By Ray Birch
LAKE FOREST, Ill.—A big change is taking place in overdraft pricing, reveals a new study that also shows OD prices are at record highs among the largest financial institutions.
The report also suggests big banks may begin exiting the overdraft market while community banks are becoming more aggressive in pricing their overdrafts.
That findings and the forecast are part of a Moebs $ervices’ study conducted in November that shows how overdrafts, the largest fee revenue source from consumers for depositories, are shifting from penalty pricing to error charges.
“This is a huge contrast in many decades for the overdraft business,” explained Michael Moebs, CEO and economist for Moebs $ervices. “The average overdraft price at the largest financial institutions increased to $33.19. This is higher than ever before in the Moebs’ studies dating back to 1986 and Federal Reserve studies going back to the late 1950s.”
The largest financial institutions have been increasing their overdraft prices to the highest level ever, an increase of more than $1 per charge from previous years, the report shows.
“However, there are rays of light in this large group coming from the largest credit unions who maintained their overdraft price at a low of $26.18,” said Moebs. “The price difference between the large CUs and the large banks ($34.33)—a disparity of $8.15, a 31% higher price—strongly suggests large banks need to decide if they want the transaction account business or yield these accounts to credit unions.”
Clear Intentions
Moebs said the pricing strategies at the biggest banks make clear their intentions toward overdraft business.
“As more and more big banks, and those who follow along with what big banks do, have falling OD revenue, financial institutions are saying they do not want small, cash-unsecured credit and are increasing price and keeping limits on overdrafts low as a way to say to customers, ‘Seek assistance elsewhere,’” explained Moebs. “Those depositories with low OD prices and higher limits are saying we welcome you to our overdrafts business with open arms. The secret is knowing how to control losses.”
Moebs said community banks, those with less than $100 million in assets, are displacing their “rival credit unions” with an overdraft price at $26.26, versus credit unions at $28.40 per overdraft in the smaller asset group.
“The community banks are offering a $2.14, or an 8.1% better deal than the credit unions at these average prices,” said Moebs. “So, if the consumer is shopping for transaction accounts, they need to look for community banks or large credit unions with low fees.”
Michael Moebs
Driving the Trend
What is forcing the move away from penalty pricing for consumers who do not watch their checking account balances closely—or who have no choice-- is the large amount of deposits within checking today, explained Moebs.
“For more banks, credit unions and savings banks, overdraft prices have peaked. The Fed monetary statistics show the consumer and small business are hoarding money mainly in checking,” said Moebs. “More money in checking means much less possibility for the checking account to go negative. With so many Americans working from home they have the opportunity to review money in their accounts more frequently and prevent overdrafts. The financial institutions that are winning are ones that have overdraft prices substantially below the average and median of $30 and curb total fees charged on a daily basis. The era of treating overdrafts as a penalty for not watching your checking account is fading fast.”
Pricing Differences by Geography
While there are differences in overdraft pricing by financial institution type, prices contrast by city and region, the Moebs $ervices study shows:
- The highest price by region is the East, where overdrafts average $31.29
- The lowest regional price is in the West, at $29.18 per OD
- Kansas has the lowest average state price at $28.55, versus Maryland and Florida, which share the highest fee at $33.13
- The smallest fee of the major cities is San Diego, at $27.42, against the highest big city price of $34.90 in Miami