 8,400 depositories offering checking accounts, show the annual median price for an overdraft fell from $30 to $22 in 2022, and yearly volume increased from about 1.1 billion transactions to almost 1.5 billion.
Moebs pointed out that annual OD revenue in 2022 is still higher than yearly overdraft revenue prior to 2005, and in line with OD revenue since.
But the key point the data highlight is that when an FI decreases OD price, volume increases, Moebs said.
“Walmart’s OD price went from $25 to $15 in the pandemic. Now they lead the nation with almost 19% of the 570 million checking accounts in the market,” pointed out Moebs. “Many FIs followed Walmart’s lead and reduced OD prices to less than $20 in the latter half of 2022. It makes so much sense to drop price. Data show that for a full year, a $1 price drop will produce almost $2 more in revenue for the overdraft vehicle.”
A Zero of a Strategy
Moebs said there is no need for any credit union to cut its overdraft price to zero, as a reasonable price—under $20—will not draw attention from regulators or consumer groups.
“Reducing the price to zero is unnecessary,” stated Moebs. “Having a reasonable price like Bank of America’s $10 OD fee will do. And remember what your mother said, ‘Watch out for something for nothing.’ All depositories that dropped their price to zero were making very little OD revenue. So, it was a good move for them in the short term. Yet, they will be back charging or completely exiting the overdraft business in the near future.”
The Rising Cost of Life
As Moebs has emphasized in previous reports, those institutions that do well with overdrafts also have higher limits. He noted that limits must help consumers meet daily payment shortages, such as the monthly rent bill.
“The average overdraft checking account limit is $600,” Moebs said, citing his company has compiled. “However, the median monthly rent for an apartment in 2022 per the Cost of Living Index done by the Center for Regional Economic Competitiveness was $1,200. The mortgage median monthly payment was $1,532. This is 2.5 times the standard OD limit offered by FIs. People make errors. Overdrafts have become a way of life. The consumer will seek checking services offering meaningful ove
Michael Moebs
rdraft limits to cover shortfalls in monthly expenses, like rent or mortgages, and prices competitive with Walmart and Bank of America.”
Restoring Trust
Moebs asserted that in the current inflationary and potentially recessionary times, coupled with banking crises in America and Europe, trust needs to be restored quickly to consumers.
“Lowering the overdraft price and increasing limits restores the trust now,” he said. “The consumer seeks greater overdraft value driven by lower costs and higher benefits. The financial institutions dropping the OD fee price are telling the American consumer, ‘We are OK but you are suffering so we are going to charge you less to get by the inflationary and recessionary times.’”