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Protecting Fee Income from Banking Disruptors

By Roy Berelowitz

The Financial Services industry has endured substantial disruption since deregulation in the 1980s. In fact, the disruption has been so severe that in every decade since deregulation, the Federal Government has had to directly or indirectly bail out all or parts of the banking system to maintain liquidity:

1. In the late 1980s it was a massive failure of Savings and Loans which were unable to maintain a sufficient spread to be profitable. About 1,500 S&LS failed.

2. In 1997 Long-Term Capital Management collapsed, requiring a FED-orchestrated bailout.

3. In 2008, the Treasury had to infuse $700B into the banking system via TARP to maintain liquidity. Over 800 banks failed during the period, and another 3,000 disappeared since 2008.

4. In 2020 Congress enacted PPP which was ostensibly a means to backstop payroll during COVID-19 but was really a way to help banks bump up their loan loss provisions by giving them massive fee infusion income for free.

It is not a coincidence that since 1990, 75% of all US banks have been acquired or closed by FDIC action. Starting in 2001, and particularly since 2008, margins have been under tremendous pressure and banks have tried to boost fee income to compensate for the loss of margin, sometimes going to extraordinary and even illegal means to maintain and boost revenue.

At the same time, total assets under management have soared and transaction volume has increased by orders of magnitude.


In the area of technology, while there have been some interesting developments such as online banking, mobile banking and remote capture, despite all the noise FinTech makes, Commercial and Retail Banking has ultimately remained a highly regulated business relying almost entirely on Fee and Margin income. Very little has changed because very little can.

Most banks are running on backend systems that are 15 to 20 years old. New entrants to traditional banking are locked out because of CRA requirements. Walmart and others tried to get Utah Industrial licenses to start banks but were blocked by Congress.

All the new disrupters want the transaction and fee revenue, but they are not really trying to be bankers at all – although Google might be closest. Facebook basically gave up and tried to invent a new currency, but that effort hasn’t been met with much success. Apple is not trying to be a bank, but is trying to capture the transaction fees that would normally go to banks. Just recently, the FDIC revised the Volcker rule to allow banks to free up billions of dollars in capital and invest in venture funds. Why, in the middle of pandemic and economic crisis, allow banks to increase their risk? The answer simple – they need to find alternative sources of revenue.

What’s the punchline? Simply put: banks and credit unions need to protect their deposit base and fee income from predatory non-bankers. They cannot allow themselves to be squeezed out of fee income in an environment where margins are so compressed and with no end in sight. One way to achieve this is to modernize their products and processes to enable a high degree of digital experiences and control to their cardholders. Banks and credit unions that fail to meet this level of consumer service will be increasingly marginalized and challenged to retain their fee income.