Non-Interest IncomeExplained & Defined

Written By:
Adiste Mae

What is Non-Interest Income?

Non-Interest Income is a secondary income generating unit of financial institutions like banks, credit unions, or lenders. 

Examples of these fees are:

• Monthly service charge fees
• Annual fees
• deposit/withdrawal fees
• Administrative fees (processing fees)
• Insufficient fund fees

Credit card companies also impose penalties, late payment fees, over-limit fees, etc. These fees increase the revenue of financial institutions. 

Understanding Non-Interest Income

The principal operating income of Financial Institutions, Lending Companies, and Credit Unions is interest income.

These are related costs in administering loan applications.

The primary operation of financing companies is to lend money to borrowers.

Through this, they are able to generate both interest and non-interest income. 

Other related fees in a loan agreement may be considered as secondary income generating units but companies highly depend on those types of income because there are situations where interest rates are low and it directly affects the primary operating unit of financial institutions. 

Strategic Importance of Non-Interest Income

Interest income mainly serves financing companies, while other industries derive their income from non-interest fees.

The significance of non-interest income is very high to financing companies, especially when the interest rates in an economic period are low.

It helps in increasing the profitability of the company and due to its significance, non-interest income is included in the line item in an income statement.

No clients see non-interest fees as pleasing for it represents an additional cost on their part. But it is a different case for a financial institution, creditors, or lenders.

Fees paid by a client tend to protect the profitability rate of the said company.

They are also called drivers of income because they help sustain the company’s operation from volatile market conditions. 

Drivers of Non-Interest Income

Interest income is the primary income-generating unit of financing companies.

But before banks may impose a specific rate, it has to be within the rulings of the federal reserve.

This rate is the federal funds rate, derived from the rate paid by the Federal Reserve to banks.

Such a rate is the interest rate on excess reserves (IOER).

It has a direct relationship to the profitability rate of the company.

As the IOER increases, the interest rate also increases.

Non-interest fees can be a tool for strategic marketing. If the interest rates in an economy are high, reducing the amount of non-interest fees is the best strategy to entice potential clients from applying for new deposits.