LAKE BLUFF, Ill.-Overdraft usage at all financial institutions dropped to its lowest point in the last 14 years at the close of the second quarter, according to a new study by Moebs $ervices.

According to the report based on Q2 Federal Reserve data, consumer overdrafts declined 2.8% over the first quarter to seven overdrafts per checking account per year. Consumer OD totals were 6.8 per account in 1999. Michael Moebs, economist and CEO at Moebs $ervices, attributed the decline to consumers becoming much more frugal. The fact that the decline has occurred two quarters in a row has the economist concerned about the future of overdrafts for the next 18 months.

"Macro-economic issues are affecting consumers' attention to their budgets," said Moebs, who believes the biggest impact is from smaller paychecks this year due to the end of the Social Security payroll tax cut Jan. 1. "The Social Security situation is having a big impact on the economy. It generally takes three to six months for economic fiscal changes to fully show up in the marketplace. Consumers are getting more frugal, watching their budgets closely and avoiding overdrafts."

Overdraft revenue across all FIs at the end of Q2 increased modestly to an annualized $31.3 billion. The approximately $200-million rise from the first quarter of 2013 still trails year-end 2012, which was at $32 billion. FIs raising their OD prices is keeping revenue up, said Moebs, who pointed out CUs are leading the way with hikes.

'Good and Bad'

"For almost two years, since the third quarter of 2011, the median price nationally was $29, with the banks and thrifts higher at $30 and credit unions at $25. Over the past two years, credit unions have increased their fees from $25 in 2011, to $27 in 2012 and now $28 in 2013," said Moebs, who reported the trend in a Credit Union Journal report earlier this year.

Moebs asserted that credit unions, now raising OD prices, are emulating what banks and thrifts began doing years ago. "That is good and bad-good because they are maintaining a vital revenue source, but bad in that many are doing this from a penalty pricing aspect."

Making matters worse, according to Moebs, is that many credit unions are not monitoring their overdraft transactions, policies and pricing closely to adapt them to the needs of the membership and the credit union. Moebs believes an option for ODs is "safety net" pricing-where the financial institution sets the overdraft price below $20, providing members an affordable means to manage their checking balances while also driving up usage. He also said penalty pricing is another option-if the credit union realizes what it is doing and wants to deter overdrafts.

Safety Nets & Penalties

Moebs said CUs can employ both safety net and penalty pricing, turning to low OD pricing for free accounts and more penalty pricing for interest-bearing accounts.

"The bottom line is credit unions have to get more empirical," concluded Moebs. "They have to understand in detail what is going on with their overdrafts-how members are using them. If they do, they will likely produce strategies that drive more fee income. If they don't, they could lose fee income, alienate members and potentially lose checking accounts."

With two consecutive quarters in which overdraft volume has declined, and the second quarter being a period in which ODs generally bounce back after consumers tighten their belts right after the holidays, Moebs is concerned for the longer term, especially with such a large percentage of the U.S. workforce (37%) not even looking for a job. "Will this trend of declining overdraft activity continue? If retailers don't have a good Christmas then declining OD volume could continue through much of 2014."

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