Non-interest income is a vital part of any financial institution’s overall profitability in good times and bad times, but particularly in a low interest rate environment, as interest income is significantly diminished. Despite this fact, however, many community banks and credit unions often struggle to take advantage of the market conditions or to leverage other important concepts that can generate additional non-interest income for their organizations.
These opportunities can be uncovered by conducting a thorough revenue analysis, but why are so many institutions unwilling to take immediate, decisive action on their non-interest income? The answer is simple – fear of fees.
More specifically, the common fear expressed by many banks and credit unions is that increasing non-interest income, or fee income, will inadvertently produce customer or member attrition.
The truth is that, based on our 25 years of working with financial institutions on revenue enhancement engagements across the country, there is not much evidence, if any, to support any causality between these two separate events. In fact, we have had clients track their customer attrition post changes with no adverse impact. Why? Let’s consider the following ideas: (1) Competitive Intelligence, (2) Product Positioning, (3) Price Elasticity and (4) Revenue Scope and Channels.
Competitive Intelligence is the process of collecting, analyzing, and understanding your financial institution’s markets and competitors. By conducting a thorough competitive and SWOT analysis, you will be able to gain a deeper understanding of the pricing, design, parameters and strategic alignment of the products and services offered by your organization and by your competitors, including loans, deposits and ancillary services. Ask yourself if there are areas of opportunity, given your markets and competitors, for making changes to your products or services that will promote increases in non-interest income. How can you leverage the power of competitive intelligence to identify opportunities and devise strategies to generate new non-interest revenue?
Based on our experience, the opportunities always exist and if you are competitively priced in your markets and you have developed solid brand equity, your customers will notice that you are competitive, see your value and remain loyal to your bank or credit union.
Product positioning is the process of designing and marketing your products to shape the minds of your customers or members to distinguish your products and their unique value from that of your competitors. Product positioning strategies are important when juxtaposing with your income growth strategies. Ask yourself which products and services drive your income, and which products are profitable or not profitable. How are you positioning and differentiating your products and services, not only from a sales and marketing perspective, but also from a design and pricing perspective?
The positioning of your products and services will most likely vary based on several key factors, including your income growth objectives. Remember, you do not have to be the “low cost leader” in everything. Positioning yourself as the “low cost leader” is often associated with low quality products or services if it applies to everything. Based on our experience, your customers will pay more for a product or service if they perceive it as “high end” or “premium” and/or if they deem it valuable.
Price elasticity is the degree to which the effective consumer desire, behavior or demand changes in relation to the change in price of a particular product or service. Understanding the elasticity of your products is a critical element when devising or re-evaluating your product pricing strategies.
Ask yourself which products and services in your portfolio have elastic or inelastic demand. How can you leverage the power of elasticity of demand to identify opportunities and develop a course of action for increasing non-interest income? As Warren Buffett, the famous investor and CEO of Berkshire Hathaway once said, “If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”
The truth is that customers are not as easily influenced or discouraged by fee pricing as many believe. According to the many studies conducted on fee and service charges in the financial services industry related to price elasticity, and based on our own experiences with many banks and credit unions, your customers or members are more likely to be sensitive to interest rate pricing, which is much more elastic, than fee pricing as a general rule.
Often, there are two very common misconceptions about increasing non-interest income, including:
However, the truth is that most banks and credit unions have approximately more than 360 revenue areas that could be analyzed and leveraged throughout the organization as part of an overall non-interest income strategy that spans across both sides of the balance sheet, including loan products, deposit products and ancillary services, for both consumers and businesses.
Based on our experience working with thousands of financial institutions, overdraft or NSF fees only account for about 5% of these 360 revenue areas, illustrating that there are a variety of income layers that can be evaluated for opportunities to make significant gains in fee income.
Additionally, although fee pricing is a significant component to your non-interest income strategy, it only makes up a small portion of the levers that can be pulled to drive revenue, including optimizing product design and alignment, re-evaluating un-priced services, or reducing revenue leakage, to name a few.
Finally, keep in mind that most of your customers, particularly your profitable customers, will most likely not be impacted when adjusting product pricing or product design, as they may not meet any of the requirements for the changes being made. It is also important to recognize that not all your customers, whether they are profitable or not, will be affected by these very same changes being made either.
Remember, fee income can certainly improve your profitability, but you do not have to sacrifice your corporate strategy, community-centric culture, brand or customer satisfaction to do so. To learn more about fee income and the role it plays in profitability, be sure to check out this blog authored by our founder and CEO, Nicholas Ceto Jr., “To Fee, or Not to Fee.”
We also recommend exploring our Profitability Enhancement Playbook, a 3-step guide to increasing your profitability and improving your efficiency ratio by leveraging competitive intelligence and business intelligence to optimize income, enhance operational performance and productivity, and minimize costs.