October 20, 2014

Customer-account fee revenue plunges at banks

The revenue banks are generating from customer-account fees has dropped sharply, stemming from changes in consumer behavior and new regulations created to protect account holder interests.

Federal Deposit Insurance Corp. figures revealed that after rising every year between 1942 - the first year the organization began collecting data - and 2009, the annual account fees that U.S. commercial banks collected changed direction and started moving lower, falling to $32.5 billion in 2013 from $41.1 billion in 2009, a drop of almost 21 percent, according to The Wall Street Journal.

Fee revenue peaks in 2009
These account fees peaked in 2009, the final year before government regulations restricted banks' ability to collect overdraft fees, The Record reported. In 2010, the Federal Reserve, concerned about protecting consumers, provided new rules requiring banks to offer account holders the option to opt-in for overdraft protection when using debit and ATM cards.

While customer-account fees have been moving lower since 2010, FDIC data indicates bank deposits have surged, and these factors have combined to reduce the share of profits contributed by these fees, according to The Wall Street Journal. While deposit-account fees made up an average of 17 percent of total noninterest income from 2000 through 2009, this portion moved to 14.1 percent in 2013, the lowest since 1942.

Changing demographics
Bankers and analysts have weighed in on this shift, singling it out as an example of how the starkly different regulatory landscape that followed the financial crisis - as well as the rising use of mobile and online banking - have combined to impact how banks operate, the media outlet reported.

Banks are being forced to rethink their revenue streams, as they can no longer think of customer-account fees as an easy way to increase profitability, according to the news source. Jefferson Harralson, a banking analyst at Keefe, Bruyette & Woods, weighed in on the situation, stating that when considering methods to grow their business, banks are not considering fees.

What banks can do
Amid the current situation of falling customer-account fees, one way banks can potentially bolster their income is with loan portfolios. To produce the best possible results, financial institutions must be active managers of their loan portfolios, selling lower-performing investments and buying high quality, high yielding holdings.