As the Federal Reserve executes its strategy to slowly raise rates, net-interest margins will continue to compress. That compression makes non-interest income a key element in bank success as the primary source of earnings growth. Wisconsin banks must explore practical strategies to increase non-interest income without alienating customers or experiencing regulatory compliance violations.
Pursue Fee Income
Since fee income is a common source of non-interest income, it is a popular first choice for many institutions. The first step in this strategy is to evaluate the bank's current fee structure. "Banks should evaluate loan fees regularly, along with new product and services fees," said Kirsten Spira, banking attorney at Boardman and Clark, LLP. "Banks may determine that their fees are below the market rate, and even a slight adjustment could improve the bottom line without losing your customer base." It's also important for management to monitor the rate at which fees are actually collected. "Management might be surprised at how often fees are waived or not collected," said Spira. "In addition to loss of revenue, this collection issue can raise compliance concerns, as well, such as fair lending, et cetera."
Of course, it is difficult to introduce or raise fees without generating a negative reaction from customers. One way to do so is to use opt-ins, according to Shane Bauer, first vice president/security officer at Bankers' Bank, Madison. "Offer different flavors of a product starting with 'free' and then charge for incremental benefits the customer values," he suggested. One example would be to offer same-day ACH as a paid upgrade to the bank's already-existing payment options. "It's the bank equivalent of Economy Plus seating," Bauer explained.
Expand or Diversify Offerings
Another popular option to generate additional non-interest income is to expand or diversify the bank's current slate of product and/or service offerings. This strategy includes options ranging from fees generated from SBA loan packaging services or secondary market sales to wealth management and trust services, or even add-on products like credit insurance, GAP and debt protection. Because there are so many options, banks must take care to select line(s) of business that match up with their customers' needs and price sensitivity. "The most important thing is offering the right variety of properly priced products," Bauer advised. "Develop products based on a demonstrable need from customers, not just based on what everyone else is doing."
Banks considering this strategy face the key decision of whether to grow their product/service line organically or find an independent company to acquire. The choice between organic growth or acquisition depends on the bank's unique circumstances and how quickly they want to grow, according to Nate Zastrow, executive vice president and CFO, First Bank Financial Centre, Oconomowoc. "For example, we knew that wealth management was an area that needed fast growth, so we found a firm to acquire," he explained. "On the other hand, we grew our mortgage lending from within, over time."
Another popular source of non-interest income is credit card lines of business. "Card programs offer banks a variety of ways to increase fee income, from interchange fees paid to an issuer for card transactions to profitable pricing in merchant services," said Bauer. Since cards—both on the issuing and merchant side—are volume businesses, Bauer advises banks to grow their card business with the right partner to strengthen relationships.
Trust companies can also be a good source of non-interest income, but often take a long time to reach profitability when grown organically. If this is an area where the bank has identified opportunity, finding a trust company to purchase may be a better strategy than building from the ground up.
Evaluate the Risks
As with any new strategic direction, bank leadership must carefully evaluate the risks associated with their non-interest income strategy prior to implementing it. Predictably, regulatory compliance is of the highest concern for most institutions. "The current regulatory environment does not leave much room for creativity," said Spira. "Leadership should consider the regulators and make sure the strategic plan takes into account the legal restrictions on products and fees." She recommends that bank management work closely with compliance staff and the bank's attorneys to ensure any new fees, products or services are compliant. "State and federal regulators look closely at fees and add-on products, and the CFPB has a keen eye on strategies employed for the sale of add-on products," she added.
Not having a well-defined strategy creates massive risk with any new business endeavor, and generating non-interest income is no exception. "It's important to be clear on what you want to accomplish and have a plan for getting there," said Bauer. "Banks need to identify value-added services that customers are willing to pay for and explore ways to offer them." Proper planning allows for flexibility, as well. First Bank Financial Centre has a rolling three- to five-year strategy that is evaluated and adjusted quarterly, according to Zastrow. "If something is working we go deeper and if something isn't we scratch it and move on," he said. Because no bank can be "everything to everyone," it is important for product and service offerings to be consistent with the bank's strategic plan in pricing and delivery.
Identifying your customers' tolerance for new or higher fees, as well as their appetite for expanded products and services is another key risk. Spira pointed out that many non-bank competitors offer consumers a wide variety of digital services at no charge, and that has transformed bank customers' expectations. "The marketplace is increasingly competitive, consisting of bank and non-bank competitors, and a customer base that expects more for less… including electronic access to all banking products and services without additional fees," she said. One way to mitigate this risk is by placing customer satisfaction at the center. "Our strategy wasn't dollar-driven," Zastrow explained. "It was more focused on delivery channel and product base, building up a complete suite of products for our customers. From that, the non-interest income grew."
Finally, verifying that the bank has the appropriate infrastructure and staff expertise to capably deliver the new product or service is also essential. "Having the expertise is key, and that's where having the right people comes in," Zastrow said. In order to successfully offer a new fee-generating product or service, the bank must either acquire the expertise needed or grow it over time, according to Bauer. "The bank needs to be clear on what it is willing to devote in time and resources and be realistic in its expectations," he said. "Success will come from the right planning and execution, including tasking the right team internally and contracting with the right vendors where needed."