U.S. banks have been reporting their quarterly earnings this week and most of the big banks have exceeded analyst expectations. Since interest rates are still low and the economy is still recovering, the income is coming largely from service fees, and industry experts predict that the revenue performance is not sustainable.
The Financial Times reports that among the 64 banks reporting earnings this week, 52 reported a rise on year-on-year fee income. The aggregate for fee income was up 6 percent over the first quarter and 10 percent from the second quarter of 2014. Clearly the profits are coming from fee income. With fee restriction ruling pending this October from the Consumer Financial Protection Bureau (CFPB) it seems banks are taking fee profits while they still can.
According to investment bank Oppenheimer & Co., in 2008 ( the year the Fed cut interest rates from 4.25 percent to 0.25 percent) net interest income for the big banks reached $203 billion. Earnings from this interest income this year are predicted to be about the same for the big six at $209 billion. Non-interest income is another story, having doubled from $98 billion in 2008 to $185 billion this year. Fee income is catching up to interest income as percentage of overall revenue.
However, service fee income won’t be sustainable with pending regulations. Last week, the CFPB celebrated its fourth birthday by getting Citi to pay $770 million in credit-card refunds for improper fee practices. The ruling gives a refund to 9 million credit card customers who signed up for additional deb-protection services they didn’t need – the CFPB ruled that sales tactics were misleading and credit card application language confusing.
So this seems to be the trend for the future. The lending margin squeeze continues and fee revenue is taking a more important role, until the CFPB starts to take a closer look at fee practices. Banks and credit unions are stuck between continued low deposit rates and new rulings that will limit fee income. As the saying goes, when your are getting squeezed by both lending margins and fee income it’s time to turn the lemons into lemonade.
Smart banks and credit unions aren’t going to wait for the fee fines to start falling. Instead, they are going to take a hard look at their competitive market and their service offering and determine where there is more room for legitimate fee revenue. Overdraft protection is coming under scrutiny for potential abuses, but that doesn’t mean that other sources of fee revenue aren’t available. Consumer demand for prepaid cards, peer-to-peer payments, mobile banking, and other new services is on the rise. And there are still ATM fees, wire transfers, and monthly service charges.
However, banks and credit unions are going to have to be more competitive on fees. It’s going to be more important than ever to track fees against competing institutions, geography, and product type, not only to stay competitive but to be sure you comply with the latest regulations. As fees become more important and more competitive they also are going to change more frequently to attract and retain customers.
After October, everything you know about fee revenue is likely to change.
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