What are Corporate Credit Cards? – Different Types of Cards
February 12, 2025
The dividend discount models assume that the investors have no control over the payout policy of the firm whatsoever. This is true for the case of the minority shareholder. Hence, it is said that as far as the minority shareholder is concerned, dividend discount models may be the best tools for valuing a firm. This […]
A central bank is an institution that is mandated by constitutional decree to function along certain principles and entrusted with managing the fiscal side of the country’s economy. The Fed Reserve and Bank of England are examples of central banks. These banks have many functions, some of which are listed below. The central bank manages […]
Many theorists believe that organizational decay is caused by external factors. In fact, some have gone far enough to suggest the various stages in which this decline happens. However, the exact external causes are often difficult to understand. In this article, we will have a look at some of the most prominent causes of organizational […]
Economic cycles are a reality of life. Founders need to be aware of the fact that their start-up company could find itself in the middle of an economic downturn. Such situations tend to be the real test of start-up companies. The poorly managed start-ups face severe cash flow issues during such recessions. A lot of […]
The recent coronavirus pandemic has fundamentally changed the way in which individuals, organizations, and even nations manage their finances. Most people around the world now know about the devastating effects that a pandemic can have on the overall economy. This is the reason that they want to be financially prepared for such emergencies. Many different […]
Over the years, corporate banking has become a very important part of the overall banking system. This is because of the fact that banks derive a bulk of their profits from their commercial or corporate banking divisions. Now, the reason that banks derive a larger than usual percentage of their revenue from their commercial banking arm is that commercial banks have several sources of revenue.
Apart from generating their income from interest income, commercial banks generate a lot of non-interest income as well. This income includes fees generated from various services such as bank guarantees, payment transactions, point of sales systems, etc. Up until now, there has been a lot of debate about whether this is a positive point or a negative point for the overall banking industry.
In this article, we will look at the positive aspects i.e. the various benefits which commercial banks derive as a result of having a huge percentage of non-interest income.
Non-interest income such as credit card fees and payment processing fees are not associated with the interest rate. Rather, they tend to be associated with the scale of operations of the client. Hence, these fees do not vary as much as interest income. Thus, having a significant percentage of income in the form of non-interest income leads to diversification and stabilizes the overall income of the commercial bank even if the external environment is going through different business cycles.
The commercial bank earns non-interest income by performing certain services for their clients. Now, the bank needs very little working capital to perform these services. Once the infrastructure has been put in place, they can simply continue to earn income without incurring a lot of expenses periodically. Hence, non-interest income can enable banks to grow their business in a non-linear manner. This means that they can earn more income without investing more capital! This is why many commercial banks prefer non-interest income and try to increase it to the maximum extent possible.
As already mentioned above, non-interest income is not dependent upon the amount of money that banks can lend out. Since the bank is not lending out any of its money, the question of credit risk does not arise! Also, a typical loan transaction tends to go on for many years. However, transactions that generate non-interest income are executed within a few minutes. Hence, it is a risk-free approach for banks to generate additional income just by making use of the infrastructure which they already have on hand.
Needless to say, running all these teams requires a lot of expense. Hence, interest income is associated with many overhead costs. However, when it comes to non-interest income, the situation is different. Non-interest income is usually generated when by using the bank’s information technology systems. Hence, the bank does not have to pay a lot of overheads in order to earn this income.
Another feature of non-interest income is that it tends to be recurring. Hence, if a commercial bank is able to onboard a client, it can continue to generate income from the same client for a very long period of time. Thus, there are fewer marketing expenses associated with non-interest income as related to interest income.
The fact of the matter is that non-interest income is an important source of revenue for any commercial banking organization. This is because of the various benefits that this income provides. The benefits have been listed above. However, the benefits should be viewed in conjunction with the disadvantages which will be explained in the next article.
Your email address will not be published. Required fields are marked *