The Fact Behind Why Consumers Hate Overdrafts?
“The Economy, Stupid.” Phrase used by Presidents Clinton & Trump Campaigns
Lake Forest, IL (March 14, 2017) In 2000, the median overdraft was $18. A price less than $20 was not controversial then and it is not today. According to the Minneapolis Fed’s Inflation Calculator, the current price of an Overdraft today should be $25. According to a new Overdraft Study in January, 2017 by Moebs $ervices, an economic research firm, the median price of an overdraft (OD) is $30. “Matching the current price of $30 with the inflation adjusted price of $25 is a 20% more for a service that has not changed enough in value or cost to warrant this price,” says Michael Moebs, CEO & Economist of Moebs Services.
CREDIT UNIONS ARE THE WORST?
Moebs OD Study found that 75.3% of all Financial Institutions charge an Overdraft fee greater than the inflation adjusted OD price. Taking a look at Banks and Credit Unions (CUs) separately, there is a clear difference between who is priced higher than inflation.
In 2000 Banks and CUs charged $20 and $15 for an OD, respectively. Therefore, the inflation adjusted price for Banks today is $27.82, while the Credit Unions are at $20.86 per item.
Using the inflation adjusted price for each type of institution, the Moebs Study found about 26.4% of Banks are priced less than or equal to the inflation adjusted OD price. Simultaneously, only about 7.7% of Credit Unions are priced less than or equal to the inflation adjusted OD Price, with a current median price of $29.00 per item.
The pricing behavior between Banks & Credit Unions is also evident when comparing the 2000 price to the current price. Banks increased their price 50% from $20 to $30 in 2017. Whereas, the Credit Unions nearly doubled their price from $15 in 2000 to $29 in 2017, or 93%.
“Credit Unions have an image of being more consumer friendly. When taking a look at the history of Overdraft prices, Credit Unions have been increasing their price at a much quicker rate and now almost on par with Banks,” notes Moebs.
BUT IF I LOWER THE OD PRICE, WILL I LOSE A LOT OF REVENUE?
Basic Micro-Economic Theory states lower price increases volume. With overdrafts, the question then becomes: how far can the price fall to stimulate enough volume to increase revenue? Those Financial Institutions with an OD price of $25 or less are producing more volume, which increases revenue over time.
Case in point are the Community Banks less than $100M in assets. They have maintained their OD price at $25 for the past seven years, while their current Fee Income (dominated by overdrafts) is 0.22% of assets. In comparison, the Too Big To Fail banks have a price of $35, while bringing in the same Fee Income of 0.22% to assets. On a relative bases, community banks are maintaining an inflation adjusted OD price and making just as much money due to volume with a much more consumer friendly price.
JUMP OR DIVE? THAT IS THE QUESTION
Ultimately it appears that the Overdraft Price of $30 has peaked. “It is time for all depositories to take a long hard look at how they price overdrafts. They must decide to jump ahead with a high price and have less volume, or take a dive with a low price to drive volume,” Michael Moebs concludes. “If your OD revenue is falling or has not increased in the past several years, then lowering the price is a strategy worth considering to reverse the trend.”
Written By: m.moebs
Date Posted: 7/22/2017
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