LAKE FOREST, Ill.—Overdraft revenue continues to rise, according to a new study that indicates consumers are driving the increase rather than the CFPB or pricing changes or promotions from banks and credit unions.
“Despite the best intentions of the Consumer Financial Protection Bureau, legislators, regulators, and consumer advocates, the consumer continues to use overdrafts,” said Michael Moebs, economist and CEO at Moebs $ervices.
A new Moebs overdraft report shows that overdraft revenue increased by 4.4% in the first quarter of 2016 when compared to the first quarter of 2015. Overdraft usage also increased by 4.4% during the same period.
In March, a Moebs $ervices study also revealed that annual overdraft revenue at credit unions reached its highest total ever last year—$5.9 billion.
“Everyone is trying to kill overdrafts, yet both revenue and usage are increasing. The question, of course, is ‘why’?” said Moebs.
30 Years Of Data
Moebs $ervices has studied overdrafts for more than 30 years, noted Moebs.
“We have a lot of evidence showing the behavior of consumers in need of small-dollar loans and the financial institutions providing them,” he explained. “There are over 40 million Americans who make up the small-dollar loan market and they meet short-term cash needs either with overdrafts or other sources, such as payday loans.”
The Moebs analysis shows overdraft prices have stayed at a national median of $30 for the past three years. Since the first quarter of 2012 overall national prices have been steady, he said.
Michael Moebs, Moebs $ervices
“While this is true for banks and thrifts, credit unions have steadily increased their overdraft fee from $25 in 2005 to $29 in 2015,” said Moebs. “Since the beginning of 2015, there is no statistical difference in OD pricing between banks, thrifts and credit unions. This is a statistically derived measurement using over 2,700 FIs. This indicates the price is not a significant factor in the OD revenue growth, even with the increases by the credit unions.”
Much of the compliance on ODs follows the FDIC overdraft guidelines from 2010 which even credit unions have adopted, said Moebs.
“Daily caps and de minimis amounts have been installed by most FIs,” observed Moebs. “These compliance features dampen overdraft revenue, but they have become common enough to where the cost of these compliance features is absorbed through the OD price.”
Overdraft limits and other volume features did not change in 2016.
“It would appear that banks, thrifts, and credit unions are not promoting, nor encouraging overdraft usage,” said Moebs. “So if not financial institutions, what is the cause of the overdraft increase?”
Since 1992 the median number of annual OD transactions has been approximately 1.08 billion, explained Moebs. In the first quarter of 2016 the number of overdraft transactions was 1.06 or 1.75% below the norm. The low point was in 1992 when overdraft transactions were 0.8 billion—the high was 1.5 billion in 2008. OD usage has trended upward quarter over quarter since 2014, said Moebs.
OD Usage
Equally important, said Moebs, is the household usage of overdrafts—which was 7.0 in the first quarter of 2016 or 3.3% higher than in the first quarter of 2015. The high was 10.4 in 2008 and the low was 6.1 in 1992. The benchmark norm of annual household overdraft is 7.4 since 1992. Currently household overdraft usage is 7.0 or 9.1% below the norm.
“Again it appears household overdraft usage is trending upward to get to the normal benchmark,” said Moebs. “What this transaction and usage OD data shows is the consumer is driving high volumes, more usage, and therefore more revenue.”
That trend, said Moebs, raises questions about the CFPB’s efforts to address overdrafts. The CFPB is expected to deliver a proposed rule on overdrafts before the end of 2016.
“Trying to kill a source of funds that 40 million Americans use, want and depend on calls for another solution,” asserted Moebs.