Fee Income

Fee income is the revenue taken in by financial institutions from account-related charges to customers. Charges that generate fee income include non-sufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, account research fees and more. Credit unions, banks and credit card companies are types of financial institutions that earn fee income.

Financial institutions earn a significant portion of their income from fees, also called non-interest income. Interest income, which is money earned by lending out customers' deposits in the form of mortgages, small business loans, lines of credit, personal loans, student loans and by allowing customers to carry a credit card balance makes up another significant portion of financial institutions' income.

Even before the deregulation of the mid-1980s offered banks more opportunities to sell nontraditional fee-based services, noninterest income had already accounted for nearly a quarter of all operating income generated by commercial banks. The dramatic increase in noninterest income at U.S. banking institutions over the last two decades reflects not only diversification of banks into nontraditional activities but also a shift in how banks earn money from their traditional banking activities. During this period, deregulation opened the door for commercial banks to earn fee income from investment banking, merchant banking, insurance agency, securities brokerage, and other nontraditional financial services.

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

It is estimated noninterest fee income accounts for nearly half of all operating income generated by U.S. commercial banks. And contrary to popular belief, evidence shows increased reliance on fee-based income may increase rather than decrease the volatility of banks’ earnings streams.