The proportion of non-interest revenue for domestic banks, which are frequently criticized for 'interest profiteering', is actually much lower than that of overseas banks. When comparing the return on equity (ROE), a typical profitability indicator for banks, domestic banks lag significantly behind foreign banks. While there are aspects in which domestic banks are hindered by regulations when trying to diversify their operations, there are calls to prepare alternatives within realistic measures such as expanding foreign exchange income fees and activating trust services.
◇ U.S. sees increase in fee income from maintaining deposit accounts; Japan allows non-financial services.
According to the Federal Deposit Insurance Corporation (FDIC) and the Financial Supervisory Service, as of the end of 2022, the proportion of non-interest revenue relative to total profits of U.S. commercial banks was 32.1%, while domestic banks only reached 5.7%. A study by the Banking Association found that the average ROE of U.S. banks over the past decade since 2022 has been 10.2%, whereas the average ROE for Korean banks was only 5.2%.
The reason why the profitability of domestic banks falls significantly short of that of the U.S. banks is largely due to the low proportion of non-interest revenue. Kim Woo-jin, a researcher at the Korea Financial Research Institute, noted, "Expanding non-interest revenue does not always improve a bank's profitability, but there is a positive correlation between the proportion of non-interest revenue among the top 100 global financial companies and their market capitalization." He explained that expanding non-interest operations allows banks to overcome the limits of asset-based growth and create new revenue sources, establishing a sustainable income base.
The primary reason for the high proportion of non-interest revenue in the U.S. is attributed to fees from maintaining deposit accounts. The deposit account maintenance fee, found in the U.S. and Canada, is literally a system that charges customers a fee for account management. In these countries, maintenance fees for deposit accounts account for 10% to 15% of fee income.
Moreover, banks in the U.S. and Canada are spending substantial marketing expenses and analyzing customer payment account and card transaction data to secure significant asset management fees. Major banks such as Wells Fargo in the U.S. and the Royal Bank of Canada (RBC) boast high ROEs, with the proportion of asset management fees in their total fee income being 49% and 33%, respectively.
In Japan, authorities are promoting the expansion of non-interest revenue for banks by easing regulations on the scope of their operations. In 2018, Japanese financial authorities allowed banks to conduct non-financial services such as fintech and regional commerce through subsidiaries and subsequently amended the Banking Law to permit operations related to digital, local economy, and sustainable society. This aims not only to secure non-interest revenue but also to create synergies with financial services.
◇ "Korea must seek realistic alternatives such as expanding foreign exchange income fees and trust services."
There are calls for Korea to develop realistic methods to increase non-interest revenue. For instance, maintaining a fee for deposit accounts, akin to that in the U.S., is difficult to impose domestically. There is considerable public resistance, making the collection of such fees related to deposits virtually impossible. In 2017, Citibank Korea introduced an account maintenance fee system, but it became virtually ineffective after facing significant criticism and implementing several exceptions.
Experts say that the fee sector where domestic banks can first increase their proportions is in 'foreign exchange income fees.' They advise that this area allows banks to generate revenue without investment. Currently, the proportion of non-interest revenue generated from foreign exchange income fees is high, and with ongoing demand for currency exchange, banks should actively seek to expand this area, especially as they pursue foreign exchange revenue through travel cards.
There are increasing voices advocating for the expansion of trust revenue, which is a non-financial service of banks. Due to the impact of the sales suspension following the improper sales of securities linked to the Hong Kong H index (ELS), the balances of specific money trust accounts at the four major banks decreased by about 10 trillion won to 95 trillion won as of the end of the first half of this year. In this situation, the inability to expand the request for unspecified money trusts (products where the customer does not specify the product, and the bank invests in stocks or bonds and distributes the earnings) has been highlighted as a necessity.
Professor Seo Ji-yong from Sangmyung University stated, "The expansion of non-interest revenue should focus on strengthening trust services as separate products in line with the aging population, as this could serve as a basis for revenue generation," and added, "As non-interest income increases, the tendency for banks to 'profit excessively' in a high-interest environment will decrease."
Kim Hye-mi, a research fellow at Hana Financial Research Institute, also noted, "The diverse non-financial operations of Japanese banks not only diversify existing revenue models focused on interest-based operations but also enable the acquisition of non-interest revenue while creating synergies with financial operations." She emphasized that with the recent expansion of business areas, including allowing platforms for banks, domestic banks need to pay attention to the examples set by Japanese banks.