CHICAGO — In the struggle to increase membership, credit unions may have a lot to gain by lowering overdraft fees.
According to Mike Moebs, economist and CEO of Moebs Services, credit unions can win over consumers in today’s economy by making overdraft information more available to members and lowering fees.
“This is a golden opportunity for credit unions. With the economy, now is a terrific time for credit unions to lower overdraft prices. If they’re smart about it they can do it in a way that they won’t lose any revenue, and they will win over consumers,” Moebs said.
Sam Davis, president of consulting firm Strunk & Associates, said that he agrees with Moebs, but only if credit unions have improved their efficiency and lowered their operating costs.
“We agree, but only if they can accurately determine that their operating efficiency has significantly improved and their operating costs have significantly gone down. Otherwise–and particularly in these times and even though lowering fees is politically expedient–credit union boards should fire whoever comes up with this idea,” Davis said.
Davis said that in theory credit unions should decrease all fees, but they need every penny of fee income, and in these times especially, it has to be in line with operations and costs.
Moebs Services recently conducted a national survey that examined average overdraft service fees on consumer checking accounts at large banks, community banks and credit unions. The survey found that the average national overdraft price is $25.67 and the median price is $25.00. Credit unions’ average overdraft price was $24.24, with community banks averaging $26.98 and large banks coming in at $33.34.
Over the past five years, overdraft prices have been increasing, and while there is a statistical difference between overdraft prices for large banks and credit unions, there is no statistical difference between the prices at credit unions and community banks.
The increase in overdraft prices over the past five years, Moebs said, reflects the increase in the consumer price index. Credit unions over the years have kept their overdraft prices in line with the index, while large banks have historically kept fees above the CPI.
Davis agreed with this but would summarize the data differently. He said that for the past four years, financial institutions’ overdraft fee increases have been modest at 2.49% per year on average, 21.69% less than overall increases in the CPI.
With the current low auto and home prices, Moebs said that the CPI will start to decline. Large banks will increase overdraft prices, according to Moebs, because they’re beyond their economies of scale and banks are inefficient. This creates an opportune time for credit unions to start lowering their fees.
“Credit unions should be asking right now, ‘How can we help our members?’ They can provide a service to members with overdrafts.”
Moebs said that 87% to 90% of Americans do not reconcile their checking accounts and that statistic has remained the same for approximately 40 years.
A retail merchant study conducted by Moebs Services found that the average returned-check fee for a retail merchant was $27.78.
“Credit unions should be thinking that when they bounce a check, it’s costing the member at least $51,” Moebs said.
The study also pointed out that the retail merchant that leads in returned check fees is the U.S. Postal Service, which charges $29.
Davis said this is actually an understatement of the true cost to consumers for unpaid or returned items because approximately one-third of all unpaid items are presented at least twice, incurring at least a second merchant fee. That brings the cost to the consumer up to approximately $71 for each returned item, which Davis said is more in line with Strunk clients’ experiences.
“If you subtract Moeb’s average credit union fee of $24.24, that represents a very real member savings for every NSF/overdraft the credit union pays,” Davis said.
However, Davis added, when a financial institution denies an electronic transaction. there are no fees charged and since electronic transactions represent the majority of all payment transactions, these savings will continue to diminish overtime. But various merchant fees still apply for unpaid electronic payments, Davis said, and nonmonetary benefits to members of paying rather than denying their electronic overdrafts such as embarrassment, inconvenience and time have also proven to be a high value for members.
To help members, Moebs said, credit unions should not return checks, but in order to still get paid quickly. they should use technology to keep members informed. Large banks like Chase use commercials to show that texts and e-mails can be sent to members to notify them when they’re checking accounts are low and they need to transfer money. Moebs said there’s no reason why credit unions can’t offer those services too.
With reforms coming from the Federal Reserve Board and the NCUA that will mandate overdraft transparency to the consumer, Moebs advocated that credit unions start offering checking account texting and e-mail services to members.
“If credit unions make information on overdrafts much more transparent to the consumer and lower prices, they will win over consumers. It doesn’t have to be done drastically, just drop fees to $19, and it will show members that you’re here to help.”
Moebs said that overdrafts are as ubiquitous as cell phones and seatbelts and people don’t keep accurate records of their accounts. With information more transparency, people could manage their accounts better and see credit unions as a better deal.
While members pay one-third less in fees at a credit union than they would at a large bank, Moebs said that the real competitors for credit unions are the community banks, not the large banks.
“We’re at a point that, because of the state of the economy, community banks and credit unions are identical, and it’s not just in overdraft fees.”
Moebs predicted that overdraft prices are going to start to plateau, and community banks will follow suit with dropping prices, so now is the right time for credit unions to start lowering their fees.
Credit unions increased overdraft fees at two points in the last 10 years: in 2002 after 9/11 and in 2005.
The jump in 2005 Moebs said was because credit union realized that their net income margin had fallen to 2.84% due to an increase in competition.
“At this time credit unions realized that if they were going to grow, they had to have more income so they had to increase fees.”
Another area the survey looked at was comparing overdraft fees by region. For the first time in 25 years, Moebs said the survey found a significant disparity in fees by region.
The southern region, reported statistically significant higher fees than any other region, while there was no statistical difference between any of the other regions.
Moebs said that the disparity is due to the fact that the south is not experiencing the same degree of economic difficulty as the rest of the country. Due to the fact that the south has more military bases and suppliers of military equipment are heavily based in the south, that region has not felt the same degree of economic hardship as the rest of the country.
In terms of other fees, the survey found that the average fee credit unions charge for deposit transfers is $4.31. The average credit union charge for NSF checks is $24.01. The average credit union charge for stop payment is $18.43, and the average charge for deposit items returned is $16.62.
The reason the fees for stop payments and deposit items returned is so high, Moebs said, is because many financial institutions started to increase those fees due to check kiting.