By Ray Birch
LAKE FOREST, Ill.—More than a year of major change in the checking market—driven by banks and credit unions slashing overdraft fees—demands that credit unions make pricing and program adjustments soon or risk the future of their organization in the next six months, one expert is warning.
Michael Moebs, economist and CEO at Moebs $ervices, calls what is happening with transaction accounts the “checking perfect storm,” and he has outlined key questions he said all FIs need to address to remain successful with the service and in business.
“Is the state of checking and overdrafts this critical and time sensitive? Depository management has been hit with changes so different and numerous it has produced a checking perfect storm,” stated Moebs.
The various fronts all coming together to the terrible weather for checking include, according to Moebs: COVID-19, work from home, Federal Reserve changes that include new M1—no reserves—no withdrawal limits, Walmart’s rapid expansion of its checking presence, CFPB overdraft enforcement, overdraft class action litigation, and Bank of America’s checking and OD price moves.
The Way Out
“The way out of the checking perfect storm is to answer and execute on some critical questions,” said Moebs. “FIs must change their checking and overdraft strategy within the next six months. If they don’t want to do this, they should then search for a merger or acquisition partner ASAP.”
The transformation in the transaction account business this past year has been dramatic, said Moebs.
“Bank, credit union, thrift and fintech executives have never seen anything like this in their lifetimes,” said Moebs.
Points to Address
According to Moebs, the key policy questions that depositories that want to stay in the checking business must now address incude:
- Whether to offer one or more checking accounts
- Determining if checking is a profitable service or loss leader
- Whether to allow zero, one or more daily overdrafts per user
“Why is the number of checking accounts important? The more checking account types offered, the more difficult it is to sell checking and more difficult it is to cross-sell other services,” asserted Moebs. “The more checking accounts the higher the cost to maintain checking.”
Key to Profitability
Michael Moebs
Moebs said that being able to efficiently cross-sell three or more account relationships can make checking profitable.
“This requires having underwriting, operations and marketing in place ready to build a relationship in a few weeks upon the consumer walking through the door for the first time,” said Moebs. “Otherwise, checking is driven by debit card transactions, which need to be 40 or more a month per each account.”
Turning to overdrafts, Moebs addressed the risk presented in the category and ways to drive revenue.
“OD risk is high because it is unsecured credit. The average loss on overdraft revenue for depositories is 11% of revenue. Payday lenders with the same credit risk lose 23%,” explained Moebs. “However, the use of analytics can reduce losses to 4%.”
The Choices Before FIs
Moebs outlined the overdraft choices facing FIs, including the choice to not to charge for overdrafts.
“This can be successful if OD revenue is very low. Otherwise, a zero OD fee does not consider value—what do you think of something you get for nothing?” asked Moebs.
Moebs said FIs can also choose to charge only one overdraft fee per day, based on the end-of-day-balance.
“This type of OD pricing eliminates class action lawsuits and avoids examination regulatory risk,” Moebs said.
Finally, an FI can choose to charge more than one OD fee, charging for each overdraft transaction.
“This approach is important if fee income is more than 25% of net income and this type of revenue is vital,” said Moebs. “Most credit unions use one OD fee for each transaction with a very high price—a median of $30 nationwide. This approach is very open to scrutiny by Congress, CFPB, and class action lawsuit attorneys.
“Are you afraid of the Consumer Financial Protection Bureau? Does your IT system require a major overhaul to be competitive with checking and OD? Will capital become too low with a minimum $1-million class action settlement?” Moebs continued. “If you answer yes to anyone of these questions, then seek a merger or sell out to a depository which answers no to all these questions.”