Making the most of fee income

Setting fees effectively is an important factor in a bank's profitability, a former bank president told community bankers recently. Robert McGoffin, a faculty member for the graduate schools of banking in Madison, Wis., and Baton Rouge, La., urged bankers to carefully consider their pricing strategies.. "Don't waive more than 5 percent of your fees," he said, noting that most banks waive 15 percent or more. He encouraged bankers to reconsider customers who get a "permanent waiver" on fees. "Make sure you still have a reason to waive their fees," he said, noting that names added to the list years ago may no longer warrant special treatment.. Most banks undercharge for loan administration, he said. While the average bank charges $150, the actual cost to book a typical loan is about $750, he said. Customers are not sensitive to this fee, he said. Furthermore, fees can vary depending on the customer and the circumstances of the loan, he said.. Many small business borrowers become lax about providing their banker annual financial figures. McGoffin urged bankers to incorporate a late fee into loan agreements. "Tell customers you want to give them your best rate on a loan, but that in order to do that you need their financials in a timely manner," he said. If the financial information comes in late, consider changing their rate or charging them a fee.. McGoffin also suggested bankers consider charging an "exit fee" on loans. This is not a pre-payment penalty, he clarified. He said loan agreements should include a fee in the event the borrower refinances with another lender. "What you want is relationships, not rate-shoppers," he said. "If a customer changes lenders because of rate, then you should charge a fee." He suggested a fee of 1 percent of the original loan amount, stated in dollars.. McGoffin said he is a big fan of fractional pricing on rates. Bankers often think in terms of quarter-percent increments, but he encouraged bankers to rethink along one-eighth-percent increments. Banks don't need to offer 25 basis points more than competitors to win deposits, he said; 12.5 bps will do. The same is true on loans. In order to beat a competitor offering a 6.25 percent rate, offer 6.125 rather than 6.0 percent.. On fees, he said, bankers should move away from even-dollar figures and add a few pennies. For example, customers are not sensitive to the difference between $24.00 and $24.83, but the additional 83 cents charged across the customer base will add up to meaningful income.. All contracts with outside vendors should be negotiated, McGoffin said. And he said bankers should be raising floors on adjustable rate loan products even now, in anticipation of rising rates.. Most banks can offer additional valuable products without excessive expense, he said, citing services such as ID theft protection and payment protection on consumer loans. He said many people are happy to pay for insurance that will cover their loan payments for three or six months should they lose their job.. McGoffin encouraged bankers to carefully look through their customer records. He said the best prospects for new business are customers who have certificates of deposit or loans with the bank, but no checking account. Bankers should target these customers for checking accounts and associated products, such as bill pay.