What Are Noncredit Services?
Noncredit services are fee-based services that do not involve the extension of credit that a lending institution offers to its customers.
Non-interest income generated from noncredit services can be a significant source of revenue for banks, and can limit the erosion of profitability when net interest margins are squeezed in a declining interest rate environment.
- Noncredit services are banking services or financial products offered to banking customers that do not involve the extension of credit.
- The traditional banking model generated profits based on the spread between the interest rates charged on loans granted and the lower rate of interest credited to depositors.
- Nonbaking services have risen in prominence to become a key profit center for many banks, which the bank charges a commission or flat fee for.
- These may include account services, payments processing, investments, savings, and insurance products, among others.
Understanding Noncredit Services
Banks traditionally make money on the net interest rate spread between lending to customers through loans and that credited to depositors. Historically, the basic profitability model of a bank has therefore been to lend to customers at X% and pay them some lower interest rate Y% on deposits held at the bank. The difference between X% - Y% is the spread that brings money to the bottom line.
However, another pillar of profitability has developed for banks that does not involve using the balance sheet to generate income. Various noncredit services for retail and corporate customers are routinely offered by banks. For retail customers, aside from checking and savings accounts, such services could include debit card processing, stock trading (i.e. brokerage), and asset management.
Fee income is also derived from noncredit services. This includes the revenue taken in from account-related charges such as insufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, and account research fees, among others
For small businesses and larger corporate entities, noncredit services include cash management, payroll processing, merchant transactions, merger and acquisition advisory or other corporate finance services, loan syndication and agency, and insurance underwriting. Collectively, these services produce commissions and fees for a bank. In such cases, not a single dollar need be loaned out to capture profitability.
Example: Income from Noncredit Services at Citigroup
Citigroup Inc. recorded approximately $16.0 billion in noncredit service income in 2017, roughly 36% of its net interest revenue (interest revenue minus interest expense, or the spread in terms of dollar amount). The bank derived a majority of the income from commission and fees described above and the balance from administration and fiduciary fees. The income from noncredit services for the bank has provided a measure of stability to overall earnings during a period of suppressed interest rates as a result of quantitative easing policies by the Federal Reserve Bank. Net interest revenues had declined from around $48 billion in 2013 to $45 billion in 2017, but contributions from noncredit services more or less held steady.