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Even if regulators restrict banks' ability to charge overdraft fees, those consumers who value banks that cover their overdrafts will find a way to reward institutions providing the best service.
March 11 -
Smaller banks are beginning to see more revenue from service charges as they experiment with new fees and products.
February 5
Overdraft revenue at banks, credit unions and thrifts rose last year for the first time since 2009, according to a new report from the economic research firm Moebs Services.
Total overdraft revenue ticked up to $32.0 billion in 2012 — up $400 million, or 1%, from the previous year, according to the report.
The study's authors attributed the increase to rising overdraft volume, which was driven in part by the relatively stable regulatory environment for overdraft fees in 2012. In the two prior years, regulators required banks to offer customers the choice of opting into overdraft programs, and some banks discontinued the practice of reordering payments from high amount to low amount. Those changes drove down revenues.
Industry-wide overdraft revenue remained well below the $37.1 billion that financial institutions generated in 2009.
Still, despite regulations that put downward pressure on overdraft revenue, "consumers' use of overdrafts shows no indication of going away, and is actually increasing," Michael Moebs, chief executive officer of Moebs Services, said in a press release.
Moebs noted that overdraft volume fell to an 11-year low in the first quarter of 2012, but that it rose sharply in the final nine months of the year. If that trend continues, income from overdraft fees will eventually surpass historic highs, according to the report.
The Lake Bluff, Ill., company's research is based both on publicly reported data and on a survey of more than 2,700 financial institutions.
The largest banks are charging the highest overdraft fees — a median price of $35 at banks with more than $25 billion in assets, compared with $25 at banks with under $100 million in assets, according to the report.
Credit unions generally charge less than banks; their median price is $27, while the median price for banks is $30, the report found. Since 2009, the median overdraft fee among credit unions has risen by $2, and among banks it's risen by $1.
In an interview, Moebs said that he is advising smaller banks to lower their overdraft fees in an effort to compete with payday lenders. (The same logic does not apply at large banks, he says, because they have higher cost structures and different business models.)
Rather than paying a $30 overdraft fee at a bank, consumers are often better served by payday lenders, where they will pay $16 for a $100 cash advance, he argues.
"In this market, the payday lenders are substantial. And there's a huge reason for that," Moebs says.
"If a bank or a credit union or a thrift wants to make more overdraft money, drop the price," he adds. "The consumers would prefer to stay with a bank or a thrift or a credit union [that] has a reasonable price."
Despite the sharp consumer backlash against high-to-low reordering, 13.8% of all banks, thrifts and credit unions are still using the practice, Moebs says. That figure is down from 19.9% in 2009.
Moebs attributes the relatively slow pace of change away from the controversial practice to the high cost of revamping banks' computer systems. "You're talking about millions of dollars to make these changes," he says.
