LAKE BLUFF, Ill.-A debit card fee led to Bank Transfer Day. Now a big jump in bank overdraft pricing could add to the wave of bank customers moving over to credit unions, according to one analyst.
Moebs $ervices research shows banks raised overdraft fees by $2.50 on average in 2011, the biggest overdraft hike Michael Moebs has ever seen. "We examined over 2,500 banks and credit unions in June 2011, and again in November, and we were taken aback by the bank price increases," said the CEO and economist of Moebs $ervices, who noted that banks' median overdraft charge is now $30. Credit unions' median overdraft price remained the same at $25.
"In almost 30 years of collecting this data we have never seen an increase as high as $2.50 at one time, especially in a five-month period," said Moebs. "A $2.50 increase translates to $2 billion a year more for consumers who overdraw their checking accounts."
That is a big reason many more bank customers may switch to a credit union, pointed out Moebs. But Moebs, who has been urging credit unions for the past two years to drop overdraft pricing and advertise that they are the low-cost provider, said CUs are not doing so and are missing a significant opportunity to add new checking business as a result.
"This is not a golden, but a platinum opportunity. Credit unions have been sitting on the sidelines, watching the banks," Moebs said. " I think Bank Transfer Day did not work as well as it could have since credit unions did not take this approach."
A Counter-Intuitive Pricing Decision
Though it seems counterintuitive, Moebs said the track record of several of his company's community bank and credit union clients shows that reducing overdraft charges to below $20 actually increases revenue. Moebs said the price drop initially lowers overdraft income, but then heavy overdraft users increase usage frequency. "You end up making more due to higher volume, and the member saves money. This is the difference of treating overdrafts as a safety net for the member as opposed to a penalty."
Moebs suggested that if a credit union does not want to lower its current overdraft price on its standard checking account, it should create a second, highly efficient checking account that requires members to use all electronic services, such as e-statements and online banking. "Then lower the overdraft fee below $20 on that account. The cost savings and volume increase will move revenue higher and serve members better with a lower price."
At the start of 2011, CUs saw an increase in overdraft revenue, which Moebs believes made many CUs "comfortable." But credit union overdraft revenue fell in the second half of 2011, and CUs ended the year reporting losing $1.4 billion in overdraft income compared with 2010, pointed out Moebs. The loss continued a drop in overdraft revenue for all financial institutions that began at the end of 2009.
Not Driven By Debit Fees
Moebs does not believe the increase in bank overdraft fees is in reaction to having to pull back or not move forward with debit fees. Instead, he blames the FDIC.
"The bank hike was caused by the FDIC and proposed OCC overdraft guidelines. In our survey, when we asked banks why they raised their overdraft prices, the responses were all the same: to pay for the cost of overdraft regulation," Moebs said. "I spoke with one banker who told me he remembers 10 years ago he had one compliance officer; now he has five, and one dedicated solely to checking and overdraft."
Moebs cautioned that the FDIC's costly overdraft guidelines-which limit the number of times a person can overdraft in one day and require the bank to communicate overdraft alternatives to anyone who overdrafts six or more times a year-could make their way over to credit unions if the Consumer Financial Protection Bureau adopts the guidelines for all financial institutions.
"Whether this happens or not, in no way should credit unions follow the bank pricing," insisted Moebs. "They have a huge opportunity here to gain more checking business by creating a highly efficient checking account and lowering their overdraft price. I think credit unions should create Checking Account Efficiency Day this year and advertise to consumers that they are the low-cost provider and this is why they should come over."
