LAKE FOREST, Ill.—Banks and credit unions with successful overdraft programs are setting higher average OD limits and allowing artificial intelligence to determine those limits per person, says Moebs $ervices.
“Overdraft limits are like roadway speed signs,” said J.V. Proesel, president of Moebs $ervices. “The larger the limits, the faster the financial institution travels the overdraft highway, serving more consumers. Yet, there are many speed traps to avoid.”
Depository OD limits (see table) average $240 for fintechs, such as Walmart and Chime, to well over $800 for thrifts, like Ridgewood Savings Bank in New York, explained Proesel.
“And the range spans about $100 to $10,000,” he explained. “This is a huge competitive range replicated in no other financial service. The marketplace for any FI providing consumer checking must be constantly assessed for limits on overdrafts provided by the competition.”
Credit unions, which offer the second-highest average overdraft limits among FIs and fintechs, including one institution with the highest in the nation at $10,000, are faring better than banks in managing their overdraft programs, said Proesel.
“Two-thirds of the credit unions use overdraft limits. Whereas, only about two out of five banks use OD limits, and only one out of seven thrifts,” he pointed out. “Limits are like the Tour de France bicycle race. It is endurance that makes a champion in the Tour de France. It is the largest limit coupled with the appropriate risk that wins in overdrafting.”
Modern Age Of Overdrafts
Overdraft risk is best determined by AI, not humans, said Proesel.
J.V. Proesel
“The modern age of overdrafts is now. People are not good at making decisions,” Proesel said. “Coupling AI with what is known as Big Data is fundamental to modern day intellectual property. Humans are good at getting the data needed to make the right decision. So, couple the technology of AI with the right data and costs fall and losses become minimal.
“The largest limit of $10,000 is not with a bank, thrift or fintech, but with a credit union,” reminded Proesel. “Why? The credit union knows its market. It couples the large limit with risk and low price. Often this CU will pay the amount of the entire paycheck even though the member has a FICO score below 600. Limits are not just about FICO score but also about the loss the CU might endure along with collection cost.”
Proesel pointed out overdraft limits have tripled in size since they were first introduced in 1998. Meanwhile, overdraft price has peaked and continues to fall, down to $15 a transaction.
“Less than half of FIs have limits on checking, which means over half still use judgmental determination,” said Proesel. “This is time consuming, costly, and can result in reversed charges and higher losses. Employing AI reduces human interface, lowers cost and losses, and allows many more payments—doing so via IT systems 24/7. Using debit scoring—the deposit side of credit scoring for loans—coupled with AI makes transaction processing, including overdrafts, as easy as grocery shopping without having to drive to the supermarket.”