The Kansas Banker | January 2007
Ten fee-income ideas that can help a bank’s noninterest income strategy take off.
by Don Ebbert with Susan Connor
By now it’s a familiar refrain: The industry’s net interest margin (NIM) is shrinking. While Kansas banks have experienced some relief from this decade-long national trend—a 17-basis-point increase of the state’s median NIM since 2004—they have undoubtedly felt the effects of interest margin compression in recent years. To combat this challenge, more and more community banks have begun focusing on noninterest income (NII) as a way to boost their bottom line.
Capitalizing on fee-income ideas that are compatible with the bank’s noninterest income strategy will increase profitability for almost every bank. (For a primer on creating a NII strategy, access part 1 of this series from the May/June 2006 issue of The Kansas Banker at www.ksbankers.com.) However, before looking at its specific fee structure and deciding whether to implement new charges or increase existing fees, the bank should evaluate whether its corporate culture is ready for maximizing fee income.
One of the most critical aspects of maximizing noninterest income lies in creating a corporate culture that recognizes reasonable fees as a legitimate source of income. Too often, when customers question fees or complain about them, bank employees will agree with the customers. The frontline staff frequently will apologize for the fees and simply waive them rather than have the uncomfortable conversation that can arise surrounding the bank’s fee structure. While fee waivers have their place, high-performance banks report fee collection rates of 95 percent or more— some as high as 98 percent. Obviously in institutions like these, fees are not perceived as optional or onerous, but are simply part of doing business. The bank offers valuable services, and it charges appropriately for those services. In most instances, bank staff would no more consider waiving fees than a grocery store would consider giving away its produce. The bank provides value, the employees understand that value proposition and, as a result, the customers are amenable to paying reasonable fees for the valuable services that they receive.
A reality in banking is that some customers shop for price. If Bank A offers a low-interest credit card with a $100 annual fee and Bank B offers the same product with a $99 annual fee, it’s no surprise where the majority of the price-shopping customers will go. The lesson here is not to draw attention to fees that could influence prospective customers to choose the bank down the street. Concentrate on NII from operations and services performed after account opening rather than from origination fees and fees associated with opening new accounts.
Noninterest income is often approached only from the revenue side, but reducing costs can have the same effect on profitability as increasing fees. One way to cut expenses is to offer customer incentives for use of low-cost delivery mechanisms like e-statements, which can save the bank $2 to $4 per statement, per month. Online banking, debit cards, direct deposit and direct debit are all services that reduce delivery costs. A simple customer incentive to encourage low-cost delivery channel usage, with the proper disclosures, is to charge less for the less expensive channels. For example, the bank might charge a $1 fee for in-person balance checks, while only charging $0.50 for an ATM balance check and not charging for a customer to check a balance online. Because noninterest income is tied to core deposit accounts, it makes sense to mount consumer campaigns to generate customer traffic and build the core deposit checking base. In addition to generating NII, this strategy provides cross-sell opportunities into other profitable products and services.
So, when the bank’s culture is ready to implement and collect fees, the fee structure is timed appropriately and the executive team is minimizing costs efficiently, what fee-income ideas can have the biggest bottom-line impact? Before adding new fees or raising existing ones, the bank should carefully conduct due diligence about its competitors and whether existing customer and prospect segments will perceive enough value from the bank’s products and services to accept the proposed fees associated with them. The bank should also take steps to ensure that the fees are in compliance with state and federal banking laws.
Bearing these precautions in mind, here are 10 fee-income ideas to consider:
1. Eliminate third-party vendors from club checking accounts
Many community banks use a thirdparty vendor to promote a club account, typically for seniors. Most of the benefits of the account, however, are services that the bank already offers. The bank pays as much as $3 to $4 per month, per account, to the vendor, when usually it is the bank’s services that the customers are drawn to. Banks can create a proprietary club account and save the monthly fees. When asked why they use a vendor for these accounts, most banks mention that the vendor promotes a group trip at reduced rates for club members and accidental life insurance coverage. Both of these services are easily obtained through local travel agents and insurance companies. The bank may even have its own insurance subsidiary.
2. Charge returned mail fees
The typical community bank expends considerable effort to process returned mail. There should be two fees—one for the first time a piece is returned and the other for pieces that continue to be produced and must be archived. The original return fee should pay for the research to find a correct address. $10 should cover the work and is a standard amount. If no valid address can be found, then the core system should be coded to hold the mail and archive it at a monthly fee of $3 to $5.
3. Collect core account overdraft fees.
Overdraft continues to be a key area of NII collection, and the more basic core checking accounts the bank has, the more nonsufficient funds (NSF) fees it will have. Many banks have fallen into a habit of waiving far too many of these fees. Collection remains critical for banks to maximize the impact of overdraft fees to the bottom line.
4. Review waived checking service charges
Many banks will waive all fees on demand deposit accounts for a variety of reasons, which include providing an incentive to open DDAs, a personal relationship with prospects, accounts for nonprofit organizations or single-purpose accounts for election campaign funds, weddings, etc. If the bank has agreed up front never to charge service fees on an account, then that agreement must be kept. However, few banks ever review the hard waivers, whether they have entered into such agreements or not. As a result, accounts that should be charged never are assessed. A quarterly— or at least annual—review of waived service charge accounts is critical. Banks can boost their noninterest income by agreeing to waive select fees on accounts, or to waive them for a limited period of time after account opening.
5. Promote debit card usage as credit to earn interchange fees.
Community banks have often overlooked the opportunity provided by interchange fees on debit cards. Think about initiating a program to reward usage of debit cards as a credit card. Not only do many community banks not encourage the use of debit cards, some are actually restricting their use by running credit checks and requiring high credit scores before a debit card is issued. This misplaced strategy stems from the perspective that treats the debit card as a credit instrument rather than a transaction instrument. Increased usage of the debit card as a credit card will increase interchange fees.
6. Tie debit cards to HELOC withdrawals
Four reasons make the debit-HELOC relationship a sound idea: (1) debit cards are universally accepted, (2) debit card withdrawals from a home equity line of credit are paperless (3) the bank earns interchange fees on transactions and (4) it is less expensive to provide the plastic card than to provide checks.
7. Defer FASB 91 expenses
While it is common practice for banks to defer their origination fees over the term of their loans, few are doing the same for origination expenses. Deferring expenses will permit more fee income to flow to the bottom line.
8. Implement unsolicited loan fees.
Every bank receives requests for loan proposals from unsolicited prospects. Usually, the requests are from existing bank customers who are trying to price-shop interest rates and terms. It can take the lender hours, and, in some cases, days, to prepare a written proposal. For these unsolicited loans, banks can offer to prepare a proposal for a flat fee that represents a reimbursement of the preparation costs. The fee can be structured to depend on how the bank and customer choose to proceed with the application: (1) if the bank makes an offer and the applicant does not accept it, the applicant will forfeit the fee; (2) if the bank approves the application, and the applicant accepts it, the fee will be applied toward the origination fee; and, finally, (3) if the bank declines to offer a loan, the bank will refund the fee. It’s critical that the applicant understands this fee up front, and that the fee is only charged if it appears that other banks have received the same loan request.
9. Apply late charges that prompt payment
When establishing late-charge pricing, banks must consider the maximum allowed by federal and state regulations, as well as the differences between commercial loan and consumer loan late charges. For instance, a 5 percent late charge with a maximum of $50 might be adequate for consumer loans, but it will not provide sufficient impetus for commercial borrowers to pay their loans on a timely basis. Include late charges for fully mature commercial loan balances. This late charge not only affects the borrower’s behavior but also allows the lender to address the delinquency more quickly. Finally, reconsider when late charges are recognized as income. Many banks will assess a late charge after a grace period, but they will not take it into income until the charge has been paid. The problem with this approach is that the late charge can be waived or reversed, but the waivers or reversals are not appropriately monitored. Optimally, late charge waivers and reversals should be in the 8 percent to 12 percent range; if the bank is collecting less than 90 percent of its late charges, the policy should be reviewed.
10. Appoint a director of noninterest income At the end of the day, someone at the bank must be responsible for
Adhering to the maxim that people will support what they help create, a director of noninterest income should also research and monitor the service charge environment, soliciting input from employees and customers as needed about which fees are appropriate— and which ones are not. Having someone actively managing NII will not only bring this critical line item to the forefront of the bank’s management strategy, it will also incorporate the valuable feedback of the bank’s entire staff. Without this relatively senior manager with the authority to monitor, collect, waive (as appropriate) and incent, community banks will struggle with maximizing noninterest income.
As banks have come to depend more on fee income, some consumers have begun to resist fee collection. The key to acceptance of both new and existing fees is emphasizing to customers and employees that the bank charges for its services and accounts based on the level of customer service and support that it provides. Make it clear, particularly to frontline staff, that the bank has researched the market for appropriate service charges and has established its own charges based on market conditions and its unique mix of products and services.
Once fees are in place, it’s important to continually monitor the market so that fee levels remain in touch with the competition. Don’t be afraid to charge the highest price if the service being provided merits it—but don’t charge so much more than the next bank in line as to raise unneeded questions. Create a culture in the bank that teaches employees not only to provide superior service but to value the service that they provide—and customers will value the service, too.