Non-Interest Income

What is 'Non-Interest Income'

Non-interest income is bank and creditor income derived primarily from fees including deposit and transaction fees, insufficient funds (NSF) fees, annual fees, monthly account service charges, inactivity fees, check and deposit slip fees, and so on. Institutions charge fees that provide non-interest income as a way of generating revenue and ensuring liquidity in the event of increased default rates. Credit card issuers also charge penalty fees, including late fees and over-the-limit fees.

BREAKING DOWN 'Non-Interest Income'

Interest is the cost of borrowing money and is considered a form of income. For some companies, interest represents operating income, which is income from normal business operations. The core purpose of this firm's business model is to sell money, so as such, its primary source of income is interest, and its primary asset is cash. These firms are referred to as financial institutions or banks. Banks rely heavily on non-interest income when interest rates are low and tend to use it as a marketing tool when rates are high.

Non-interest Income

The average firm relies solely on non-interest income. This is the primary way in which the company generates sales. Financial institutions and banks, on the other hand, make money from the sale of money. These firms view non-interest income as a strategic line-item on the income statement. This is especially true when interest rates are low since banks profit from the spread between the cost of funds and the average lending rate. Low interest rates make it difficult for banks to make a profit, so they must rely on non-interest income to make a profit.

Non-interest income can be anything from asset sales to fees for penalties related to overdrafts or withdrawals. Some banks rely heavily on fees from automated teller machines, while other banks rely on general transaction fees. Non-interest income is particularly important in business banking relationships. Banks generally charge businesses and companies more for non-interest transactions.

Drivers of Non-interest Income

The degree to which banks rely on non-interest fees to make a profit is a function of the economic environment. Market interest rates are driven by benchmark rates such as the Fed funds rate. The Fed funds rate, or the rate at which banks lend money to one another, is determined by the rate at which the federal reserve pays banks interest. This rate is referred to as the interest rate on excess reserves (IOER). As the IOER increases, banks can make a higher profit from interest income. At a certain point, it becomes more advantageous for the bank to use the reduction of fees and charges as a marketing tool to lure new deposits, rather than a way to increase profits.

RELATED TERMS
  1. Noninterest Expense

    Fixed operating costs that a financial institution must incur, ...
  2. Fee Income

    Revenue taken in by financial institutions from account-related ...
  3. Exchange Fees

    A type of investment fee that some mutual funds charge to shareholders ...
  4. Clearing Fee

    A fee charged by a clearing house for its services. A clearing ...
  5. Brokerage Fee

    A fee charged by an agent, or agent's company to facilitate transactions ...
  6. Service Charge

    A type of fee charged to cover services related to the primary ...
Related Articles
  1. Personal Finance

    Bank Fees Be Gone

    Not only are bank account interest rates measly, but fees can take a serious bite out your balance. Here's what to do.
  2. Investing

    Cut Your Bank Fees

    Find out how to get the bank to pay you for using their services, not the other way around.
  3. Markets

    The Ins And Outs Of Bank Fees

    These service charges could nickel and dime you right out of your nest egg.
  4. Retirement

    Are Fees Eating Up Your Nest Egg?

    You may not be able to avoid all fees associated with retirement planning, but you should know what you’re being charged for. Here's a list of common fees.
  5. ETFs & Mutual Funds

    A Guide To Investor Fees

    Fees are one of the most important determinants of investment performance and something that every investor should know.
  6. Retirement

    Are Fees Depleting Your Retirement Savings?  

    Each retirement account will have a fee associated with it. The key is to lower these fees as much as possible to maximize your return.
  7. Investing

    How a 1% Annual Fee Can Ruin Your Nest Egg

    What kind of impact does an annual 1% fee have on your portfolio? The answer may surprise you.
  8. Markets

    Behind Bank of America's 72.2% Drop in 10 years (BAC)

    Analyze Bank of America's historical stock price performance to determine the effects of the financial crisis, low interest rates and strict regulatory cash-reserve standards.
  9. Financial Advisor

    Are Financial Advisor Fees Too High?

    Fees charged by financial advisors run the gamut. Are you getting a fair deal or paying too much?
  10. Financial Advisor

    How To Optimize Your Portfolio and Reduce Fees

    Investment fees aren't avoidable altogether, but there are strategies investors can employ to keep those fees at bay and reduce the impact on returns.
RELATED FAQS
  1. When using a brokerage, what are the fees?

    Are there ongo Read Answer >>
  2. What kinds of fees are involved in futures trading?

    Learn what the various costs are that are charged by brokerage firms and trading exchanges to individual futures trading ... Read Answer >>
  3. Where do I look for fees that I am charged on investments? What are those fees called?

    The fees and expenses charged for investments vary. The fees usually depend on the type of investment and the investment ... Read Answer >>
  4. What are typical trust fund management fees?

    Learn about trust fund management fees, such as the annual management fee, annual expense ratio, brokerage commissions and ... Read Answer >>
  5. How do mutual fund expense ratios affect returns?

    Learn what kinds of mutual fund fees there are, how to find out what fees your funds have and how they impact the future ... Read Answer >>
  6. Can a checking account go negative?

    Find out about negative checking account balances and the ramifications. There is a price to pay, but smart consumers can ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center