Why You Should Evaluate Your Non-Interest Income Strategy
Posted by The Mad Banker on Nov 7, 2019
We get it, as an executive you are balancing a variety of projects and responsibilities daily to ensure the health and growth of your financial institution. Even though increasing profitability is always a critical goal for any financial institution, it is often not treated that way. However, due to the popularity of online banking and fintech competitors quickly coming into the market, banks and credit unions need to make strategic business decisions to ensure they stay profitable. Between this increase of competition, and the lowering interest rates, financial institutions need to evaluate all their sources of revenue, but most importantly, non-interest income.
In this blog, I am going to discuss two reasons why you should be evaluating and reviewing your non-interest income strategy, product alignment and product pricing.
1. Non-interest income isn’t impacted by rates
Your Asset Liability Management Committee (ALCO) does a great job of evaluating interest earning income; however, non-interest income is often underutilized, or not evaluated often enough that financial institutions are missing the opportunity to increase their overall revenue.
Since the Federal Open Market Committee (FOMC) recently dropped rates, it is now more important than ever to look at non-interest income. The products and services the majority of banks and credit unions earn non-interest income from are not impacted by rate changes.
2. Non-interest income is a reliable and recurring source of revenue
Non-interest income is a reliable source of income. While there is a lot of uncertainty with an institution’s loan portfolio due to loan volume and constantly changing rates, non-interest income isn’t impacted by these factors that are out of a financial institution’s control.
In addition, non-interest income will continue to grow as your customer and member count rises. As long as the financial institution grows, your total revenue from non-interest income will as well.
By increasing non-interest income and making strategic business decisions around fee pricing, financial institutions set themselves up to continue to be profitable even if rates continue to lower. Non-interest income is a valuable source of revenue to financial institutions because it is not impacted by rates and is a recurring and reliable source of revenue that grows proportionally to your member and customers.
As a caveat to all this, we can’t express enough the importance of making sure your products and services that bring in non-interest income are competitively priced in your market. We’ve worked with many financial institutions that have missed the opportunity to increase their revenue from non-interest income. They often give away products and services for free or charge extremely low prices. We recommend beginning your non-interest income strategy evaluation by getting a thorough understanding of your competitor’s pricing and build your pricing model based on that.
If you’re unsure about where to start, we’d recommend utilizing an unbiased third party to review not only your institutions’ current pricing and product strategy, but also your competitor’s – click here for more information.