LAKE BLUFF, Ill.-Overdraft revenue in 2012 made a strong comeback, a sign that the consumer service is here to stay and is on its way to post record revenue numbers for financial institutions by 2016.
That is analysis from the latest study on overdrafts by Moebs $ervices. The report showed that in a year in which there was not a great deal impacting overdrafts-such as 2008's Truth in Savings revision, 2010's Reg E opt-in rules and the 2011 overdraft guidelines issued by the FDIC-there is growing consumer demand for overdrafts. Last year was the first since 2009 that overdraft transaction volume and revenue has grown at banks, thrifts and CUs.
Michael Moebs, CEO and economist at Moebs $ervices, said the study indicates that by 2016, at the rate of overdraft growth for the last nine months of 2012, overdraft revenue will reach an all-time high of near $38 billion.
"Once all the clouds cleared away, such as the regulatory changes and actions by the mega-banks-exiting the overdraft market and court skirmishes over pool-batch processing of transactions-we had a year in which we could truly measure the direction of overdrafts," said Moebs. "What 2012 showed us is that you can't kill overdrafts. The public wants it. It is here to stay and usage is increasing."
For the year ended Dec. 31, 2012, overdraft revenue increased 1.3% to $32 billion from $31.6 billion for 2011. The $400-million increase came entirely from a 1.2% increase in volume, the study showed. In Q1 2012, overdraft volume fell to an 11-year low at approximately one-billion overdraft transactions, or a decrease of 29% from the all-time high ($37.2 billion) in the third quarter of 2009, just after the start of the Great Recession. Overdraft transactions increased 4.4% in volume for the nine-month period from April 1, 2012, through Dec. 31, 2012.
As Moebs has previously posited in interviews with Credit Union Journal, institutions should drop their overdraft price below $20, a move Moebs has seen consistently increase usage and provide consumers with an affordable safety net.
While credit unions last year showed a slight increase in their average overdraft price, the recent study shows they are still lower than banks ($27 vs. $30, respectively).
But Moebs pointed out that when depository size is taken into account, the difference can be significant (see chart, above).
While CUs on average offer lower OD prices than banks, they face tough competition from payday lenders, reminded Moebs, who noted that 38 million of the 134-million consumer checking accounts are frequent overdraft users. Of those, 20 million use payday lenders and 18-million use banks and credit unions.
"Rather than a bank or CU, more consumers utilize payday lenders to cover an overdrawn balance in their checking account," said Moebs. "The reason is the median charge for a $100 payday advance is $16, down from $17.50 in 2011. A bank would charge $30 and a CU $27. Our research shows the median overdraft account balance is about $40-57 out of 100 frequent overdraft users go to payday lenders when short on funds."
The Moebs $ervices survey was expanded in 2012, reaching more than 2,700 financial institutions.
