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What actions can banks take in 2025 to boost noninterest income?
Key messages:
- Banks should focus more on boosting noninterest income to compensate for challenges in growing net interest income.
- Using the following strategies may help banks achieve this goal.
- Retail banking: Implementing pricing innovations like service bundling and tiered accounts.
- Payments: Increasing transaction volumes via new channels and expanding value-added services.
- Wealth management: Emphasizing the value of personalized advice, enhancing the customer experience, and revising fee structures.
As discussed earlier, banks’ net interest income will likely face pressure in 2025; deposit costs are expected to remain elevated despite rates coming down. As a result, banks may want to prioritize boosting noninterest income.
For more than 20 years, many banks have worked to diversify revenue through noninterest income.33 However, their success has varied.
The proportion of noninterest income to total income for the US banking industry in the last 10+ years has averaged 35%, with very low overall growth.34 That said, noninterest income product lines require minimal capital and tend to be more profitable than business that relies on interest income.
Banks have several options to grow noninterest income. Among them:
- Increase volume in transactions, 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 strategies to adopt may vary by business type, customers’ price sensitivity and the nature of the demand function, and the regulatory compliance requirements.
Thinking ahead for 2025, banks may want to reevaluate their noninterest income strategies, especially in the following business lines: retail banking, payments, wealth management, and investment banking and capital markets.
Retail banking
For many banks, service charges, such as those for monthly services, overdrafts, nonsufficient funds, and ATM transactions, make up a sizable portion of total noninterest income.35 This revenue stream may be less reliable in the years ahead because regulators seem keen to limit banks’ service charges as part of the broader effort by the Consumer Financial Protection Bureau (CFPB) to “rein in junk fees.”36 For example, the CFPB has proposed a cap on overdraft fees as low as US$3.37
In response, some banks may start charging for formerly free services, such as checking account maintenance.38 However, this comes with some risks: A few banks were forced to roll back such fees due to customer backlash and regulatory scrutiny more than a decade ago.39
So, what new strategies should banks implement to grow fee income in retail banking?
Options include adding services, such as embedded advice; bundling different services; tiering pricing based on account offerings; and developing finer customer segmentation based on data such as lifestyle or spending habits. To achieve these goals, banks will need to gain a deeper understanding of customer needs and price sensitivity, and equip themselves with robust customer data and more effective targeted marketing.
Payments
Fee income generates well over US$100 billion for US payments companies, as per Deloitte’s analysis. A 2022 Federal Reserve study concluded that fees, excluding interchange fees, make up 15% of the total profitability for credit card issuers.40 Payment networks, meanwhile, earn almost all their revenues and profits from fees.41
But increasingly, this business is facing challenges like declining transaction margins and greater regulatory pressure on credit card late fees. Merchants are also fighting back against interchange fees by incentivizing customers to use low-cost payment methods, such as point-of-sale (POS) account-to-account (“pay-by-bank”) payments.42 And, of course, competition from bigtechs and fintechs is also growing.
To boost fee income, payments companies can consider:
- Increasing transaction volumes by enabling seamless and secure transaction flows; and
- Delivering more value-added services to merchants and customers on top of those transactions.
Card issuers can grow co-branded deals from traditional categories, such as travel and groceries, to new spend verticals and channels like in-app gaming purchases and social commerce, respectively, to grow their share of consumer wallet.43
Additionally, working with merchants to enable secure payments and expand options via different instruments can allow payments institutions to alleviate customers’ concerns, process higher transaction volumes, and grow revenues. A recent study by Adyen found that 55% of surveyed customers will abandon a purchase if they cannot pay with the instrument of their choice. On the other hand, in the same survey, 25% of respondents feel more unsafe while shopping today than they did a decade ago due to the perceived rise in payments fraud.44
Payments companies could also help generate additional fee income by offering value-added services; they could, for example, provide accounting services to small and midsize business clients. Meanwhile, payment networks could continue to grow their data and risk management solutions. Mastercard posted 19% year-over-year growth in its value-added services and solutions vertical, to US$2.6 billion in second quarter 2024, which was largely driven by its cybersecurity solutions.45
Wealth management
Wealth management has been a bright spot for many banks in recent years.46 But, it appears, much of this growth has come from increased assets under management, driven largely by overall market gains and net inflows.
There is still room to grow, though: Top banks only have a 32% market share of the total wealth management market globally.47 But these opportunities could be harder to exploit than before, due to increasing competition, commoditization of advice, and widespread customer dissatisfaction with fees.48 Regulators are also focusing their attention on fee transparency.
As a result, wealth managers are facing increasing calls for fee compression, according to the Deloitte Global co-sponsored survey with ThoughtLab, Wealth and Asset Management 4.0 (figure 7). However, this is not happening across the board.49 It is most evident among the more “vanilla” areas of wealth management, such as passive investment strategies, where it is more difficult to justify a high fee.