Overdraft Revenue Up at CUs, Down at Banks & Thrifts

Overdrafts created a revenue bonanza for credit unions in 2018, according to new research from financial institutions analytics company Moebs Services.

The Lake Forest, Ill.-based firm reported this week that for 2018, credit unions increased the average overdraft fee from $29 to $30 and made $6.9 billion in revenue from overdraft fees for the year, which was a 5.72% increase over 2017. The industry also recorded 2.19% more overdraft transactions during the year.

Banks and thrifts did not fare as well, according to the data. Overdraft revenue for banks fell by 0.73%, and the number of overdraft transactions fell by almost 7%. The drop occurred despite an increase in average overdraft price from $30 to $32 during the year, Moebs reported. At thrifts, overdraft revenue fell by 1.83% in 2018, and the number of overdraft transactions dropped by 0.53%.

The upticks for credit unions were enough to raise overall overdraft revenue by 0.50% in 2018 to $34.5 billion.

The data suggests that overdraft fee size has begun wielding more influence on consumer decisions, according to Moebs.

“Depositories have thought the elasticity of overdrafts, or price changes versus volume changes on overdrafts, was inelastic — no connection between price and volume, yet this link is no longer true,” Moebs Services Economist and CEO Michael Moebs said.

The unsecured nature of overdraft lines was one factor in the latest numbers, according to the research. The average overdraft limit on a checking account was $500, which has remained unchanged since 1998, it noted. In addition, the average financial institution’s loss on overdraft was 11% and reached as high as 20%, which has induced many banks, thrifts and credit unions to increase their overdraft pricing in order to accommodate the risk, Moebs said.

But in 2018 many consumers found the price of overdraft too high for the limit provided, it noted.

“According to Moebs and FDIC studies, the median overdraft of all transactions in a day is $40,” the study said. “So, the consumer decides: should I go to a credit union or bank and pay $30 for each transaction and have to pay back in 24 hours, or go to a payday lender, pay $18, get $100 and have 14 days to repay? The answer is simple. This is why the Moebs OD Revenue Study found there are 18 million people who do overdrafts at banks, thrifts, and credit unions annually, and more than 23 million people who go to payday lenders.”

The study recommended that financial institutions increase their overdraft limits and lower their overdraft pricing so that more consumers use the higher limits and financial institutions better control risk while earning more revenue.

“Depositories with an overdraft price greater than $19.99 will lose revenue in 2019,” Moebs predicted.