Trends

Moebs study suggests overdrafts reflect economy

Overdraft revenue increased modestly to an annualized $31.3 billion according to the latest quarterly study on overdrafts by Moebs Services, an economic research firm located in Lake Bluff, Illinois.  The approximately $200 million rise from the first quarter of 2013 still trails year end 2012 which was at $32.0 billion.  “Overdraft volume decreased as consumers reacted to uncertain economic times, so America’s financial institutions reacted by increasing price.  The combination of less volume and higher price results in a breakeven in net revenue for financial institutions,” says Michael Moebs, economist and CEO at Moebs Services.

Overdrafts are an economic barometer
“With the tax increase in Social Security January 1st, stemming from government automatic budget increases, consumers net pay was reduced,” explains Moebs.  “It takes 3 to 6 months for economic fiscal changes to fully show up in the marketplace, and the cut in the average pay hit consumers’ pocket books in the second quarter of this year.  Reduced overdraft volume reflects the belt tightening by the consumer.  The back to school season shows parents were conservative in school supply purchases, and recently released individual income data reflects very small increases so far this year.  The automatic budget cuts, or sequester, have created uncertainty for consumers.  Keeping the checkbook balanced and avoiding overdrafts reflect these economic trends.”

Overdraft prices respond to reduced activity
According to the Moebs Study, consumer overdrafts declined 2.8% over first quarter to 7.0 overdrafts per checking account per year.  “This is the lowest consumer usage of overdrafts since 1995 to 1999,” says Moebs.  To maintain their net overdraft revenue in light of shrinking volumes, financial institutions increased the median price of overdrafts from $29 to $30 or an increase of 3.4%.  Credit unions led the increase.  “For almost two years, since the 3rd Quarter of 2011, the median price nationally was $29 with the banks and thrifts higher at $30 and credit unions at $25.  Over the past two years, credit unions have increased their fees from $25 in 2011, to $27 in 2012 and now $28 in 2013,” noted Moebs.  However, the stated price of an overdraft fee is not the best indicator of how much overdraft fees effect consumers.  The number and frequnecy of the surcharges will determine how much impact the fees have on the consumer's finances.  The data suggest that credit unions impose the fee much less frequently than do banks--resulting in a lower dollar value of fees paid by credit union members than that paid by bank customers.

Moebs also pointed out, “So far this year, 60% of nonfinancial businesses show a bottom line increase, despite the fact that less than 50% had increases in sales.  Businesses of all types increased price to influence the bottom line and financial institutions were no different.”

Focus on overdrafts will continue
30% to 40% of consumers are illiquid and in need of cash at any given time, according to Moebs' “Small Cash Market,” study of March 2012.  The Consumer Financial Protection Bureau (CFPB) issued a review on overdrafts of nine banks over $10 billion in assets.  The review looked at features and prices of overdrafts.  The Safe Checking Project of the Pew Charitable Trusts issued a report on the practices of banks, again mainly the large banks, indicating confusion and concern over bank overdraft practices.  “The Pew report emphasizes consumers’ need for more information to make decisions on their checking account, while the CFPB appears focused on price enforcement,” states Moebs.  Regulators, trade groups, legislators, advocates, and financial institutions will continue to address these challenges.

“Consumers are ‘balancing their checkbooks’ in reaction to the economy, getting more and more frugal.  This means doing more with less, so overdraft activity is reduced,” concludes economist Moebs.