Fee-Based Services – Meaning & Advantages
Introduction
Also called Non-Fund Based services. Here, the financial institution does not lend money. It lends its Brain (Expertise) or Brand (Guarantee).
1. Why Fee-Based?
- No NPA Risk: Since no money is lent, there is no risk of default.
- Steady Income: Fees are earned upfront or on success.
- Client Relationship: Helps cross-sell other products.
Fund Based vs Fee Based Services
Fund Based
- Involves lending money
- Primary Income: Interest
- High Capital Requirement
- Risk: Credit Risk (NPA)
VS
Fee Based
- Involves guaranteed/advisory
- Primary Income: Fees/Commission
- Low Capital Requirement
- Risk: Reputation Risk
2. Examples
- Issue Management: Helping co's launch IPO.
- M&A Advisory: Corporate Counseling.
- Letters of Credit / Guarantee: Bank guarantees payment to third party. (Technically a non-fund commitment).
- Stock Broking: Earning brokerage.
- Custodial Services: Safekeeping assets.
Summary
- Motto: "Advice is Money".
- Risk: Low financial risk, High reputation risk.
- Trend: Banks prefer this to improve "Return on Assets" (RoA).
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 4
1. Which of the following is a primary advantage of Fee-Based services for a bank?