LAKE FOREST, Ill. Wis. (8/16/12)--A recent study indicates that debit card use is growing. With that, financial institutions can expect an increased possibility consumers will overdraft their checking accounts, thanks to a "financial tsunami" enacted in 2003, the study said.
Debit card payments accounted for 43% of 110 billion annual transactions in 2011, an increase from 19.4% in 2003. That was the year that the Check Clearing for the 21st Century Act (Check 21 Act) was enacted, according to the study from Moebs Services, Lake Forest, Ill. Check 21 Act eliminated the "float" on checks that kept many from overdrawing their accounts.
Float—the amount represented by a check passing through a financial institution's check clearing cycle--averaged $10 billion a day in 2003--when paper checks constituted 46.3% of the annual check processing system. In 2011, business and paper checks averaged only $400 million in float per day, a reduction of 96% in less than nine years.
"The lack of float and increased debit card usage has made the time between initiating payment and depositing payment--almost non-existent," the study said. "With 87% of checking account users not reconciling their checking accounts, the probability that the average consumer will overdraw is immeasurably increased."
The paper describes a "small cash market" that is created when consumers have a financial need and they do not have liquid funds to meet that need. Credit unions and banks participate in this market when they provide overdraft services. In 2011, financial institutions earned $31.6 billion in fees from overdrafts, according to the Moebs study. The national median price of an overdraft was $29 at all financial institutions in 2011.
Payday lenders also participate in the "small cash market," charging $17.50 per $100 advanced, the study said.
"But community banks and credit unions have been a safe haven for checking accountholder fleeing the penalty pricing tactics of the very large banks," the Moebs study said. "The lack of statistical surveys and a broad focus of all financial institutions have created a climate of 'all are wrong' when only a few big banks victimized consumers."
Credit unions' median charge for an overdraft is $25, the study said. That is less than the national median for all financial institutions, and compares with $35 at Wall Street banks, $30 for all banks, $25 for "Main Street banks and credit unions," and $17 for payday lenders, the study said.
About 67% of the overdraft market is unintentional users, the study said. Losses for banks and credit unions are about $3 billion a year. For an individual transaction, the full cost is about $13 to the financial institution.