The Rise of the Overdraft


March 06, 2012 09:00 AM Eastern Time 
NEW ANALYSIS SHOWS HOW THREE FACTORS FUELED CONSUMER PROPENSITY TO OVERDRAW

LAKE BLUFF, Ill.--()--According to Moebs Services, an economic research firm in Lake Bluff, IL, three major factors have contributed to the rise and propensity for consumers to overdraw their checking account:
“This dramatic shift in payment and transaction processing has acted like a silent sleuth on consumers. With these variables playing out against the backdrop of a sluggish economic recovery, consumers found themselves caught in a perfect storm.”
1. A reduction in the time it takes for checks to clear the bank, known in banking industry as “float’”
2. Increase in debit card usage and volume
3. Sluggish economic conditions
In 2003, float averaged $10 billion a day. Since then it has steadily declined, down 96 percent to an average of $400 million per day in 2011. During the same period, debit card usage went from less than 9 billion transactions in 2000 to almost 48 billion today, or a compound increase of more than 16 percent per year – an unprecedented boost in volume. “This decline in float combined with the explosion of debit cards, increased the speed in which funds flow out of consumer checking accounts,” said Michael Moebs, economist and CEO of Moebs Services. “This dramatic shift in payment and transaction processing has acted like a silent sleuth on consumers. With these variables playing out against the backdrop of a sluggish economic recovery, consumers found themselves caught in a perfect storm.”
Congress Directed No More Float
Float is a term not understood by those under the age of 30. In the past a check took up to 10 days to process. In 2003, Congress passed the Check 21 Act – Check Clearing for the 21st Century Act. This allowed banks and credit unions to digitize checks at the bank. The digitized images are now sent thru the Federal Reserve System, other processing systems, thus eliminating the need to transport the physical check. The Check 21 Act also reduced the number of locations the Fed utilized to collect checks (endpoints) from more than 120 in 2003, to a single location in Cleveland. Checks now clear the bank overnight.
Debit Card Usage Takes off
In 2000 only 11.6 percent of payments were completed via debit card, and checks were used almost six times as much. By the end of 2011, debit card transactions constituted 43 percent of all payments totaling 48 billion transactions. This was more than twice the amount of transactions involving checks.
Why the $39 Latte
When a consumer buys a $4 latte and gets hit with a $35 fee the stark reality of: instant payment, no float, and no money become very genuine. 67% of overdraft consumers (approximately 40-45 million Americans), who overdraw their checking account, do so unintentionally, and about one third do so intentionally, Moebs Research shows. “Regulating the price of overdrafts is not the solution to help these consumers avoid the harsh realities of the market place. More information and greater clarity of message is what is needed. Notice needs to be made via text messaging and email messages within hours of the checking account going negative, and communication needs to be provided in non-legalize, common sense, junior high language,” concludes Moebs.
About Moebs $ervices
Since 1983, Moebs Services has been collecting primary empirical data about financial institutions’ services, pricing, operating expenses and financial condition and analyzing the data in a counter intuitive manner, which provides solutions that make sense. For more info please visit www.moebs.com