It’s Time to Rethink Non-Interest Income (Plus, Tested Tactics That Drive Growth)
After years of paying hefty incentives to attract deposits, financial institutions are grappling with one of their biggest challenges in 2025: margin compression. With net interest margins declining and traditional fee income from sources like overdrafts under pressure, community banks and credit unions must pivot from spread-based to fee-driven income to fuel growth.
By Mark B. Egan
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Margin compression stands out as one of the most pressing challenges for financial institutions in 2025, driven in part by the hefty incentives paid out in recent years to attract rate-sensitive deposits — $300, $500 or more just to open an account. Now, after two years of chasing deposits, community banks and credit unions are focused on pivoting from spread- to fee-based income growth.
Never mind that they are operating in one of the most dynamic and unpredictable economic environments in history. To succeed in this cycle (regardless of the policy outlook) they will need to move beyond traditional strategies and tactics — many of which are losing relevance in an already highly competitive, fee-resistant marketplace.
The challenge is significant: the two core pillars of consumer non-interest income (NII) — overdraft and interchange fees — have been under sustained pressure. Overdraft income has declined sharply in recent years, driven by regulatory shifts and mobile tools that help consumers avoid mistakes. At the same time, growth in interchange revenue is increasingly influenced constrained by intense competition from digital payment platforms and fintech challengers.
The problem is easy to see but harder to solve: Can community banks and credit unions capitalize on the deposits they’ve already gathered — and the customers they’ve acquired — to drive NII growth? To bring an effective strategy to market, they will need to rethink their assumptions about product, pricing and consumer behavior.
Want more insights like this? Check out Kasasa’s content portal: Low-Cost Deposit Strategies
The State of Play
For many institutions, net interest margins (NIM) peaked in late 2022 or early 2023, during a brief window when loan yields rose faster than deposit costs. Since then, rising deposit competition and slower loan growth have led to progressively smaller margins — a trend expected to continue through 2025 as rates stabilize or begin to decline.
To be sure, many FIs expect to benefit as older, low-yielding loans mature, freeing up capital for higher-yielding assets. Industry data suggests they could see 10–20 basis points of NIM growth, assuming no major recession and modest rate declines. But again, rising deposit costs, credit risk from aggressive loan growth, and uncertainty around the Fed’s rate path will likely temper these gains.
However things play out, engineering an effective hand-off from spread-driven growth to fee-driven growth is critical. A recent analysis by Deloitte outlines three categories of action that institutions can take:
- Market expansion — through increased transaction volume, new customer segments or new geographic markets
- Product line expansion — by offering new fee-based services to generate additional income
- Fee innovation — through, for example, charging for formerly-free services or developing new pricing models, perhaps by bundling or unbundling services
Of the three levers, market expansion is the least viable for smaller institutions — few of which can scale transaction volume or reach new markets at a level that meaningfully boosts fee income. In fact, most FIs only have two levers to pull, increasing fees via product innovations and convincing customers to swipe their cards more.
“All else equal, building back NII means adding a fee paid by the consumer,” says Kasasa CEO Gabriel Krajicek. “So the question becomes, ‘How can you add a fee in the most consumer-friendly way?'” And the answer lies in rethinking products, pricing and value delivery — starting with a clearer understanding of what today’s account holders are willing to pay for. According to Krajicek, three mindset shifts are essential.
1 – Start With Value
Many marketers — concerned that they won’t achieve their desired response rates — focus first on the mechanics of the offer. But when asking a customer to absorb a fee, it’s essential to ensure you are offering them something of value.
The key, according to Krajicek — and the first mindset shift — is going to market with a service most customers want but don’t already have, and presenting the most popular price point. For example, Kasasa research shows that 70% of consumers would pay around $5 per month for an ID fraud protection bundle that includes one-click credit lock, concierge restoration, $5 million of insurance, and dark web monitoring.
Framing this distinctive, high-value package as a default feature in a $5 checking account can keep opt-out rates below 40% — far outperforming opt-in campaigns, which often convert fewer than 10%, according to Kasasa data.
2 – Reframe Opt-Out
With a clear product value proposition in place, the next mindset shift becomes possible — challenging the conventional wisdom around opt-in versus opt-out fee models. This starts with reframing the opt-out model as the “remain-in” model, says Krajicek.
For many in financial services, opt-out is viewed as risky, often raising concerns about trust, reputation, and regulatory scrutiny. But according to Krajicek, the real barrier is customer inertia: “It’s really tough to convince customers to take action to opt in to buy things. Even if the customer likes your product — and it’s exactly what they want — you still have to prompt them and wait for them to respond.” In Kasasa’s experience, opt-in campaigns typically yield single-digit adoption rates. “Opt-in doesn’t work,” he says.
The solution, Krajicek argues, is to “dramatically overcommunicate,” emphasizing the value being offered if the customer chooses to remain in, while also transparently stating the fee and offering an exit option.
In one Kasasa implementation for a fee-based rewards checking account, customers receive no fewer than 13 separate notices about the fee after product acceptance. These include a physical mailer, six text messages, and six emails — each one explaining how to opt out and linking to a single sign-on page that clearly lays out both the fee and the account’s benefits.
3 – To Drive More Transactions, Set Smaller Goals
Growing transaction-based revenue — especially through interchange fees — remains a critical pathway to NII growth. But traditional financial institutions are steadily losing ground. Neo-banks, digital-first challengers, and payment platforms like Venmo continue to erode credit and debit market share. In fact, banks are losing approximately 4% of deposits each year as customers move funds to platforms that simplify everyday payments, according to Kasasa research.
To keep their debit and credit products top of wallet, many institutions turn to reward programs. These programs are essential in the fight for transaction loyalty — but too often, financial institutions assume that simply launching a program is enough to drive results.
A behavioral economist would take a different approach, says Krajicek: start with a small, easy action that nudges broader behavioral change. The goal isn’t to impose fees but to encourage more transaction activity — most effectively through well-designed, low-friction incentives.
The best first step? Encourage customers to set up direct deposit. This anchors the account relationship and drives more consistent card usage. When it comes to transaction thresholds, simplicity matters. Requiring 25 swipes a month will feel like a discouragingly large goal to many customers — but lowering the target to 10 swipes often has a surprising effect. According to Kasasa research, customers typically exceed the lower threshold, averaging more than 25 swipes a month anyway.
Even small digital touchpoints can make a difference. Encouraging customers to log into mobile banking not only keeps them engaged and informed — it also opens the door to timely cross-sell opportunities within the app experience.
When well-targeted and optimized, such reward-based strategies can generate between 50 to 100 basis points in additional non-interest income, Krajicek says — even after accounting for program costs — potentially offsetting the margin compression forecast for the next two years.
