Fee Income

What Is Fee Income?

Financial institutions make money in just two ways: by collecting interest on loans and by charging fees on services.

Fee income is the revenue taken in from account-related charges. Charges that generate fee income include non-sufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, and account research fees, among others.

Credit unions, banks, and credit card companies are types of financial institutions that earn fee income.

Understanding Fee Income

Interest income is the money that an institution earns by lending money, and includes interest payments on mortgages, small business loans, lines of credit, personal loans, and student loans. Another highly lucrative source of interest income is carry-over balances on credit cards.

Financial institutions also earn a significant portion of their income from fees, which are sometimes called non-interest income. In fact, fee income has skyrocketed since the 1980s.

The deregulation of the banking industry in the mid-1980s offered banks new opportunities to sell nontraditional fee-based services. Noninterest income already accounted for nearly a quarter of all operating income generated by commercial banks. That percentage dramatically increased as American banking institutions diversified into other financial activities including investment banking, merchant banking, insurance sales, and brokerage services.

The average fee charged for a bounced check as of 2019.

Noninterest fee income took off with the Gramm–Leach–Bliley (GLB) Act of 1999, which created a financial holding company (FHC) framework that enables common ownership of banking and nonbanking activities. The GLB Act was the catalyst for eliminating the vaunted Glass-Steagall Act (1933), which prohibited mixing commercial banking with other financial services activities such as investment banking services.

At the same time, commercial banks began to maximize revenues from the fees they collected from their traditional lines of business such as checking and savings accounts.

A Bonanza of Fees

It is estimated noninterest fee income now accounts for nearly half of all operating income generated by U.S. commercial banks.

No matter how low the interest rates on mortgages get, banks can rely on a variety of fees as a steady source of income. The average charge for a bounced check was $30 as of 2019. The big banks collected $11 billion in overdraft fees alone from their American customers in 2019.

On the other hand, the average fee for using an out-of-network ATM withdrawal was $4.72.

Other common fees can include monthly account maintenance fees for checking and savings accounts and minimum balance fees. Special services also incur fees, such as foreign transaction fees, cashier's check fees, and paper statement fees.