WASHINGTON-The size of the "small cash" market is great, which bodes well for the potential of overdraft revenue. But other forces at work and just over the horizon may limit, if not severely reduce, the overdraft market for banks and CUs.
Those are key assertions of two white papers introduced last week by Moebs $ervices: "The Small Cash Market" and "Who is Killing Overdrafts?"
Pressure from consumer advocates and regulation from the FDIC-and potentially from the Consumer Financial Protection Bureau, as well--are killing the overdraft market, according to Michael Moebs, economist and CEO at Moebs $ervices, Lake Bluff, Ill.
"The small cash market is 75 million Americans and $20 billion in balances, and it's $40 billion in gross revenue," said Moebs, who noted that the small cash market is loosely defined, fragmented, and changing. He said it's comprised of much more than just small loans, but also "the $80 cash from a pawn shop with a piece of jewelry as security, to the $3,000 borrowed from mom to replace the transmission on her daughter's auto."
Because of the lack of definition around the small cash market, many financial institutions fail to see the needs of this economic segment nor the growth potential it presents for overdrafts, asserted Moebs. "Almost three times as many people use non-bank providers for small cash needs as use traditional overdrafts; 50 to 60 million people versus the 15 million who are frequent users of overdrafts through banks and credit unions," stressed Moebs.
Kill the Overdraft Market
Yet over-regulation by the FDIC, and potentially the CFPB, may kill the overdraft market, opined Moebs, who recently shared (Credit Union Journal, March 19) that financial institutions have to take steps to prevent Washington from overstepping its boundaries here. "The FDIC is trying to get rid of the overdraft market," insisted Moebs.
Moebs contended that financial institutions must be more transparent in their overdraft pricing and with how their overdraft processes work-which may dissuade the CFPB from controlling overdraft pricing-and price the service as a safety net for consumers rather than a penalty, below $20. The median overdraft price today among financial institutions is $29. Dropping overdraft price below $20 also increases overdraft usage and therefore revenue, said Moebs.
Moebs insisted that too much attention is being paid by Washington and consumer advocacy groups to measuring overdrafts by APR. "Instead overdrafts should be measured by fees," said Moebs, who explained that the high operating costs associated with this very risky market drop the actual overdraft APR for payday lenders, banks, and CUs closer to 5% to 6%. "Not the triple digits you hear about from consumer advocates."
Where the Focus Should Be
Moebs believes payday lenders are the ones Washington should be looking at to model overdraft rules. "The payday lenders are the most efficient at small loans; they have to be. Their losses on short-term small-dollar loans (20%) are twice that of the banking industry's overdraft losses. The payday lenders have become very efficient at lending money and follow-up, like collections.
"I would hope the CFPB would say payday lenders are most efficient and charging $17.50 for a $100 advance (average payday loan fee) will be the benchmark," concluded Moebs. "And if anyone gets well beyond that we will notify them and they better give us a good reason why they are higher, and if not, we will shut them down."
What may be most concerning to Moebs, even greater than the threat to overdrafts, is the negative effects on the economy if the small cash market is not understood by legislators, regulators, consumer advocates and financial institutions.
"The small cash market is essential to the smooth functioning of the economy. It can't and shouldn't be eliminated. But it can be understood. And to ensure the economic well-being of those 50 to 60 million Americans, it needs to be understood."
For info: www.moebs.com