Interest Rate Delays Mean Continued Dependence on Non-Interest Income

by tom 28. August 2015 22:50

The dip in the stock market this week may spell an indefinite postponement of any interest rate hike by the Federal Reserve, but according to analysts no one was really counting on a change in interest rates to affect bank fiscal performance for the months ahead. As reported in American Banker this week:

“Analyst forecasts of net interest margins, based on data released before the market correction, were for increases at just 44% of banks between June 30, 2015, and yearend 2016, according to an analysis by FIG Partners released this week. FIG looked at consensus NIM estimates for 222 banks with market capitalizations of more than $150 million.”

Even if the Fed were to raise rates, they would have to raise them by at least 100 basis points to havimagee any impact on NIM. Given the Fed;s history, they are not likely to abandon their common practice of gradual rate increases in favor of a jump that significant.

Clearly the banking industry is going to have to rely on non-interest income for the time being. This will be part of a new trend for financial institutions. The FDIC reported that banks earned $39.8 billion in the first quarter, up 6.9 percent from the previous year. Of that growth, 4.6 percent was made up of non-interest income. For community banks, non-interest income increased 17.7 percent year-on-tear, while non-interest expenses rose 5.9 percent.

Obviously, the banking industry is becoming more reliant on non-interest income, including service charges, loan origination, NSF, and overdraft. Consumers are still rebelling against fees, especially from mid-sized banks and credit unions. Data gathered in January 2014 showed that  48 percent of consumers left a financial institution due to fees; more than twice the number who left for bad services (21 percent), which was the second highest cause cited for customer dissatisfaction.

In a market with flat interest rates, it’s clear that non-interest income has become a necessary, and lucrative, resource for financial institutions. The challenge is to set the rates as competitive rather than punitive. With increased pressure from the Consumer Financial Protection Bureau (CFPB) and pushback from consumers who are now shopping fees as well as deposit interest rates, banks and credit unions have to start be more competitive and creative about how they earn non-interest income. They can no longer set fees once a year and assume they can compete. Financial institutions are going to have to watch the competition more closely to follow how they handle fees, and they are going to have to make sure their own fees are not only competitive but align with new regulations.

Some banks are already adjusting their fee structures in anticipation of the pending October ruling by the CFPB on overdraft rates. There are rumors that the CFPB is going to delay making any decision about overdrafts until 2016, perhaps in hopes that the banking industry will clean up its own fee practices. In any case, the war for fees is heating up and the smart competitors are going to start finding new and more creative ways to optimize non-interest income while charging fees that align with the market.

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Overdraft | Fees

Weekly Term Accounts APY Spread and Premium Index–Aug 24

by tom 24. August 2015 21:56

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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National Pricing Indicator | CD rates | Building Deposits

More Banks Cashing in on Cash! More Fees Coming from “Smart Safes”

by tom 20. August 2015 15:41

With the increased focus on online transactions, prepaid cards, smart credit cards, and other new transaction technologies, banks and credit unions are overlooking an obvious area where they can earn more fee revenue – cash! For retailers, restaurants, and various kinds of merchants, cash is still king, and offering a secure and convenient way to deposit cash is a service that business find is worth paying for.

Smart safes or “cash recyclers” are growing in popularity with businesses because they are a safe and easy way to secure cash transactions. The concept behind the smart safe is simple enough. Smart safes installed at stores accept cash from the day’s transactions and automatically count it and credit the cash to the company’s account. The actual cash is collected periodically by armored car, but the retailer or restaurant doesn’t have to wait for credit on the cash deposit since the smart safe acts as an extension of the bank. Cash recyclers are similar, but allow store managers to withdraw cash to set up cash registers for the day’s business; the smart safe tracks the amount of money withdrawn as well as deposited.

Cash is still king in imageretail. Cash is still the preferred method for small transactions, especially with Generation Y consumers. The number of cash transactions is actually about 40 percent of retail business, although cash makes up about 14 percent of the overall transaction revenue. The average value of a cash transaction is $21 compared to $44 for debit cards and $168 for checks.

Retailers like American Apparel are finding smart safes also substantially reduce theft and improve accounting processes. Using smart safes, American Apparel stores now can reconcile their sales reports faster than before, and they have reduced internal cash theft and variables by 98 percent. They also reduced counterfeit bill acceptance by 45 percent.

Since cash transactions are still popular with consumers, businesses are looking to their bankers for more secure ways to manage cash transactions. According to John Bultema, executive vice president of Fifth Third Bank’s treasury management division, smart saves are “our fastest-growing product in treasury management. Fifth Third currently has 8,500 smart safe devices installed in customer stores and expects to have 10,000 in place by the end of 2015. One source estimates that smart safes generates about $30 million per year, with is about 1 percent of Fifth Third’s non-interest revenue.

The cost of handling cash for retailers more than makes up for the cost of a smart safe service. PNC Financial Services says their smart safe business rose 60 percent last year. And regional banks like KeyCorp are also starting to offer smart safes to retail customers. Regional banks and banks with rural customers are seeing more demand for smart safes, since it is less convenient to arrange for daily cash pickups.

It’s no coincidence that KeyCorp and PNC reported a rise in fee income of nearly 10 percent last quarter. Smart banks are looking for other sources of noninterest income, and clearly smart safes are proving to be a smart investment.

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Interested in the latest product trends from banks and credit unions? Be sure to signup for ProductBuilder Alert, our weekly sampling from our ProductBuilder database of financial product ideas. Here’s a sample from this week:

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Banking Trends | Business Banking | Fees

Weekly Term Accounts APY Spread and Premium Index–Aug 17

by tom 17. August 2015 16:56

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

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Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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New Mortgage Competition Means Declining Lending Revenue

by tom 13. August 2015 20:18

Banks and credit unions are continuing to feel the revenue squeeze from new directions. We have already talked about the the threats to fee revenue and the market is still waiting for the Federal Reserve to act on interest rates. A recent article from Bloomberg explains how new competitors are taking over mortgage lending as well.

According to Bloomberg, new players entering the mortgage market are forcing down origination fees, even though compliance costs continue to rise. According to research from Bankrate, in the last 12 months mortgage origination fees have dropped 22 percent to an average of $1,041. Dodd-Fimagerank has a hand in the profit reductions. Banks reported an average profit per loan of $1,447, which is down from the $1,654 reported for the same period in 2012. During the second quarter of this year, Wells Fargo, JP Morgan Chase, and other large banks reported a drop in mortgage revenue.

In June, 55 percent of mortgage lending was underwritten by lenders other than traditional banks. That’s double the number of non-traditional mortgage lenders than reported at the end of 2012. Even at the height of the mortgage boom in 2006, non-banks only had about 30 percent of the mortgage market. The new mortgage players include peer-to-peer lenders and new online firms. While the competition is good for consumers, these new players lack the resources to ride out another economic downturn; if homeowners default the taxpayers will end up picking if the tab.

With the housing market in the rebound, more consumers are looking to buy new homes and homeowners are looking to refinance, and even though mortgage marketing continues to be aggressive, banks are no longer the first consideration for mortgage seekers. The Consumer Federal Protection Bureau (CFPB) says about half of borrowers don’t bother to shop for a mortgage, assuming all rates and underwriters are basically the same. However, the difference in closing costs can be substantial, and more consumer education is going to be needed to get more home buyers to talk to their banks about mortgages.

The drop in mortgage revenue also highlights banks’ and credit unions’ ongoing challenge to find new sources of income. American Banker reports that sub-prime lending made up only 8 percent of mortgages last quarter so other, more attractive incentives are clearly needed. To remain competitive on mortgages, financial institutions are going to have to get creative with terms, relationship bundles, and other packages that demand consumer attention.

What are your thoughts about getting home buyers to come back to banks and credit unions to talk mortgages and refinancing? Are you seeing a downturn in your home lending? If so, how do we turn things around?

Your comments are always welcome.

The Latest from ProductBuilder Alert

Interested in the latest product trends from banks and credit unions? Be sure to signup for ProductBuilder Alert, our weekly sampling from our ProductBuilder database of financial product ideas. Here’s a sample from this week:

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Loans | New Products | In The News | Fees

Weekly Term Accounts APY Spread and Premium Index–Aug 10

by tom 10. August 2015 18:52

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

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Free Checking Can Mean More Revenue for Banks

by tom 7. August 2015 12:49

If you have been a regular visitor to our blog, then you know that ProductBuilder is our database of the latest product ideas from banks and credit unions. One of the great things about maintaining a product watch product is that we get to identity trends, or at least brilliant ideas that should be trends. This week we noted that BBVA Compass was touting a new product called ClearChoice Checking, a build-your-own checking account. Given the recent complaints from consumers about overdraft protections and unwanted fees, the concept of a roll-your-own checking account is innovative in today’s market.image

The concept of a build-your-own-account isn’t really new, but it is unusual. Most banks bundle fees for services with different kinds of checking accounts and just create more options. BBVA is offering a basic free checking account, and then offering additional services a la carte. As Chris Nichols, Chief Strategy Officer for CenterState Bank Central Florida, observes:

“The advantage is clear in that you give the customer the option to pick and choose what account attributes would give them the most value. The downside is that management loses some control over cost and account performance, plus it is harder operationally. The biggest benefit for most community banks is that it moves the bank from being transactional to relationship focused.”

As we have noted in the past, customers want service. By giving them free checking, BBVA is delivering that service and changing the rules of the game, asking customers to engage and make choices about their bank relationship. When you break BBVA’s ClearChoice Checking options down, most of the standard options are free, such as online banking, mobile banking, alerts, paper or electronic statements, and a Visa check card. The value added services are available, but for an additional fee. However, customers have to engage with the bank and make a conscious decision to accept those fees.

Too many banking products include hidden charges, which leads to consumer backlash. By establishing a relationship with customers you are truly asking permission rather than asking them to read the fine print. And while it may be true that you have less control over fee revenue projections, you do get other benefits. As Nichols points out, you get to consolidate your checking products into one or two options, a basic free account and a value-added account. This means less to manage, and less to market. And customers are happier. Nichols estimates that customers are able to receive a 20 percent to 40 percent discount on ancillary checking products and the bank doubles its customer retention rate. By increasing customer retention and focusing on relationships rather than transactions, net return on equity jumps from 30 percent to 80 percent as customers use more products. 

Giving customers more choice and more control over their financial products is sure to win the hearts and minds of consumers, sand increase profits. As the financial climate continues to evolve as fees dominate and deposit rates are poised to rebound (any day now…), maintaining a loyal customer base is the best defense against market uncertainty.

The Latest from ProductBuilder Alert

Interested in the latest product trends from banks and credit unions? Be sure to signup for ProductBuilder Alert, our weekly sampling from our ProductBuilder database of financial product ideas. Here’s a sample from this week:

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Building Deposits | Fees | ProductBuilder Alert

Weekly Term Accounts APY Spread and Premium Index–Aug. 3

by tom 3. August 2015 16:11

American Banker and Market Rates Insight feature a weekly APY Spread and Premium indices to provide pricing executives with greater insight into national pricing trends and practices.

APY Spread Index

The APY spread is a simplified form of a standard deviation. It measures the variance between the high and low ends of the price range to the average, which indicates whether the APY of a particular CD is closer to the low or the high end of the pricing spectrum.

image

Premium Index

Premiums are used as the main vehicle to drive balances towards the most desired deposit products, and are an indication of the capital strategy of each individual institution. This week’s highest and lowest national premiums:

image

Tags: , , ,

National Pricing Indicator | CD rates | Deposit Products

Analysts See Fee Revenue as Short-Term Windfall for Banks

by tom 30. July 2015 13:26

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.image

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.

The Latest from ProductBuilder Alert

Interested in the latest product trends from banks and credit unions? Be sure to signup for ProductBuilder Alert, our weekly sampling from our ProductBuilder database of financial product ideas. Here’s a sample from this week:

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In The News | Fees | Banking Trends

ProductBuilder Alert: MidFirst Bank Offers PeoplePay

by Tom 29. July 2015 14:04

Here us a snapshot from our ProductBuilder database, which contains more than 18 years of financial product data. Every week we share the latest financial product ideas in our ProductBuilder Alert. And we don’t just watch the top tier banks, we track activity among mid-market and community banks as well.

We offer ProductBuilder Alert for free – just click here to subscribe.

Item No

Pub Date

Bank Name

State

Phone

Source

More Info

More like this

5899

7/29/2015

REDWOOD CREDIT UNION

AK

(707) 545-4000

MRI Survey Specialist

 

 

Redwood Credit Union has expanded its RedwoodRewards Plus debit/credit rewards program with new options. In addition to redeeming points for their own use, members now can donate their points to any one of 250 national charities. Members also can use their points to instantly download eGift cards for preferred retailers.

5900

7/29/2015

AMERICAN TRUST BANK OF EAST TENNESSEE

AK

866.546.8273

MRI Survey Specialist

 

 

To help customers invest for better yield, American Trust Bank of East Tennessee is offering customers three Raise Your Rate CD options with rate bump options – an 11-month CD with one-time raise the rate, a 36-month CD with a one-time raise the rate, and 60-month with a two-time raise the rate.

5901

7/29/2015

NASHVILLE POST OFFICE CREDIT UNION

AK

(615) 871-4221

MRI Survey Specialist

 

 

Nashville POCU is offering a Skip-A-Payment special for the summer months. Members can skip a loan payment during July, August, and September and a processing fee of $25 will be charged for each loan; the amount is deducted from a savings or checking account or paid by cash or check. Interest continues to accumulate and credit card and real estate loans are excluded.

5902

7/29/2015

GOODYEAR EMPLOYEES CREDIT UNION

MI

330.724.9391

MRI Survey Specialist

 

 

Goodyear is offering its credit union members an emergency loan – borrow $500 to cover emergency expenses with no credit check and no paystub.

5903

7/29/2015

VINTON COUNTY NATIONAL BANK

OH

(800) 542-5004

MRI Survey Specialist

 

 

Vinton County National is offering an online-only CD special – a double-bump, 24-month CD at a 0.85% APY.

5904

7/29/2015

MIDFIRST BANK

AK

(888.643.3477)

MRI Survey Specialist

 

 

MidFirst has introduced People Pay, a new peer-to-peer payment system. Users simply enter the recipient’s contact and payment information and they are notified that a payment is waiting from the MidFirst secure payment portal. Each time you use People Pay customers are entered in a sweepstakes to win a $500 Visa gift card.

If you have any product ideas you want to share, send them to research@marketratesinsight.com.

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