LAKE BLUFF, Ill. (6/4/13)--Overdraft revenue for financial institutions dropped at an annual rate of nearly $1 billion or 2.8% during first quarter 2013 from first quarter 2012, according to a quarterly study by a Chicago-area economic research firm.
Total deposit service charges fell 2.9% on an annualized basis, which is the first quarterly drop since fourth quarter of 2011 and the second drop in two years, said Lake Bluff, Ill.-based Moebs Services.
Overdraft revenue for first quarter 2013 was $31.1 billion. That compares with $32 billion in fourth quarter 2012; $31.8 billion in third quarter 2012, $31.5 billion in second quarter 2012, and $31 billion in first quarter 2012, said the firm. Since these are all annual rates, that means that overdraft revenue fell from $8 billion in the fourth quarter of 2012 to just under $7.8 billion in this year's first quarter.
"Overdraft revenue is starting to act like a barometer of sluggish economy," said Michael Moebs, economist and CEO of Moebs Services. "With the net pay of Americans suffering a jolt under the Affordable Health Care Act's provisions of increased taxes starting Jan. 1, savvy checking account users are fine tuning their finances and reducing expenses especially deposit service charges."
"The tax issue, coupled with the seasonal nature of overdrafts helped dampen OD revenue," he added. February and March are historically low months for overdraft transactions because consumers are trying to recover from holiday spending, he said. "With the reduction of net pay right after the holidays, February and March moved up a month sooner, making the first quarter of 2013 bad."
Although population, household formation and newly opened checking accounts continued to grow, overdraft transactions fell to the lowest level since 1999, said the firm.
Moebs also noted these factors:
- The Consumer Financial Protection Bureau's decision to delay potential overdraft regulations so it could study the issue. "This threw banks and credit unions into a quandary over how to position price changes on overdrafts," Moebs said, adding, "most financial institutions decided to keep the prices the same while the consumer was overdrawing less--median national charge for an overdraft is $29."
- Marketing by financial institutions to give waivers on the first six overdraft transactions in a year or to forgo small overdraft balances of less than $5.
- Lower prices offered by financial institutions. "Our data show financial institutions that lower prices to help the consumer reduce fees actually increase revenue from having more volume of new checking accounts and transactions," Moebs said.
The study indicates that overdraft revenue in the past six months reflects economic behavior, legislation, regulation and social/cultural changes, Moebs said, adding that the same changes occurred in the 1990s and 2000s while overdraft revenue continues to grow. Currently about 30% of the 135 million checking users range from underbanked to less than 600 FICO scores, and the percentage was the same 20 years ago, he said.
"This seems to tell us the consumer and small business person need a financial safety net and want overdraft service. Banks, thrifts and credit unions also appear ready to provide the overdraft safety net, hopefully in a transparent, low price way, free of market restrictions, " Moebs said.