LAKE FOREST, Ill.—A shift in bank behavior has led to a “strategic grab” by credit unions, according to one analyst’s analysis of the latest data.
The data show credit union overdraft income is up, while bank OD revenue is down, according to a new report, and is the result of a shift in checking account business, according to the Moebs $ervices.
CU overdraft revenue rose 6.6% comparing the first quarters of 2017 and 2018. Bank OD revenue decreased 1.3%, and savings institutions lost a whopping 6.6%, explained Michael Moebs, CEO and economist at Moebs $ervices.
“What’s happening is banks and thrifts are shedding single-services households when the only account is checking,” Moebs said. “Credit unions are welcoming these single-service households with only checking to gain fee income from transactions like OD fees.”
Overall, overdraft OD revenue fell 0.1% for all depositories from first quarter of 2017.
Consumer Not Yet ‘Engaged’
Demand deposit account (DDA) balances by consumers and businesses rose 6.2% in the first quarter of 2017 to 2018 and is now over $2.1 trillion, the study shows.
“Normally, DDA is about 4% of total money stock, yet currently it is 13.2% of money stock,” said Moebs. “This signals the consumer has not yet reengaged with the economy.”
With more money in DDAs, or checking, the consumer as well as small businesses can use the additional funds to avoid overdrawn balances, said Moebs.
Total service charges on deposits fell 0.3% comparing the first quarters of 2017 and 2018.
In addition to overdraft revenue, all service charges on deposits includes business services charges and consumer service charges other than overdrafts. All non-overdraft service charges total about $10 billion and fell in revenue only 10 basis points from 2017—effectively not growing or declining, Moebs said.
“The total of all depositories’ service charges on deposits is $43.6 billion, which fell 0.3% from Q1 2017,” said Moebs. “Total service charges on deposits are split, with the banks dominating, having 79% of this fee revenue, while credit unions have 19% and thrifts only 2%.”
Michael Moebs
The ‘Whole Story’
Total overdraft transaction volume showed a negligible decline from the first quarters of 2017 and 2018, said Moebs. Annualized OD transactions are slightly above 1.1 billion transactions.
“Looking at overall OD transactions doesn’t tell the whole story,” said Moebs. “While the portion of transactions for banks, thrifts and credit unions is the same as fee revenue, the volume changes by institution type reveal what is going on in the payments system with overdraft transactions. The number of ODs for credit unions rose 5.9%, yet at the same time from first quarter of 2017 to first quarter of 2018, bank OD transactions fell 1.3% and savings institutions fell 6.6% for overdraft transactions.”
Moebs said the findings reflect the fundamental shift in overdrafts caused by the different pricing strategies implemented by banks and credit unions in the last few years.
A ‘Strategic Grab’
“Banks and thrifts are emphasizing two or more services per household. This relationship approach reduces overdraft transactions and thus revenue,” he said. “Banks are moving away from the transaction business especially checking debits and payments.”
Moebs said credit unions are paying attention to this shift away from transactions by banks and thrifts, as well as a need by the consumer for overdrafts.
“Credit unions want fee revenue, and overdrafts is a huge part of this strategic grab to obtain non-interest income,” he said. “The latest overdraft revenue data clearly demonstrates this fundamental shift with many credit unions capitalizing on this unique opportunity.”