With margins compressed and prospects of rate hikes waning, banks are once again becoming laser-focused on fee income to drive overall revenue growth. According to a survey of more than 200 bank executives conducted by Earnix and SourceMedia (publisher of American Banker), 74% mentioned growing fee revenue as one of their biggest challenges for 2016. Service charge fees have recently come under regulatory scrutiny, so with regulatory headwinds, how do you grow fee income?
Recent fee changes, including the transition from Free to Fee have left many banks challenged for checking and fee income growth. 67% of bankers mentioned that fee income growth is a function of checking growth, and their strategy to grow fee income in 2016 and beyond was through checking acquisition. This strategy, although effective, is going to become more competitive in the coming years as banks look to grow their way out of fee income declines. This will drive the acquisition cost of the mass market client up, eventually to a point of unprofitability.
Another opportunity to increase fee income is to increase fees. When considering fee changes, banks generally follow the competition. If the bank across the street raises fees, we raise fees. Surprisingly, less than 20% of banking execs use any kind of behavioral models to understand long term client impact of any fee pricing changes. Banks have made great strides in using analytics and behavior models in interest rate optimization but haven’t made the same progress in fee optimization.
Fortunately, behavior models can also be applied to fee pricing changes to better understand the impact of fees, and the elasticity of fees on client segments, including fee paying segments. Understanding consumer behavior and their pressure points can be valuable in understanding how clients value the services for which they pay fees. This can help determine the right price to maintain revenue, attract new clients and retain valuable fee paying relationships. At Earnix we can help optimize fee income performance both on the existing portfolio, and on checking acquisition campaigns. Optimization modeling and Earnix software can predict long term impact on fee changes, including overall revenue and attrition. As mentioned in our previous blog, while bankers are clearly reluctant to assume that rates will rise quickly, they are at the same time counting on these rate rises to help meet their interest income growth goals. Given that interest margins are unlikely to increase significantly in the coming year, focusing on fee income optimization is a clear path to revenue growth.