What actions can banks take to increase non-interest income in 2025?
Key message:
Banks will need to focus more on growing non-interest income to offset challenges in increasing net interest income. Banks may be able to achieve this goal by using the following strategies: Retail Banking: Implementing pricing innovations such as service bundling and tiered accounts. Payments: Increase transaction volumes and expand value-added services through new channels. Wealth Management: Emphasizing the value of personalized advice, improving customer experience, and rethinking pricing.
As mentioned earlier, banks’ net interest income may face pressure in 2025. Despite falling interest rates, deposit costs are expected to continue rising. As a result, banks may want to prioritize increasing non-interest income.
For more than 20 years, many banks have been working to diversify their revenue with non-interest income33. However, they have had varying degrees of success.
Noninterest income has averaged 35% of total U.S. banking industry revenue over the past decade, with very low overall growth rates.34 That said, non-interest income product lines require minimal capital and tend to be more profitable than profitable businesses. Depends on interest income.
Banks have several options to increase their non-interest income. among them:
an increase in trading volume, customers or customer segments, or new geographic markets; Offer new services to generate additional income. Or implement new pricing strategies, such as charging for services that are currently free, designing new pricing models, or bundling or unbundling services.
The exact strategy you should adopt may vary depending on the type of business, the price sensitivity of your customers and the nature of your demand function, and your regulatory compliance requirements.
Looking ahead to 2025, banks may need to reassess their non-interest income strategies, particularly in business areas such as retail banking, payments, wealth management, investment banking and capital markets.
retail banking
For many banks, service fees such as monthly servicing, overdrafts, non-sufficient funds, and ATM transactions constitute a significant portion of non-interest income35. Regulators may reduce the reliability of this revenue source in the coming years. As part of a broader effort by the Consumer Financial Protection Bureau (CFPB) to “curb junk fees,” banks are capping service fees.36 For example, the CFPB proposes capping overdraft fees as low as $3.37.
In response, some banks may start charging for services that were previously free, such as maintaining a checking account38. However, this comes with some risks. Several banks were forced to lower such fees more than a decade ago due to customer backlash and regulatory scrutiny. .39
So what new strategies should banks implement to increase fee income in retail banking?
Options include adding services such as embedded advice. Bundle different services together. Tiered pricing based on account offerings. Develop more detailed customer segmentation based on data such as lifestyle and spending habits. To achieve these goals, banks must have a deeper understanding of customer needs and price sensitivities, and be equipped with robust customer data and more effective targeted marketing.
payment
According to a Deloitte analysis, fee income generates well over $100 billion for U.S. payment companies. A 2022 Federal Reserve study concluded that fees, excluding interchange fees, account for 15% of credit card issuers’ total revenue40. Payment networks, on the other hand, derive almost all of their revenue and profits from fees41.
However, the business is increasingly facing challenges such as declining trading profits and increasing regulatory pressure on credit card late fees. Merchants are also fighting back against currency exchange fees by encouraging customers to use lower-cost payment methods, such as point-of-sale (POS) account-to-account (“bank payment”) payments.42 . And of course, competition from big tech and fintech is also increasing.
To increase fee income, payment companies can consider:
Increase transaction volume by enabling seamless and secure transaction flows. In addition to these transactions, we provide higher value-added services to sellers and customers.
Card issuers are increasing their share of consumer wallets by expanding co-branded transactions, from traditional categories like travel and groceries to new spend areas and channels like in-app game purchases and social commerce. You can43.
Additionally, by working with merchants to enable secure payments and expand options through a variety of means, payment institutions can reduce customer anxiety, process more transaction volume, and increase revenue. You can. A recent study by Adyen found that 55% of customers surveyed would abandon a purchase if they were unable to pay for a selected product. Meanwhile, the same survey found that 25% of respondents feel less secure shopping today than they did 10 years ago, due to a perceived increase in payment fraud.44
Payment companies can also generate additional fee income by providing value-added services. For example, you can provide accounting services to small business customers. Meanwhile, payment networks are likely to continue expanding their data and risk management solutions. Mastercard posted revenue of USD 2.6 billion in the second quarter of 2024, an increase of 19% year-over-year in the Value-Added Services and Solutions segment. This is primarily due to the company’s cybersecurity solutions45.
asset management
Wealth management has been a bright spot for many banks in recent years.46 However, much of this growth appears to be due to increases in assets under management, primarily through market-wide gains and net inflows.
However, there is still room for growth. Top banks only have a 32% market share of the total global wealth management market47. However, increased competition, the commoditization of advice, and a broader range of clients may make it more difficult to take advantage of these opportunities than before. 48 Regulators are also focusing on price transparency.
As a result, asset managers are increasingly demanding fee compression, according to research conducted by Deloitte Global in collaboration with ThoughtLab and Wealth and Asset Management 4.0 (Figure 7). However, this is not happening across the board.49 This is most evident in more “vanilla” areas of asset management, such as passive investment strategies, where higher fees are more difficult to justify.
