Today’s rate environment is compressing net interest margin for community financial institutions. So generating non-interest income is more important than ever. But not just any non-interest income. Done right, the revenue you drive can add value to consumers’ lives and deepen your relationships with them.
Nickel-and-diming consumers is counter-productive.
According to the FDIC, the most common drivers of non-interest income are:
- Fee accounts and maintenance fees
- ATM fees
- Service charges and origination fees
- Cross-sell of other products
With the top three drivers being fee-based, it begs the question: how can fees be the holy grail of non-interest income if consumers hate them?
We all know that consumers despise fees. At Kasasa, we perform yearly studies to see just how much. (See above for results from a 2019 Kasasa Consumer Study.)
There’s also a concern for many community financial institutions around remaining competitive while charging fees. An increasing number of institutions (online-only and traditional) are offering fee-free checking accounts with no minimum balance requirements. If your checking account comes with a $5 monthly maintenance fee and the other guy’s is free, it’s a no-brainer which account consumers will choose.
There are some exceptions we’ve found to consumers’ anti-fee attitudes. One is what we call “consumer choice fees.” People tend to feel better about fees that they feel they have a choice in paying, i.e. fees that are charged when they don't perform a certain activity — such as using their debit card or opting into e-statements.
Another exception is offering more value in exchange for the fee. A regular checking account with a $5 fee doesn’t offer much value in a consumer’s eyes when they can get the same account for free somewhere else. A checking account that offers additional benefits, such as a free safe deposit box or discounts on other banking services, feels like it’s “worth” $5, rather than like an arbitrary way to squeeze money out of the consumer.
If you’re charging fees that your competitors don’t without adding extra value, it’s only a matter of time before your account holders take their dollars to greener pastures.
You can't rely on interchange fees alone.
Last year, we talked about three ways you can boost consumer-friendly non-interest income, with number one being cash back checking that encourages debit card use and drives interchange fees.
Interchange fees are still an important component of generating revenue for community financial institutions. And the stickiness created by repeated debit card use is a great way to reduce account holder attrition. But with federal regulations and threats from fintechs and retailers like Amazon and Walmart opening their own payment services, it’s important to have other sources of non-interest income that your institution can rely on.
Value-added products drive non-interest income — without driving away consumers.
Let’s go back to the FDIC’s list of common drivers. Coming in fourth is the cross-sell of other products. This not only adds the value that consumers are seeking in their relationships with their financial institutions, it also allows you to increase products-per-household and stake stronger claim in a consumer’s share of wallet.
Consumers need a lot more than checking, savings, and loans. Think about all the products that could round out someone’s experience with your institution: investment services, vehicle warranties, GAP insurance, debt protection, device protection, identity fraud protection, life and health insurance, and discount programs just to name a few.
Adding any one of these offerings to your product lineup would generate non-interest income for your institution while deepening your consumer relationships.
If your front line sells them, that is. Many financial institutions see frontline training as an obstacle to selling new products, or cross-selling in general. The trick is to create a culture of consumer-centric selling that’s based on relationships. Once your front line can get over this hump, they'll be well on their way to generating non-interest income for your institution. But creating that culture is easier said than done, and it helps to have digital programs that can automate or facilitate the selling process.
As the Fed rate continues to remain at zero and margin compression increases for many institutions, generating non-interest income is going to be your best bet for weathering the storm. Value-added products will not only generate revenue for your institution, they will increase product density and attract and deepen relationships with consumers — setting you up for success now and well into the future.