With the Fed funds rate set near zero, net-interest margins are shrinking, and margin compression is a challenge that isn't about to let up. This situation has pushed many institutions to drive revenue using non-interest income (NII). The most obvious way to do that is by raising fees or introducing new ones — something consumers hate. But don’t give up hope. Here are three ways you can boost non-interest income in a way that maintains healthy consumer relationships.
Offer checking with cash rewards
What kind of cash rewards? There are two main types of cash rewards for checking accounts. The first type gives the consumer a percentage-based return on their balance; the second is cashback, where the account holder earns back a small percentage of their transactions every month.
Why do consumers love reward checking? Consumers rate cashback as the most desirable reward type, and they especially love it when you offer the reward tied to debit card usage. Credit cards can be challenging to qualify for, and younger consumers are wary of acquiring debt. But most younger consumers are using their debit cards regularly. Also, some reward checking accounts can allow you to offer a very high rate of return and still keep the account profitable (via interchange and cost savings).
How does reward checking drive non-interest income? In a 2020 study, Kasasa found that reward checking account holders were consistently 3X as transactional as standard free checking and spent 2.7X as much via debit cards. They are also 2.3X times more likely to adopt e-statements — a major cost savings. Beyond that, reward accounts usually come with qualifying activities to ensure the right behaviors from account holders. All this adds up much better profitability characteristics for core deposits than standard free checking.
Let’s take some data from our own reward accounts to use as a comparison.
But that's not all the good news on reward checking. Kasasa also examined the loan data for reward checking account holders and discovered that the median data shows they also drive as much in loan volumes as they do in checking balances. Kasasa reward checking holders had 68% higher loan balances and, over the lifetime of the account, were 1.75X as likely to take a loan as people with non-Kasasa checking products. That's a massive boost to the asset side of the balance sheet, especially from a core deposit source!
Provide overdraft privilege
What is overdraft privilege? Overdraft privilege is a type of overdraft protection where the institution agrees to cover charges up to a preset limit, if the account balance is insufficient. The account holder still pays a fee per transaction, but the payment isn't refused.
Why do consumers love it? Consumers like overdraft privilege because it is less damaging to their finances than missing an automated payment. Imagine that a consumer has their electric bill set to autopay. This month, they don't have enough to cover the bill amount. What are the potential outcomes for the consumer?
Miss the payment. This results in NSF fees, late fees, and damage to their credit score.
With overdraft privilege, the transaction goes through, and the consumer is assessed a smaller fee for the convenience. This transparency increases consumer trust with your institution.
Out of these scenarios, overdraft privilege is the most transparent and financially beneficial situation for the consumer.
How does it drive non-interest income? The most obvious way overdraft privilege drives NII is through the fee applied when the service activates. It is important to consider the benefits of offering a consumer-centric transparent service like this: more consumers enroll, they feel more confident in managing their finances, and attrition drops.
Sell value-added products
Launching a new product can be a significant undertaking for a community financial institution. It can also be one of the most effective ways to bring in NII and provide valuable support to your account holders.
Some examples of value-added products include:
Consumers need these kinds of products. Only 1% have identity protection, even though in 2018, 14.4 million people fell victim to identity fraud, and their out-of-pocket costs clocked in at $1.7 billion. 5% of consumers make regular pharmacy transactions and may not be enrolled in a prescription savings plan. 34% of consumers do not have dental, vision, or life insurance. But as you can see in the chart below, consumers are widely receptive to receiving offers from their financial institution for these products.
How do value-added offers drive non-interest income? In the case of insurance, your institution could build up an insurance team and earn significant revenue through commissions and premiums. In the case of many smaller institutions where everyone wears multiple hats, this approach isn't feasible. Fortunately, there are vendors that you can partner with to offer these products without increasing the burden on your staff. In some cases, such as Kasasa Care, we can help you connect with account holders most likely to want an offer and earn referral credit for every purchase transaction. All the marketing, compliance, and product support is handled by the vendor and service providers.
Value-added products are a win-win. Consumers like receiving offers for products they need from an institution they trust. You get the additional non-interest income, along with the reputational benefit of helping them in a meaningful way.
Why bother with consumer-friendly NII?
If you can position your institution as a financial partner, instead of an organization that charges certain fees because "that's how we've always done it," you'll earn a lot more loyalty and goodwill.