The Future of Fee Based Banking Income

Date: April 30, 2012
Pages: 84
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Publisher: GlobalData
Report type: Strategic Report
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The Future of Fee Based Banking Income
  • This VRL report examines the growth of fee-based products as an alternative source of revenue for banks
  • It looks at the consequences of controversies over fee-based income schemes like Payment Protection Insurance
  • It considers how any banks introducing new fee-based strategies must be careful to consider customer protection and adhere to new regulation rules
  • It looks at the difficulty in persuading European consumers to switch from ‘free’ banking.


This report examines the market for fee-based retail banking products and services in the US, UK and Europe. Fee-based income is the revenue that banks earn from sources such as monthly account fees, and fees for late credit card payments or unauthorised overdrafts. Retail and commercial banking makes a significant contribution towards the overall income of some of the world’s biggest banks in comparison with investment banking activity, and the contribution of the former looks set to continue in 2012. The other main source of income earned by retail banks is from interest payments on products like personal loans and credit cards. Both supply and demand for these types of products are in decline. The number of credit cards in circulation fell by nearly one million in 2011 y-o-y due to reduced demand for the product on the behalf of consumers, and reduced supply due to the tighter lending criteria. The decline in unsecured lending will reduce the amount of interest income earned, and this is likely to lead to a continued increase in lending interest rates, regardless of the level of the UK base rate.

  • Legislation is squeezing bank retail margins just at a time when they need to maximise profitability. This report examines and discusses the current moves being taken by banks in response to dictats by regulators
  • As is so often the case, what happens in the US tends to gravitate elsewhere so this market is examined in detail
  • It is no longer just a providers market so the expectations of consumers across Europe are considered
  • Bancassurance will make an increasing contribution to banking income and this is assessed

Reasons To Buy
  • Understand the growing importance of generating fee-based income
  • Move away from reliance on interest income as a main source of revenue
  • Gain an in-depth understanding of how regulatory pressures will affect fee-based products
  • Gauge consumer attitudes to fee-based products
  • Measure the cost of compensation schemes

Key Highlights
  • Aiming to increase the amount of income from fee based products and services remains challenging from both a regulatory and market perspective
  • There is a lack of willingness on behalf of consumers to pay additional fees either for cards or advice which they consider should be free
  • The regulatory environment is becoming more restrictive, so banks will need to seek out new avenues of revenue
  • Expect to see more outsourced income generation streams, but they will only succeed if they represent value for money to the consumer

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Executive Summary
List of figures
List of tables


1.1 Non-interest banking income
1.2 A broad range of products offer the opportunity for banks to generate fee income
1.3 Regulatory changes will increase the importance of fee-based income
1.4 Durbin Amendment had a negative impact on the fee income generated by US banks
1.5 Modifications to Regulation E will further reduce fee-based income
1.6 PPI regulation will have a significant impact on UK retail bank fee-based income
1.7 Change in the structure of UK banking will impact negatively on consumers
1.8 Regulation in Europe will reduce the income earned from commission-based sales
1.9 Tighter regulation will increase the importance of the branch network
1.10 Summary


2.1 Durbin Amendment to the Wall Street Reform and Consumer Protection Act of 2010
  2.1.1 Recent developments after Durbin Amendment went into effect
  2.1.2 Impact of Durbin Agreement on banks profitability
2.2 CARD Act has changed the way in which card issuers operate credit cards
  2.2.1 Revolving credit is declining in popularity
  2.2.2 Increases in APRs
  2.2.3 Credit Card Delinquencies end 2011 nearly 5% lower than last year
  2.2.4 Increasing offers via direct mail
2.3 New rewards schemes, but at a price
2.4 Introductory periods for balance transfers will be extended
2.5 Legal rulings impact on Credit card industry
2.6 US Banks introduced additional fees
2.7 Monthly fees on bank accounts can be avoided, but only by the affluent
2.8 Loyalty and rewards programmes have been scaled back
2.9 Fee-based income is an increasingly important source of income in US banks
2.10 Banks are likely to turn to prepaid cards in order to avoid interchange caps
2.11 The new, post-Durbin, regulatory landscape
  2.11.1 Processes in place
  2.11.2 Fifth Third first
2.12 Summary


3.1 UK retail banks will be ‘ring fenced’, but reform will not take place until 2019
  3.1.1 Strengthening core capital and primary loss-absorbing capacity
  3.1.2 The separation of retail banks from investment activities
  3.1.3 Increasing competition between UK banks
  3.1.4 New entrants in the UK Banking sector
3.2 A more secure banking sector, but at what cost to consumers?
3.3 Credit cards are in decline in the UK, but interest income is rising
3.4 UK household debt will decline as a percentage of GDP by 2015
3.5 Focus on cost management has not gone away in UK banks
3.6 Structure of banking income does not reflect market trends
  3.6.1 Interest rates on personal lending products are increasing
3.7 PPI is likely to cost the UK banking sector £9bn in total
  3.7.1 Consumers are being warned to avoid ‘no win no fee’ PPI claim companies
  3.7.2 Income Protection will replace PPI in some cases
  3.7.3 The Financial Control Authority will be on the look-out for the next PPI scandal
3.8 UK Package current account market
  3.8.1 Packaged accounts overtake standard current accounts for the first time
  3.8.2 UK Package current account market fees approach £2 billion a year
  3.8.3 LSG forecasts Packaged Account market to reach 30% by 2020
  3.8.4 FSA investigates the content and selling of packaged accounts
  3.8.5 Considerable scope for development of the packaged accounts market
  3.8.6 Key Findings of the ABI Quarterly Consumer Survey 2011Q4 – Package Accounts
3.9 Summary


4.1 Regulatory reforms will impact on the whole of Europe
4.2 SEPA Compliant transfers still lack depth
  4.2.1 Banks and corporate initiatives to migrate to SEPA in recent past
4.3 Persuading European consumers to pay for financial advice will be a challenge
4.4 European consumer satisfaction with their main bank varies considerably by country
4.5 Bancassurance will make an increasing contribution to the income of European banks
4.6 Who owns the risk where bancassurance models are concerned?
4.7 A change in focus for bancassurance?
4.8 Regulators are demanding ‘unfair’ fee refunds in European countries
4.9 ‘Free’ bank accounts are usually accompanied by conditions in Germany
  4.9.1 Credit cards are not popular in Germany, but overdrafts are used more frequently
  4.9.2 German consumers can now reclaim fees for unsolicited statements
4.10 Fee-fixing in French cheque processing has been brought to an end
4.11 Tighter lending criteria in France will put further pressure on fee income
4.12 The end of commission-based advice in Europe
4.13 Quirin Bank’s new approach to investment advice and wealth management
4.14 Summary


5.1 Despite its advantages, outsourcing to 3rd party suppliers is not risk-free
5.2 Affinion Group Inc. – a way of generating fee income for US banks?
5.3 CPP Group Plc – providing ‘life assistance’
5.4 Could identity protection products follow the same path as PPI?
5.5 Summary


6.1 Regulation will create a tougher operating environment for banks in 2012 and beyond
6.2 Durbin Amendment significantly reduced US bank fee income
6.3 CARD Act and changing consumer preferences will impact negatively on credit interest and fee income
6.4 PPI complaints doubled in 2011
6.5 Fees are driving consumers to other means of managing their money
6.6 Fee income generation will be a challenge for UK banks
6.7 Consumers expect protection from the regulator
6.8 Focus will turn to alternative income sources
6.9 Summary


Table 1: US bank fees and charges
Table 2: Prepaid cards launched in the US
Table 3: The increasing cost of UK credit card borrowing, May 2011
Table 4: PPI Premiums as a percentage of loan values, 2005
Table 5: UK banks’ provisions for PPI claims - 31st December 2011
Table 6: Package accounts offered by leading banks to retail banking customers in the UK
Table 7: Commercial bancassurance models
Table 8: Examples of conditional free banking in Germany
Table 9: Changing payment preferences in France 2006-2010
Table 10: Affinion’s US product category portfolio 2009-2010 (m)
Table 11: CPP’s UK product and service range


Figure 1: Income from investment and retail banking activity amongst the world’s biggest universal banks, 2010 ($bn)
Figure 2: Changes in interest and non-interest income 2005-2010
Figure 3: UK Consumer concerns when deciding whether or not to buy a financial services product 2011
Figure 4: The decline of free vs. fee-based bank accounts in the US January-July 2011
Figure 5: Importance of the role of branch networks 2005 -2010
Figure 6: Reasons for defection from bank 2011
Figure 7: Level of Agreement that Banking customers have Trust and Confidence in the Banking Industry (%), 2011–2012
Figure 8: US credit card company fee income 2003-2010 ($bn)
Figure 9: Average US credit card rate increases 2008-2011 (%)
Figure 10: US personal lending annual percentage change 2006-2010 (%)
Figure 11: US personal lending annual value change 2006-2010 (%)
Figure 12: US consumers intending to switch bank accounts, depending on level of fees
Figure 13: Bank of America interest vs. non-interest income 2006-2011 ($m)
Figure 14: Wells Fargo interest vs. non-interest income 2006-2011 ($m)
Figure 15: JP Morgan Chase interest vs. non-interest income, 2008-2011 ($m)
Figure 16: Overview of the Independent Commission on Banking (ICB) report
Figure 17: Proportion of UK consumers that have difficulty in comparing financial products, 2011
Figure 18: The decline of credit cards in the UK 2000-2010 (m)
Figure 19: UK effective interest rates on consumer credit
Figure 20: Credit cards in circulation and outstanding balances
Figure 21: Number of UK debit and credit card purchases 2010-2020 (bn)
Figure 22: Value of debit and credit card purchases 2010-2020 (bn)
Figure 23: Total UK lending (£bn)
Figure 24: UK unsecured lending 2003-2013F (bn)
Figure 25: Credit card write-offs as a percentage of outstanding loans, 1995 - 2011
Figure 26: RBS interest vs. fee-based income 2008-2011 (£m)
Figure 27: Barclays interest vs. non-interest income 2008-2011 (£m)
Figure 28: Lloyds TSB interest vs. non-interest income 2009-2011 (£m)
Figure 29: Volume of PPI complaints received by the FOS by large banking group, H1 2011
Figure 30: Fee charged by claims management companies to reclaim PPI fees
Figure 31: Proportion of complaints upheld by the FOS 2009-2010
Figure 32: Short-term IP policy coverage
Figure 33: How the Package account market has changed since October 2006
Figure 34: Average Monthly fee for a UK Packaged account since February 2007
Figure 35: “Do you have a bank account with added insurance products, such as travel insurance, mobile phone insurance etc?
Figure 36: “What was the main reason you chose that bank account?”
Figure 37: “Which of these benefits have you claimed on in the last year? Please select all that apply.”
Figure 38: “Why not?” [In response to Figure 3.24 “Do you have a bank account with added insurance products…?”]
Figure 39: Percentage of European consumers that are willing to pay for independent advice 2010
Figure 40: European consumer satisfaction with their main bank 2010
Figure 41: Proportion of European consumers that have changed / plan to change their main bank 2010
Figure 42: Reasons for attrition amongst European banking consumers 2010
Figure 43: Change in credit card volumes in European markets 2009-2010
Figure 44: Market share of bancassurance in Italy 2011
Figure 45: Credit cards in issue in Germany 2007-2010 (m)
Figure 46: Credit Agricole interest vs. fee income 2010-2011 (€m)
Figure 47: Affinion’s Group financial performance 2007-2011 (m)
Figure 48: Number of new identity theft cases in the UK 2008-2011
Figure 49: Profit and operating expenses for US credit card operators 2009-2010
Figure 50: Number of complaints – PPI (2006-2011)
Figure 51: Number of new complaints- breakdown
Figure 52: Banking participation in the US
Figure 53: Perceived UK monetary value of financial advice (%)
Figure 54: Consumers increasingly turn to family and friends for financial advice in the past year
Figure 55: Consumers trust the financial advisors the most
Figure 56: Stakeholder responsibility for financial product choice in the UK selecting insurance products
Figure 57: Action required by UK consumers when selecting insurance products
Figure 58: Most important types of protection that should be provided by regulators
Figure 59: Structure of the US mass affluence consumer market
Figure 60: Affluent segment thresholds by total TFA in Europe
Figure 61: Development of models to support the emergence of newly affluent consumers amongst European banks


Lloyds TSB
Metro Bank
JPMorgan Chase
Fifth Third Bank
Deutsche Bank
Credit Agricole
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