Insight Report: Will People Pay for Fee-based Banking

Synopsis
The reliance of banks on fees and commissions increased following the latest financial crisis in both developed and emerging economies. Due to a weak demand for borrowing and low interest rates, banks have increased their focus on non-interest revenue. The proportion of fees and commission income in the total banking revenue however, varies according to country. The rising or decreasing proportion of fee income reflects the difference in consumers' preferences in different countries, the inherited pricing structure imposed by the banks and the country's economic cycle.

Although, consumers have strong preference for free basic banking services, evidence from different consumer surveys suggest that consumers are willing to pay for products that add value and convenience to basic banking services. Customers are willing to pay for interest-free emergency funds, automatic direct debits, increased grace periods on due payments, investment services and premium reward-associated accounts and cards.

Traditionally banks have generated their fees and commissions from overdrafts, unarranged overdraft fees, annual fees on accounts and cards, automatic teller machine (ATM) fees, interchange fees, loan processing, cross-border transactions, trade and capital market services and wealth and trust management services.

However, changing regulatory dynamics and the competitive landscape have forced banks to realign their product portfolio and pricing strategies to generate more fee-based income over the next five years. Banks have begun to increasingly focus on launching new products and services that provide alternative sources of fee income. This includes mobile payment solutions that allow convenient person-to-person (P2P) payments, international remittances and expedited payment services.

Summary
The report provides insights into the fee-based income of banks:

 It offers a global snapshot of current market dynamics of fee- and commission-based income for banks, and the future outlook.

 It explores the question of whether customers are paying for current/checking accounts. 

 It provides insights into the impact of regulations on banks' ability to generate fee income.

 It captures trends into banks' revenue structures in key markets. 

 It explores the importance of overdrafts and transaction banking as drivers of banking revenue.

Scope
 This report covers trends in bank revenue in key markets since the subprime crisis.

 It covers country- and bank-level information on banks' interest and non-interest income.

 It captures trends, challenges and drivers behind the dynamics of fee-based income for banks.

 It covers key components of fee-based revenue, including transaction banking, overdrafts, cards and payments and fee income generated from current/checking accounts.

Reason To Buy
 Gain insights into potential products and services that generate fee-based income.

 Develop an understanding of whether a traditional approach can still generate sustainable fee income.

 Gain insights into the current and future sector dynamics of fee-based income.

 Understand emerging trends in banking regulations.

Key Highlights
 Despite a decline in overdraft revenue in major economies such as the US and the UK since 2009, overdraft continues to remain a major source of fee-based revenue for banks. Banks have adopted several strategies to maintain income from overdrafts. This includes increasing fees on using overdraft facilities and increased focus on marketing overdrafts as part of current account offering.

 Consumers have become increasingly value-driven and are looking for benefits beyond standard products and services. This has led to customers being less willing to pay for services which they perceive as basic. However, consumers have demonstrated a willingness to pay for value-add services which has provided banks with new opportunities to earn additional fees and commissions from innovative products and services.

 Diversification in terms of products and services is expected, as banks increase their focus on non-interest revenue to cushion pressure on interest revenue and subsequently their total income. The increased use of large scale data analytics is likely to help banks identify emerging consumer needs and new product opportunities to serve the market demand. 

 Following the latest global financial crisis, banks have cut down on their fee-free offerings, including current accounts and the associated services. This trend has been driven by changing regulatory landscape with regards to interchange fees, product fee restrictions and various consumer protection laws, all leading to increasing pressure on the profit margins of financial institutions.

 As profits from investment banking continue to remain under pressure following 2009, transaction banking has gained prominence as a key driver of revenue. Income from transactions accounts for around 25% of total revenue generated by banks across the world and provides up to 60% returns on equity - making it a key driver of non-interest income.