By the end of 2010, the banking industry is expected to have earned $35.4 billion in overdraft fee revenue, down from $37.1 billion in 2009 and on track with 2008, according to a recent Moebs Services study.
The study analyzed fee revenue from 2,284 financial institutions and more than 15,000 depositories for the first six months of 2010; 1,093 banks and savings institutions and 1,187 credit unions were called. The data were collected via anonymous telephone surveys from June 2010 to July 2010. The financial institutions were called and asked questions that might be posed by a prospective member or customer. The asset-size breakdowns of the institutions called were: less than $250 million in assets, $250 million to $1 billion in assets, and greater than $1 billion in assets.
"We expect with the regulation requiring opt-in for debit cards and ATMs coming in the third quarter that revenue will fall again, but this will recover by the same amount in the fourth quarter," said Michael Moebs, economist and CEO of Moebs Services. "We also estimate that overdraft revenue will increase in 2011 to $38 billion and be the highest ever for the industry. Even with the price of overdraft protection going up, it appears from the opt-in numbers that the American consumer is saying they want and need overdrafts"
About $2 billion in revenue was lost in the fourth quarter of 2009, Moebs said, when banks and credit unions started to implement their own floors and ceilings on overdrafts in response to consumer and congressional complaints. Another $2.3 billion in revenue was lost during the first quarter of 2010 due to the introduction of an opt-in regulation by the Federal Reserve and changes made by depositories. Finally, it cost banks and credit unions about $2 billion in operational costs and training to implement the opt-in regulation and their own changes to overdraft services.
"When you add the lost revenue and the additional cost of the new overdraft regulations, it amounts to about $6.3 billion erosion into profitability for all banks and credit unions," Moebs said.
After the opt-in regulation, 44.3% of banks and credit unions made some type of change to their overdraft program: 20.5% increased prices to offset cost increases and loss of revenue, and 6.5% decreased their overdraft price, according to the Moebs study.
"We have never seen this many institutions decrease the price of a fee service in almost 30 years of tracking bank and credit union pricing," Moebs said. "Our data show institutions which decreased their overdraft fees actually maintained or increased their overall revenue in the past year. Forty-seven percent of them increased their price, and the median for both the banks and the credit unions was $30 for those who increased them."
The results were surprising, Moebs said.
"We've been collecting data on this for the past 25 years," he said. "Prior to this in the preceding 24 years, going back to 1985, there had never been a year where we saw a decrease in NSFs that constituted anything up to 1%. This year 14.8% decreased their price, and the median value of that was $25. And there was no statistical difference between banks and credit unions. This was extremely surprising to us. And there were many who increased it under $20. The more interesting thing we found is that 15.9% of banks and credit unions got into overdrafts for the first time. So prior to the past year, 15.9% of the credit unions got into overdrafts for the first time and 14.3% of [large] banks (like Bank of America) got out of them. The number who got out was totally offset by the numbers who got them. Our basic conclusion from this was that the overall winner from this was the Federal Reserve. What this signified to us is that the Fed wrote a good regulation."
Another item the study found is that roughly half of the banks and credit unions that were doing overdrafts in 2009 were mixed between a formal and informal program.
"We thought that number would fall," Moebs said. "In the past year, 75% who offered overdrafts went to a formal program. Most did formal programs they did themselves and dropped their third-party vendor, and included a program to let every member know they were going to do overdrafts. We thought this was going to fall. This was a very big item that came out of this."
Moebs explained that about 90% of overdraft revenue comes from frequent users. The Moebs study noted that frequent users-those with 10 or more overdrafts in a year-almost all opted in. For all consumers, consent varied between 60% and 80% with a median of about 75%. The median overdraft price increased to $28 per check in 2010 from $26 in 2009. NSFs, where the institution returns the check, increased from $25 per check returned in 2009 to $27 in 2010.
Transfer fees at credit unions is a very popular service, Moebs said.
"The credit unions didn't change; 99.6% of the credit unions who offer a checking account will offer the ability to move money from a share account to cover overdrafts," he said. "Only 81% of banks will do this. The credit unions are much more prone to offer a deposit transfer, and almost all of them do it. They charge $5 to do it. In banks, four out of five do it."
Overall, the study showed a slight dip in debit card overdrafts.
"However, ultimately the huge take-away from this is the American consumer, led by the changes the Fed made mandatory, said, 'We like the overdraft business,' so that was a big thing we saw there."
Moebs said the study proved a small difference between community bank and credit union overdraft charges, but a huge difference to Wall Street banks.
"Credit unions and community banks have gotten tossed into the same group as the large institutions and there is a big difference between credit unions and community banks and places like Chase and Wells Fargo," he said. "We view that the Wall Street banks' market share will fall to about 38% to 39% by 2011; it's now between 44% and 45%. There is a huge opportunity for credit unions right now. If a credit union has a branch near any of these Wall Street banks, boy I would take an aggressive position to go out and say, 'Hey, I'm a better deal,' because they are."
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