Four Strategies for Increasing Non-Interest Income

Non-interest income is critical to a bank’s long-term success. This is particularly true today, when a variety of economic and regulatory factors are having a negative impact on net interest income.

At the same time, non-interest income is declining for many banks. There are numerous reasons for this, including general economic conditions and regulatory changes, such as opt-in requirements for overdraft protection fees and limitations on credit card fees and debit card interchange fees.

Revenue-Generating Strategies

Common sources of non-interest income include deposit account service charges, loan origination and servicing fees, overdraft and NSF charges, and gains on sales of loans and investment securities. Non-interest income also may be derived from various products and services, including insurance and annuity products and brokerage, trust and financial planning services.

Here are four strategies for increasing non-interest income:

1. Improve collection of current fees. Banks are notoriously easy on customers, waiving NSF fees and other penalties any time they receive a complaint. Although it’s important for bank personnel to have the discretion to waive these fees, high waiver rates — some estimates are higher than 50 percent — can quickly wipe out substantial amounts of revenue.

To keep waivers under control, set a target level for discretionary waivers and train bank personnel so they can understand the significance of non-interest income, make good decisions regarding fee waivers and handle customer complaints. Try automating the fee initiation process so that nothing falls through the cracks and incorporate waiver targets into your incentive compensation decisions.

Finally, be sure to include fee waiver data in regular management reports so you can monitor results.

2. Get to know the competition. Banks often miss opportunities to charge higher fees because they fail to keep tabs on their competitors. Identify the predominant banks in your market and procure their fee schedules. Comparing competitors’ fees to your own may uncover significant pricing opportunities.

That doesn’t mean you should increase your fees to match the highest priced banks in your area. But if you find your fee schedule is on the low end of the spectrum, a modest increase can have a significant impact on your bank’s revenue.

If you do increase your fees, monitor your results closely to ensure the strategy produces the desired outcome. And, as noted above, consider automating the fee initiation process.

3. Put a value on banking relationships. Relationship value pricing can be a highly effective strategy for enhancing fee revenue. It sets prices based on the overall value of a banking relationship with a customer or group of customers (such as a family or a business and its employees).

In its simplest form, relationship value pricing might involve package deals for products or services. A common example is free checking accounts for customers who maintain a minimum loan balance. A more sophisticated approach is to develop customized pricing based on a valuation of the products and services a specific customer receives.

For relationship value pricing to work, it’s important that your bank carefully analyze the costs and benefits associated with the customer relationship to ensure the relationship is sufficiently profitable. Also, it’s critical to have systems that monitor the relationship. Banks often lose revenue because they’re unaware that the relationship has changed. For example, a bank might continue providing free checking even though the related loan has fallen below the minimum balance or has been paid off.

4. Buy life insurance. Buying insurance policies on the lives of directors, officers and other key employees can be a cost-effective tool for boosting non-interest income. Your bank can purchase insurance itself or use “split-dollar” arrangements to share the costs and benefits of these policies with employees. Bank-owned life insurance (BOLI) is often used to fund supplemental executive retirement plans, other non-qualified deferred compensation plans and retiree health benefits.

BOLI can be a powerful planning tool because a life insurance policy’s cash value grows on a tax-deferred basis and, if the policy is held until the insured employee dies, the death benefit is generally tax-free. A caveat: To enjoy these tax benefits, your bank must comply with strict notice and consent requirements before purchasing a policy on an employee’s life. (See the right-hand box for more information.)

Your Bank’s Strategic Plan

In addition to the four ideas described above, make sure you review your strategic plans and consider new strategies for generating non-interest income. These might include offering new products and services, expanding into new markets or entering new business lines, such as brokerage services, insurance sales or financial planning.

For more information on how we can help your community bank, please contact Sonny MacArthur at smacarthur@pkm.com or 404-420-5631.