The importance of non-interest income for banks continues to grow: non-interest income comprises over 40% of US bank revenues today and has grown at a much faster pace than net-interest income in recent years. Here’s why fintechs and financial institutions, collectively referred to as Financial Services Platforms (FSP), should be exploring ways to expand their non-interest income.
Non-Interest Income is an Important Element of a Resilient Business Strategy
Non-interest income serves two important purposes: diversification of revenue and boosting returns.
- Diversification of revenue: Non-interest income reduces reliance on the core revenue stream for FSPs, which is usually interest-based. This can help hedge against business cycles and headwinds.
- Boosting returns: Unlike interest-based income, non-interest income doesn’t require as much in funds and usually has better margins. As a result, core profitability metrics like return on assets and return on equity get a significant boost.
What Makes up Non-Interest Income?
Non-interest income can broadly be broken down into two buckets: core business and partnerships.
- Core business: Non-interest income generated by the core business, such as processing fees, ATM fees, late fees, overdraft fees, and mortgage sales.
- Partnerships income: Revenue generated through partnerships, such as cross-selling fees, commissions, and revenue share.
Partnership Income is More Important Than Ever
Given today’s economic environment and growing headwinds faced by core income streams, partnership income plays an increasingly important role. This includes economic slowdown, overdraft fee headwinds, and a cooling mortgage market.
- Economic slowdown: The slowing down of business activity (U.S. GDP contracted in Q1, Q2 2022) and consumer spending (consumer sentiment about the economy has turned increasingly negative recently) point toward a potential recession which would translate to lower levels of financial activity, lower repayment rates, and an overall contraction of funds.
- Overdraft fee headwinds: Overdraft fees, which have historically contributed significantly to a financial institution’s fee-based income, face an uncertain future. Consumers hate them (a survey by CivicScience found that nearly three-quarters of Americans believe that the government should ban bank overdraft fees altogether), which adds to the growing regulatory and legal scrutiny (the House is evaluating passing the Overdraft Protection Act). Additionally, with the emergence of neobanks promising zero overdraft fees (among other benefits), banks are beginning to eliminate such fees. Earlier this year, Capital One did away with overdraft fees for its consumer banking customers, and other banks are likely to follow suit. Given these trends, it is highly unlikely that overdraft fees will continue to be a valuable contributor to a financial institution’s non-interest income.
- Mortgage sales: Profits from the mortgage sales to Fannie Mae and Freddie Mac, which serve as a key source of income for many financial institutions, are expected to decline. We’re observing a slowdown in demand for real estate and the construction of new homes (home sales tumbled by 14.2% year-over-year in June 2022), trends which are expected to continue as mortgage rates climb to the highest they’ve been in recent times.
Life Insurance Provides Customers with Value While Adding New Income to the Portfolio
- It’s a win-win opportunity: By partnering with Ladder, fintechs can democratize access to life insurance and play a critical role in reducing the coverage gap. The 2022 Insurance Barometer Study by LIMRA estimates that 106 million Americans don’t have sufficient life insurance. In addition to helping solve a very pertinent problem, partnering with Ladder provides valuable income. Unlike most forms of non-interest income, it is not punitive to the customer but adds value to them, making it mutually beneficial for both FSPs and their customers.
- It deepens the customer relationship: Life insurance purchases help increase customer engagement between the customer and company as term life insurance, by design, is a consumer product with a long relationship horizon. Customers trust their existing financial services providers for life insurance purchases. A survey by Accenture found that customers are increasingly willing to consider insurance purchases while shopping for other needs - “27% of consumers are likely to consider purchasing insurance from online service providers like Amazon and Google, while 24% are likely to purchase insurance from a retailer.” Furthermore, as per a report by Cover Genius and PYMNTS.com, 45% of US consumers are highly interested in bank-embedded insurance offers based on transactional data. Further, laddering, a unique product feature by Ladder that allows users to adjust their coverage and premium as needed, invites more frequent engagement and opportunities for FSPs to help their customers save money.
- It’s a big opportunity: The life insurance market is a $776 billion industry, with over four times as many life insurance policies sold as mortgages each year. By comparison, the auto insurance industry is worth $740 billion). A confluence of factors such as COVID-19, growing global uncertainty, and the emergence of new-age insurtechs such as Ladder has driven life insurance interest and applications to a decade-long peak.
Ladder Makes it Easy to Partner
Ladder is redeeming life insurance, using technology to help more people get covered in an instant, easy, and affordable way. Ladder partners with trusted consumer brands to enable a seamless term life insurance experience.
Ladder’s digital-first approach, which powers its ability to offer around 90% of our customers a policy offer within 5 minutes, also enables a quick and seamless integration experience for partners. FSPs can add a relevant new digital product with little upfront time or resource investment and avoid the compliance burden of rolling out their own insurance product. Ladder has successful partnerships with a variety of well-respected financial services brands.
Curious to learn more? Email us at bd@ladderlife.com to see how partnering with Ladder can benefit your organization.
