What is a Non-Interest Income?
Non-interest income is any type of income that is generated from the application of fees, rather than from interest that is applied to the outstanding balance of a financial account. Income of this type is often associated with financial institutions, particularly banks and credit card companies. In some cases, the non-interest income is associated with recurring fees that are assessed on customer accounts each month. At other times, the fees are one-time charges that are applied in return for some type of specific task or service that is provided by the account issuer.
With banks and similar institutions, a major source of non-interest income is the fees associated with the management of customer accounts. For example, a checking account may be structured to allow a small fee to be debited from the customer’s account on a monthly basis. Sometimes known as a service fee, the charge is in exchange for such tasks as posting debits and credits to the account, providing checks free of charge, and supplying the customer with a monthly statement of account.
There are several different types of recurring non-interest income that is generated by various types of financial accounts. With investment accounts, maintenance fees may be assessed on a semi-annual or annual basis, as long as the investment account remains open with a specific brokerage. Some institutions charge what is known as an inactivity fee; this fee is assessed when there has been no activity on an account for a predetermined period of time, and is charged periodically until some type of activity on the part of the account holder commences.
Other types of non-interest income involve the assessment of fees based on one-time incidents that require special attention by the bank. Insufficient funds charges are an example of this type of fee that generates income for the bank. When a customer does not have enough money in the account to cover a check written on that account, the bank will charge a one-time fee in exchange for managing the transaction.
That management provided in exchange for charging a non-sufficient funds fee may take the form of honoring the check and deducting the amount from the account balance, creating a negative balance. Depending on bank policies, the check may be returned to the presenting bank, and the fee is debited from the account balance. In either situation, the bank has generated a small amount of non-interest income.
Credit card companies also earn non-interest income. Some plans call for assessing a fixed monthly service fee that is charged whether the account holder uses the account or not. Other credit card plans allow for an annual service fee that is paid as a lump sum during a specified month each calendar year. There are also a few credit card providers who assess a fee each time the account holder renders a payment on the account balance via an online transaction, thus generating a source of income that is not connected with any type of application of interest to the outstanding balance.
@Logicfest -- that is a great service to be sure, but haven't we all seen an increase in the number of services offered by banks that generate non-interest income? For example, finding totally free checking anymore is difficult as a lot of banks now charge a fee for that.
Banks should not be criticized too much for this -- the economy is still more than a bit of a mess and every business out there is looking for ways to make ends meet. Adding fees is often a quick way for a bank to generate the revenue it needs to stay in business.
There are banks out there that count on non-interest income a great deal. For example, overdraft protection generates a lot of non-interest income for banks. That benefits customers because it keeps them from writing hot checks, but banks don't offer that service for free -- there is a fee attached when a customer uses overdraft protection and banks have generated millions of dollars in fees by offering that service.
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