Banks make less on overdraft fees
The average cost of overdraft fees has risen over the past four years, but banks are earning less revenue from overdrafts.
This post comes from Brian O'Connell at partner siteMainStreet.
Moebs Services has the goods on bank overdraft fees, and apparently there were less of them in 2011, even though the cost of the average fee rose.
Moebs says that bank deposit institutions earned $31.6 billion in overdraft fees in 2011, a 4.5% drop from 2010. The analytical firm surveyed 2,273 banks to come up with its numbers, along with data accumulated from 12,000 bank and credit union research reports.
Overall, the survey shows the median figure for overdraft fees has actually risen -- to $29 from $27.50 in 2010. The larger number comes from banks hiking their overdraft fees as a result of stricter measures implemented by the U.S. government after passage of the Financial Reform Act, also known as the Dodd-Frank Act.
But evidently, more Americans are doing a better of job managing their checking accounts and are increasingly opting out of automatic bank overdraft protection. Moebs says financial institutions lost $5.5 billion -- about 14.8% -- in overdraft fee revenues in 2010 and 2011.
"The average number of overdrafts per account, per year, has fallen from a peak of 10.5% in the third quarter of 2008 by 29.5%, to 7.4% almost three years later," Moebs says. "The numbers indicate a falloff in volume, a rise in prices and a loss of revenue, yet the overall market appears to have bottomed out."
That doesn't mean overdraft fees are going away. In fact, they may be taking a breather before they come creeping back into consumers' lives.
"Amazingly, given all of the polar forces at play in the overdraft market -- volume, price, revenue, a slumping economy, high unemployment, regulator restraint by FDIC and legislation by Congress -- the overdraft market is rising like the mythical phoenix and coming back," Moebs adds. "It appears that the American consumer is saying they want overdrafts, but they want them as a reasonably priced safety net overdraft, and not an old-fashion high penalty priced overdraft." (Post continues below.)
The chart below shows how overall revenues have fallen since highs were reached in 2009, but median overdraft fee costs have risen by $4 since 2007:
Some banks are seeing the light and are trying to bring fee prices down. Moebs says that more than 30% of financial institutions surveyed changed their overdraft fees, with 14% of them reducing fee price tags. But it's really a matter of bank size. Credit unions are averaging $25 per overdraft fee, while big banks (those with more than $50 billion in assets) have fee averages of $33.50, according to the survey.
Those figures could swing more consumers into the credit union camp.
"More and more banks and credit unions are lowering the price of overdrafts," Moebs says. "This decision bodes well for these institutions as they try to reclaim lost market share to payday lenders, who only charge consumers a median price of $17.50. The closer financial institutions get to payday lenders, the more consumers will bank with Main Street institutions and rely less on payday lenders and the mega-banks during this difficult economy."
For now, big banks will keep looking for creative ways to keep the overdraft-fee gravy train rolling. But pressure from smaller banks, along with tighter regulations from the U.S. government, may finally slow that train down.
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