Have small interest margins put a squeeze on your bank’s bottom line? Maximizing your noninterest income may be the difference between a profitable year and a lackluster one.
Focus on income sources
Common sources of non-interest income include:
- Deposit account service charges (which have had ATM fees reduced by Dodd-Frank)
- Returned mail fee for deposit and loan customers
- Loan origination and servicing fees
- Overdraft and NSF charges, which have been severely reduced by Regulation E changes
- 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, as well as brokerage, trust, and financial planning services
Community banks have a history of being easy on customers by waiving NSF fees and other penalties anytime 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 to understand the significance of noninterest income, make good decisions regarding fee waivers, and handle customer complaints. If you haven’t already done so, 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 management reports, which will let you monitor results.
Familiarize yourself with competitors
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 substantial impact on your bank’s revenue.
If you do increase your fees, monitor your results closely to ensure the strategy produces the desired outcome.
Place 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, your bank must carefully analyze the costs, benefits and potential profitability of each customer relationship. It’s also 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.
Buy life insurance
Insurance policies on the lives of directors, officers, and other key employees can be cost-effective tools for boosting noninterest income. Your bank can buy coverage 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 nonqualified 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 buying a policy on an employee’s life.
There are many other ways your bank can bolster its revenue streams on the noninterest side of your operations. Your Plante Moran advisor can assist you in crunching the numbers, analyzing the results and implementing new strategies.