Over the last few decades, the income sources for banks have changed. Outline the changes and...

Over the last few decades, the income sources for banks have changed. Outline the changes and discuss why non-interest income has become so important to banks?

Expert Solution

Conventionally, decades ago, banking used to a traditional business, with interest income being almost the entire revenue source for the banks. Banks used to accept deposits from the retail and corporate clients and used to circulate these funds at a higher rate of interest. Almost all of the work was without digital support and banking was a traditional brick and mortar business.

However, in the last few years or decades, banks have been involved in a plethora of services. These services include ATM services, loan origination fees, debt syndication, charges for locker and safety deposit box, etc. Also, fintech has been used for providing various banking services to clients. Remittances, commission on insurance and mutual funds, etc have widened the scope of banking. Due to all these changes, a high proportion of banking income is generated from non-conventional businesses or is the non-interest income for banks. Almost all of the banks are involved in such services, making it mandatory for every bank to generate revenue sources from such services. Also, such services allow banks to cross-sell products as well as deepen conventional banking among the masses and retail clients. Without such services, banks would not be able to sustain only on the traditional business models.

Also, the scope for high improvement in conventional banking business has bee reducing over the decades. This is because on the liabilities side, the customer now has various other investment options as well as on the asset side, borrowers have options other than the banking system. For eg. a corporate client with a sound balance sheet can raise debt through commercial papers directly thus bypassing banks. Also, retail borrowers can directly borrow small amounts from fintech and non-banking financial institutions. Hence, in recent times, non-interest income has become very importants for banks.

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Over the last few decades, the income sources for banks have changed. Outline the changes and...

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Over the last few decades, the income sources for banks have changed. Outline the changes and...

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