Non-Interest Income, More than Courtesy Overdraft

Non-interest income is increasingly important for community banks and credit unions, despite being a much smaller proportion of total revenue compared to interest income. Financial institutions (FIs) rely on non-interest income for everything from covering operating expenses to funding the creation of new products and services to meet client needs. Many FIs focus on their courtesy overdraft program for non-interest income; creating the misconception that the only meaningful way to increase non-interest income is through modifying courtesy overdraft programs. While courtesy overdraft programs are a great source of non-interest income, it is important not to ignore other opportunities. Here are three opportunities FIs can review to increase their non-interest income:

1. Debit Card Interchange Fees

Debit card interchange fees present a sizable amount of non-interest income, especially for FIs with less than $10 billion in assets. Persuading consumers to swipe debit cards more often is popular among FIs looking to increase interchange fee income. Institutions are accomplishing this by offering products with rewards, or waived monthly fees if the consumer uses their debit card a certain number of times per month. This strategy can be mutually beneficial for the FI and consumer, with the institution receiving increased interchange income and the consumer receiving rewards or waived monthly fees. By strategically structuring a checking product that also incorporates industry best-practices (such as signature-based transactions), FIs can expect to see non-interest income increase without negative consumer impact.

2. Waivers and Charge-Offs

Increasing non-interest income isn’t always increasing fees, it is also creating new products/services or restructuring current products. An area that is commonly overlooked is waivers and charge-offs. I often work with institutions that have incredibly high waiver rates, yet the executive management team is completely unaware. The issue of high waivers and charge-offs originates with the front-line staff and must be addressed by executive management before it becomes a systemic problem. Waivers and charge-offs in moderation can actually bring value in consumer experience and increase consumer loyalty, but waivers only become a problem when they occur too often and begin hurting profitability. By focusing on reducing waivers and charge-offs, FIs are able to increase non-interest income and reduce fee leakage.

3. Competitive Fees

The most effective way to increase non-interest income while minimizing consumer impact is through small, incremental increases across many fees. Large fee increases are more noticeable and much more likely to upset consumers, which could possibly result in lower volume. Slightly increasing fees on products and services with high volumes, while maintaining competitive pricing within the market, allows FIs to effectively increase non-interest income.

One of the main concerns I encounter when discussing fee income is that the bank or credit union feels that increasing their fees will upset their customers. Understanding how much to increase fees while still remaining competitive compared to the market is pivotal. Increasing fees too much could take the fee to the top of the market and have a negative response from consumers, while not increasing fees enough would have a minimal impact on non-interest income.

Financial institutions that effectively increase their non-interest income must focus on every aspect of their products and services offered, from pricing to collections, in order to be as efficient as possible. While it is certainly easier to focus on several big ticket items in the courtesy overdraft program, the negative response of consumers (and possibly regulators) could outweigh the benefit.

Increasing non-interest income efficiently requires a deep dive into the institution and its competitors to truly determine the institution’s flaws, and also areas of opportunity. When embarking on increasing non-interest income, using a third party provides a unique and unbiased perspective; in addition to an industry-wide scope that reviews all areas of income optimization and market competitors. Non-interest income is an easy, predictable and stable way to bring in more profit without additional costs to the bank or credit union.