LAKE FOREST, Ill—Credit unions’ median overdraft price is now on par with banks’, a new analysis shows.
According to the latest Moebs $ervices Overdraft Study of 2,791 banks, thrifts and credit unions, the median bank overdraft price is $30, with CUs are right behind at $29.
Moebs $ervices’ overdraft reports in recent years show that CUs held the line on OD charges during the recession, while banks raised their prices. In 2007, banks and CUs had the same median price at $25. But by 2009 banks were charging a median price of $29, while CUs still charged $25.
However, the Moebs $ervices studies have found that since 2009 credit unions have been raising their OD price while banks have been holding steady.
“From 2008 through the first part of 2015, credit unions maintained a statistical advantage with a lower OD price over banks,” explained Michael Moebs, economist and CEO at Moebs $ervices. “This is no longer the case. The $1 difference in 2015 median prices is not statistical. In the past 16 years, there was only one other period, 2005-2007, in which banks and credits unions showed no statistical difference in OD prices.”
Some CUs Dropping Price
Moebs added that while credit union OD pricing is virtually the same as bank pricing, there is a growing number of credit unions that have substantially lowered their free on overdrafts, and many have increased OD revenue by taking the approach.
Moebs explained that the business of overdrafts has been dominated by “penalty pricing.”
“This tactic, often related to a parking ticket, means the FI views overdrafts as an unsecured risk and therefore discourages this behavior with high prices, similar to a parking ticket,” said Moebs.
More than 40 million Americans overdraw their checking accounts every year and many incur a high penalty price at their FI, Moebs said.
“These are average Americans who want and need to have their checks paid, not bounced,” said Moebs. “They should not be pu
Michael Moebs, Moebs $ervices
nished with a high price for account reconciliation errors or for periodically running short on cash.”
An alternative pricing approach treats overdrafts as a “safety net,” explained Moebs.
“A safety net approach charges much less for the OD, recognizing people will make mistakes, both intentional and unintentional,” said Moebs. “FIs that adopt the safety net approach understand the value of overdrafts as it relates to the average consumer’s financial behavior. The lower price is designed to meet consumers’ needs, and from an FI’s perspective can offset the reduction in revenue from the discounted price with an increase in volume.”
The latest Moebs study shows that 2015 price distribution of the 11,300 depositories that offer checking and overdrafts is “normal,” with similar high and low OD prices.
“However, when you examine the FIs with prices several variations from the median of $30, those charging greater than $40 or less than $20, there are dramatic differences,” said Moebs. “OD fees of $40 or more is the high end of penalty pricing, and only 0.1%, or less than a dozen FIs, are at this end of the pricing spectrum. At the opposite end, 2.3%, or over 250 FIs, employ true safety net pricing, charging less than $20 for an OD.”
OD Climate Changing
Two large credit unions benefiting from safety net pricing are the $4-billion Philadelphia Police & Fire FCU and $2-billion Idaho Central Credit Union, Moebs said.
“The Philadelphia institution charges only $6 on debit card and ACH ODs, while Idaho Central charges $19.79 per OD. Both Credit Unions have above average overdraft revenue and high member satisfaction,” he said.
“The overdraft climate is changing,” concluded Moebs. “Now that banks and credit unions share a common price, they need to make a critical, strategic decision. Should they keep increasing or maintaining a high, penalty price for overdrafts, or take a safety net approach with a much lower price to drive volume? When you examine the numbers closely, the marketplace is telling banks, thrifts and credit unions the direction to take.”