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Finding Wealth in Non-Interest Income

September 7, 2017
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The banking industry has seen its share of challenges over the past decade. Those challenges continue to be significant; especially as it relates to generating revenue. One area in particular is in growing non-interest income, thanks to challenges from the regulatory environment, changing consumer behaviors, and technology. As an industry, we need to optimize our overdraft and interchange income, as well as find new non-interest income opportunities. One opportunity lies within wealth management, or Investment Services.

The average institution in Raddon’s Performance Analytics program recognizes 31.7 percent of its revenue from non-interest income. Of that income, 49.7 percent is generated from fees. This could range from origination fees, minimum balance requirement fees, late fees, NSF/Overdraft fees, early withdrawal penalties and other product usage fees. The remaining income includes interchange, insurance services, Investment Services and sold mortgage servicing.

How reliant are you on interchange and NSF/Overdraft income to support your overall earnings? Based on Raddon’s data, we see that institutions require 23 percent of their non-interest income to be recognized from NSF/Overdraft income, in general. That revenue stream has been declining for the last 10 years. Diversifying this revenue stream is critical to sustainable growth.

Investment Services is a viable option for many institutions to help sustain and grow non-interest income. There is a great amount of opportunity to establish these services within existing customer base. Among Raddon’s Performance Analytics participants, 70 percent of institutions offer Investment Services, yet of those institutions offering these services, only 2.7 percent of their households are participating, on average. These institutions are able to generate nearly $700,000 in annual revenue.

How many of your consumers are aware that you offer Investment Services? Of those that are aware of your services, how many of them would trust investment advice coming from a community bank or credit union? When Raddon surveyed 2,500 high income households, we found that 63 percent trusted or totally trusted advice from a Financial Planner, 48 percent trusted a Bank Investment Advisor, and 46 percent trusted a Credit Union Investment Advisor. Yes, there is steep, brand equity competition from established mutual fund and investment firms.

In order for community banks and credit unions to grow this channel, they must first increase awareness that they offer Investment Services. Think about your value proposition, your unique brand, and how Investment Services align. Consider messaging that is centered on your value proposition, followed by demonstrating the level of expertise the institution offers by way of customer testimonials. Give Investment Services the same level of visibility as your other products and services. Many institutions have a formalized new customer Onboarding program. How many of you include Investment Services messaging as part of those onboarding efforts?

Think about your Investment Services offerings and who you are currently targeting. What type of consumer are your financial advisors thinking of? What type of commission-based pay are your financial advisors working from? There is a particularly strong opportunity to grow Investment Services relationships among consumers under the age of 35, earning less than $50,000 annually. Based on last year’s Raddon Research Insights study, this select group of younger consumers has a deep concentration of investment product usage today. From what I have seen throughout my travels, across the country, there is a substantial gap between the information presented by this research and what our Investment Services strategies are focusing on.

I recommend building a Novice Investor program to help supplement the declining NSF/Overdraft non-interest income. Think about structuring Junior Financial Advisor compensation with more salary-base pay that rewards relationships with younger consumers that have fewer assets to invest with. When you attract this younger, millennial group you are building the foundation for an even greater investment relationship down the road; an even greater primary financial institution relationship.

Sustaining non-interest income is the strategy, while growing financial relationships is the goal. That is when you experience the true meaning of wealth from non-interest income.