LAKE BLUFF, Ill. — The fact that average consumer transaction balances are at $4,436 — a higher dollar amount than any time in the last 25 years — should be a big red flag for credit unions.
That is the message from Moebs Services, which recently performed a study of consumer checking accounts. According to the financial institution consultancy, historically the average balance in a consumer transaction account is $2,100. If the economy is doing well, as measured by low unemployment and moderate to low inflation and prices, then the average balance in the consumer's checking account falls to about $1,400. If the economy really heats up, then, in 2007 for example, the balance can fall below $1,000 since household revenue is doing well and need for liquidity is just a paycheck or two away.
On the other hand, the study explained, when times get difficult the consumer sits things out and checking balances get larger — normally up to $3,000 or higher. Of note: $4,000-plus balances have not been seen since Moebs began collecting data 25 years ago.
"The bottom line: When times are good, consumer checking balances are low and financial institution fee revenue is high; when times are bad, balances are high and fee revenue is low," the study said.
Risks For FIs
According to the Moebs Study, the unusual amount of consumer liquidity has two impacts on financial institutions. The immediate impact is a loss or leveling out of fee revenue. When the consumer is liquid it is probable that errors in transactions will be covered by balances and, therefore, fees imposed in checking such as overdrafts, monthly fees below prescribed balances, and transfer fees from other deposit accounts are likely lower.
"As long as the consumer believes the economy is not doing well, the consumer will stay liquid and fee revenue will be curtailed," the study explained.
The longer term impact for FIs is a loss of "excess" consumer balances when and if the economy improves to the consumer's satisfaction. There is $1.5 trillion in transaction accounts of all types, and $315 billion is in "excess" consumer checking over the natural base average, according to the study.
As the economy improves, Moebs Services said the tendency is for consumers to follow historic trends and deploy these excess funds. Uses could range from paying off debts, to moving money to higher earning deposits such as money market mutual funds, or to the stock or bond markets.
"Developing initiatives to keep excess checking balances from leaving will require planning now," the consultancy advised. "Financial institutions facing weak loan demand, regulatory pressure on underwriting or even low capital may need to bleed off the excess consumer transaction account balances now and address balance recovery later."
According to Moebs, developing initiatives to address fee revenue and checking balances should be underway now — not when checking accounts and balances start to move.
"Consumer loyalty cannot be taken for granted. Now is the time to increase opt-in percentages for overdraft services on checking accounts and to review the deposit options offered to consumers," Moebs said. "The consumer could take action quickly to move funds, establish another account and/or terminate the current account. Financial institutions need to be prepared."
