Feeder Funds: What They Are, How They Work and Examples

What Is Fee Income?

Financial institutions make money in just two ways: by collecting interest on loans and by charging fees on services.

Fee income is the revenue taken in from account-related charges. Charges that generate fee income include non-sufficient funds fees, overdraft charges, late fees, over-the-limit fees, wire transfer fees, monthly service charges, and account research fees, among others.

Credit unions, banks, and credit card companies are types of financial institutions that earn fee income.

Understanding Fee Income

Interest income is the money that an institution earns by lending money, and includes interest payments on mortgages, small business loans, lines of credit, personal loans, and student loans. Another highly lucrative source of interest income is carry-over balances on credit cards.

Financial institutions also earn a significant portion of their income from fees, which are sometimes called non-interest income. In fact, fee income has skyrocketed since the 1980s.

The deregulation of the banking industry in the mid-1980s offered banks new opportunities to sell nontraditional fee-based services. Non-interest income already accounted for nearly a quarter of all operating income generated by commercial banks.

That percentage dramatically increased as American banking institutions diversified into other financial activities including investment banking, merchant banking, insurance sales, and brokerage services.

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

At the same time, commercial banks began to maximize revenues from the fees they collected from their traditional lines of business such as checking and savings accounts.

A Bonanza of Fees

Banks can rely on a variety of fees as a steady source of income. The average overdraft fee is $29.80 as of 2022. The big banks collected $50 million and $1.4 billion each in overdraft fees alone from their American customers in 2021. And though overdraft fees are declining, some others are not. The average fee for using an out-of-network ATM withdrawal was $4.66, which is the highest amount since 2019, which continues the trend of increasing out-of-network ATM withdrawals.

Other common fees can include monthly account maintenance fees for checking and savings accounts and minimum balance fees. Special services also incur fees, such as foreign transaction fees, cashier's check fees, and paper statement fees.

In addition to the interest charged on loans, it is clear that banks have an alternate and strong source of revenue from fees, which helps cushion the blow of lost revenue in times of declining interest rates.