By Ray Birch
LAKE FOREST, Ill.—One economist is asserting it’s now time all financial institutions make some major adjustments to checking if they want to keep billions in annual overdraft fee income.
Michael Moebs, economist and chair of Moebs $ervices, reminded the CFPB has been zeroing in on overdrafts, and one way it is doing that is to try to convince Congress to turn the service into a loan. That would result in overdrafts falling under Regulation Z, and in doing so render the service unaffordable for FIs to offer, Moebs said.
“All financial institutions must band together to stop the CFPB from hurting consumers by eliminating overdrafts entirely, and also taking away billions in fee revenue that consumers are willing to pay for a service they need,” stated Moebs.
Moebs pointed out that less than three weeks ago—as CUToday.info reported here-- the CFPB issued a report titled “Overdraft and Nonsufficient Fund Fees,” which claimed many consumers are “surprised by overdraft fees.” He further noted the 90-page report concluded, “Despite their use as credit, most account overdrafts are exempt from the Truth-in-Lending Act’s Regulation Z, which is designed to promote the informed use of credit and make it easier for consumers to compare the cost of credit products.”
‘This Could Not be More Clear’
“Overdrafts, defined by the Federal Reserve, are credit but not a loan. The CFPB wants to convert ODs to loans—this could not be more clear,” stated Moebs. “This would make ODs unaffordable for FIs to offer, and take away $31 billion in net fee income from ODs, NSFs, stop payments, return of deposited items, transfer from LOC and other deposit accounts…”
Moebs outlined the costs for overdrafts that he said credit unions and other financial institutions would have to absorb if overdrafts are reclassified as loans.
“The calculation is simple: The average OD is for nine days. The average amount is $120. The max rate is 33%. So, $120 times 33% divided by 360 days times nine days equals $0.99 in revenue,” explained Moebs. “The cost to do an OD is over $9 each. Even if only direct, this cost is over $3.”
Action is Urged
Moebs is urging financial institutions to take action, including eliminating unprofitable checking accounts, a step Citibank has already taken.
Michael Moebs
“In nine months Citibank has closed over two-million checking accounts, or 20% of its nearly 12 million consumer checking portfolio,” said Moebs. “The New York Times heavily criticized Citibank’s actions. But are banks charitable firms?”
Moebs asserted the CFPB wants “OD chaos” in order to drive Congress to act before the election.
According to Moebs, there are steps every FI should be taking now.
“Every January, Moebs $ervices surveys over 3,000 banks, credit unions, thrifts, and fintechs on fees, rates, and balances of deposit services,” he said. “Moebs analyzes financial institutions with one million or more checking accounts to identify how to counter the CFPB. There are 31 FIs with more than one million checking accounts: 22 banks, four CUs, three fintechs and two thrifts.”
The Steps to Take
Moebs said those surveyed Fis—which represent 75.3% of more than 610 million consumer checking accounts—have made clear what they are doing and also offer guidance on what can be done to stop the CFPB, including:
- “Checking Profitability increased from 18% in 2022 to 40% in 2023 for the 31 ‘Big Checking’ FIs. This was true for banks, thrifts, and fintech, but not credit unions,” Moebs explained. “The top four CUs do not have profitable checking. In order to thwart the CFPB’s actions on overdrafts, CUs must move to profitable checking. This is not just true for the Big Checking group, but all FIs nationally. Why open and service a transaction account that is not profitable. Would Walmart or Amazon do this?”
- “OD price for the 31 FIs averaged $25. Walmart has 19.1%, or more than 116 million accounts, and dominates the checking market, yet charges only $15 per OD. Bank of America charges $10. All FIs must get their price at this level so the CFPB’s voice will not be heard in Congress,” Moebs asserted.
- “The family of OD services needs to forego charges. These services were once popular and necessary when checks were paper and the payment system had float. Debit cards rule now, so, little revenue is made with NSF, stop payment, return of deposit items, and transfer fees from lines of credit and other deposit accounts. All FIs should eliminate these charges ASAP. Congress won’t act on fees not charged,” Moebs said.
- “Install OD friendly services. This includes de minimis transaction and balance amounts for those face value transaction of less than $25, early payday at no charge, OD grace days for occasional errors, and daily OD fee caps. These friendly features will be offset with more volume from lower fees, thus more revenue,” Moebs said.