Mobile Alerts Slashing Overdraft Volumes: Moebs Services

Mobile devices and apps have contributed to a 31% drop in the average annual number of overdrafts per checking account, according to a new study from financial institution research firm Moebs Services.

According to the Lake Forest, Ill.-based company, the average checking account experienced three overdrafts per year in 2018 compared to 4.4 in 2003. The drop is associated with the spread of mobile banking features and apps that alert customers about low account balances, suspicious card activity, bill due dates and other potential issues that could generate overdrafts.

Many financial institution anti-overdraft offerings are geared toward high-volume debit card users, who use their cards often enough to generate interchange fees that offset lost overdraft revenue, the study noted. Fintechs are also in the space, however.

“Fintechs are increasingly introducing sophisticated, consumer banking apps designed to help consumers manage their financial affairs,” the study noted. “These apps help reduce the incidence of overdrafts. New anti-overdraft apps provide cash advance tools to supply money. The banking apps along with anti-overdraft apps with money advance are slicing into overdraft revenue. Many large depository banks have spent millions of dollars in recent years to develop money management tools, which act almost like a personal, financial assistant for the consumer.”

However, alerts don’t stop over 40 to 80 million Americans who overdraw their entirely electronic checking accounts, Moebs Services noted. Overdraft revenue is still rising, going from $28.1 billion in 2003 to over $34 billion in 2018. Increases in overdraft prices and increases in the number of checking account users were largely the reasons, it said.

The average overdraft fee rose 36% in the past 15 years, from $22 in 2003 to $30 in 2018. Checking accounts grew 26% over that time as well.

Credit unions and other financial institutions that reduce their overdraft fees and increase the volume with higher account limits can still grow their overdraft revenue substantially, the study noted.

“The overdraft business as we know it today will be quite different by 2025, thanks in large part to technological advances in mobile devices and their banking applications. The consumer will benefit with lower prices, higher limits and greater understanding of the payment system,” Moebs Services CEO and Economist Michael Moebs predicted.

Moebs Services also predicted that overdraft limits currently up to $5,000 for some financial institutions will become common and that interchange prices will fall as the Federal Reserve allows more competitors into the payment system.

Earlier this year, Moebs Services reported that most large credit unions offer free checking and charge median overdraft fees below the national median, but smaller credit unions largely do not do those things. That survey of 2,917 financial institutions 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, which was below the national median of $30. The study also reported that $30 is the fully elastic overdraft price, meaning that it is the point at which consumers become motivated to look for a better price elsewhere.