By Ray Birch
LAKE FOREST, Ill.—Can banks, credit unions, thrifts and fintechs afford to lose $34 billion in annual revenue?
That $34 billion represents annual overdraft income among all financial services entities, and it’s what’s at stake from the advance of mobile apps that are increasing in their complexity, analysts told CUToday.info.
As more FIs upgrade their mobile solutions, the high-tech apps act like personal financial assistants in consumers’ pockets, helping them better manage daily expenses and even avoid overdrafts.
With that being the case, the emerging question is whether mobile devices and apps will someday kill overdraft revenue, a big piece of many CUs’ non-interest income.
Michael Moebs, economist and CEO at Moebs $ervices, is among those who believe the mobile devices and apps (MD&A) will will have a significant effect on the volume of overdrafts. The effect will be such it could change how overdrafts are structured, although Moebs also believes the service will continue to be used and needed by consumers.
Moebs pointed to data that show in the past 15 years mobile devices and apps uses by Americans has tripled to 300 million today. From 2003 through 2018, overdraft revenue grew from $28.1 billion to $34.8 billion.
“Today, overdraft alerts consumers receive at the point of sale do not stop 40 to 80 million Americans who overdraw their entirely electronic checking account. Why? It comes down to understanding the behavior of MD&A users who overdraw,” said Moebs.
What New Research Shows
New research from Moebs $ervices reveals MD&As just how MD&As have affected overdrafts. Since 2003 MD&As have contributed to the 31% reduction of overdrafts per checking account per year, from 4.4 to 3.0. today.
“Of course, the MD&As were aided by the mortgage crisis starting in 2007,” said Moebs. “Yet the OD price rise of 36% in the past 15 years stifles OD revenue. OD revenue growth is 22.8% in the past 15 years. However, checking account growth, mainly from population growth, was 26% for the same period. More checking account users lead to more mistakes, increasing overdraft revenue.”
Fintechs are increasingly introducing sophisticated, consumer banking apps designed to help consumers manage their financial affairs, noted Moebs.
“These apps help reduce the incidence of overdrafts. New anti-overdraft apps provide cash advance tools to supply money. The banking apps along with anti-overdraft apps with money advances are slicing into overdraft revenue,” he said.
Big Investments by Banks
In addition, many large depository banks have spent millions of dollars in recent years to develop money management tools which act almost like a personal financial assistant for the consumer, said Moebs.
“Most big banks like Bank of America, Chase, Wells Fargo and others have these mobile banking apps. Also, many fintech firms have created or adopted sophisticated mobile banking apps to get consumer checking accounts,” said Moebs.
Moebs said among the fintech firms that have created well-designed anti-overdraft apps the various features offered include:
- Small cash advances with direct deposit
- Tracking of expenses to pay bills to avoid overdrafts
- Overdraft fees dropped for a very short term
- Payday loans with no fees, yet a monthly charge to have the service
An Example in Philadelphia
“Almost all mobile banking apps, especially the anti-overdraft apps, are geared toward high-volume debit card users. The purpose of high-volume debit card usage is to get the interchange fees to pay for these ‘free’ ODs,” explained Moebs. “Ultimately, the keys to checking accounts are the price of the overdraft and the OD limit provided. Reducing the price and increasing the volume with higher limits can achieve substantial OD revenue growth.”
Using FICO scores is a must for this type of overdraft approach, insisted Moebs, saying a good example of this overdraft pricing philosophy can be found at Philadelphia Police Fire Federal Credit Union.
“This CU charges only $6 for a debit card overdraft and has above-average limits,” he said.
Moebs is also offering a forecast on the future of overdrafts based on his company’s study:
- MD&As will become as important to the consumer as footwear, yet some will go barefoot
- Smartphones will dominate MD&As worldwide and their banking apps will restructure overdrafts
- MD&As with two or more phone numbers per single mobile device are around the corner
- MD&As will totally dominate the payment system—
- paper checks, ATMs and cash will be minimal
- Overdraft limits currently up to $5,000 for some financial institutions will become commonplace
- Payday lenders will seek other alternatives other than payday loans less than $300
- Interchange prices will fall as the Federal Reserve allows more competitors into the payment system
“The overdraft business as we know it today will be quite different by 2025, thanks in large part to technological advances in mobile devices and their banking applications,” said Moebs. “The consumer will benefit with lower prices, higher limits, and greater understanding of the payment system.”