CU Overdraft Revenues Dip in Q1 for First Time in Five Years

For the first time in five years credit unions experienced a year-over-year drop in overdraft revenue for the first quarter, suggesting that overdraft fees have risen to a breaking point for many members, according to new data from financial institution research firm Moebs Services.

Overdraft revenues at credit unions and other financial institutions for the first quarter of 2019 were $700 million lower than they were in the first quarter of 2018, according to the Lake Forest, Illinois-based company.

Fueling the gap was a steeper-than-expected 4.6% drop in overdraft revenue for all depositories from the end of 2018 to end of the first quarter of 2019. For credit unions, the drop during the first quarter of 2019 was even steeper — 5.3%, compared to 4.2% for banks.

Overdraft revenues are somewhat cyclical, Moebs noted.

“Falling overdraft revenue is expected in the first part of every year. January is the best month for overdraft revenue in the year, followed by the worst month in February, with March just average,” Moebs Services CEO and Economist Michael Moebs explained.

But that cyclical decline during the first quarter of 2019 was larger than expected, according to the data. Overdraft transactions fell for much of 2018, rose in the fourth quarter of 2018 and then dropped by 50 million transactions in the first quarter of 2019, the company reported. Overall, overdraft revenues fell by $1.6 billion to $32.9 billion from the end of 2018 to the end of Q1 2019.

“The expectancy was about 0.5% decline or drop of $200 million in overdraft revenue,” Moebs said. “This deep decline starting 2019, more than eight times higher than normal, is very unusual.”

Fee increases were largely to blame, the data suggested. In the last half of 2018, overdraft fees rose to $30 from $29 at credit unions and to $32 from $30 at banks.

Lowering overdraft fees could increase overdraft use, and an increase in the number of overdraft transactions could actually mean higher total overdraft revenues for credit unions and other financial institutions, Moebs argued.

“The days of increasing the overdraft price and expecting an increase to the bottom line are over. Now an increase in overdraft price decreases overdraft revenue,” Moebs said. “The only way to increase overdraft revenue is by reducing the cost to the consumer.”

Credit unions held about 20% of the overdraft market during the first quarter of 2019, the report said.

Earlier this year, Moebs Services also released the results of a survey of 2,917 financial institutions, which found that 69.1% of credit unions with more than $5 billion in assets offered free checking accounts. Credit unions that size also had a median overdraft fee of $28.

That survey also found that $30 was the point at which consumers became motivated to look for a better price elsewhere. That may especially be the case for Gen Zers and millennials, it noted.