A Six-Part Prescription to Halt the Decline in Noninterest Income

MILWAUKEE — Regardless of the type of financial service provider, fee income is on the skids for many as consumers lean more toward cherry picking the types of services they deem essential these days.While noninterest income is more important to the financial services industry than ever, its role continues to dwindle steadily, according to a Metavante Corp. white paper, “Halting the Decline in Noninterest Income: Successful Growth Strategies and Tactics,” by Tom McGrath, senior banking strategist. The drop-off is attributed to fee income opportunities that have turned into giveaway services, such as Internet banking, ATM transactions and check writing. As a result, smaller segments of the customer base are paying for an increasing percentage of the bank’s services.As proof, deposit service charges as a source of fee income have been declining for the past five years and was lower in 2007, the last year of recorded data, than they were in 1998, McGrath found. That decrease is in line with service charge fees in relationship to the deposits that generate activities that produce revenue. Fee income opportunities such as Internet banking and bill payment service are now free as fewer transactions are being performed in branches over longer hours in what McGrath described as “a prescription for increased operating costs to go along with the loss of the fees.”To halt the decline, McGrath suggested six approaches: collecting current fees, implementing market-based fees, utilizing relationship-value pricing, offering new products and services, entering new markets and entering new lines of business. In some categories, it is not uncommon to find waiver rates in excess of 50%, he discovered.One way to minimize these situations is to “establish targets for the absolute level of fees as well as a threshold for the acceptable level of waivers due to reasonable management discretion. Embed this target or targets in regular incentive programs at all levels of banking activity.”Another way to boost noninterest income has to do with a basic business tenet that says “the company that owns the share drives the price.” McGrath said. In most markets a few banks hold the majority of deposits and loans, and they “are the ones against whom everyone should compare pricing.” Many credit unions already do what McGrath has recommended: researching the competition by visiting their Web sites or branches to get fee schedules.Credit unions often take pride in how they reward their members for the number of product and service relationships they have with the financial institution. However, McGrath said the most basic relationship-value pricing approach is the package that is based on an understanding of the value of each piece of the package and the expected total income from users of the package. The key lies with a more disciplined approach to product development and market testing, according to McGrath. This may include conducting research to assess the value of new services as well as market share size, aggressive execution when ample data is available and technology platforms that speed up product deployment.Yesterday’s toaster has become today’s iPod or digital camera in just one of many attempts to lure new deposits away from competitors, McGrath wrote. Loyalty programs now have many layers, and the product and services with no fees attached continue to be the norm.Still, a “chief noninterest income officer [or] fee czar” is not necessary to drive more revenue, McGrath wrote.“Instead, we are convinced that the industry will benefit from better disciplines, starting with the fairly mundane, day-to-day matter of collecting fees and running through the more strategically complex issue of entering new lines of business to drive revenue.”–[email protected]