The profit disruption.

• Author: Knops, Bryan

The growth of digital customers continues to discombobulate traditional financial services. In light of this change, what should banks do to generate more noninterest income and ensure profitability in the years ahead?

IN AN ERA FUELED WITH TECHNOLOGY INNOVATION, where today's startup is tomorrow's next billion-dollar idea, it's not difficult to understand why customers still see banking as a commoditized marketplace.

When viewing the industry from the outside, there isn't much that sets one financial institution apart from its competitors. Novel products once found enticing--such as email payments, mobile capture or even personal financial management--are now expected from even small community banks and at no additional cost. Needless to say, generating noninterest income is no longer as simple as charging customers fees for the products and services provided.

Additionally, with an increasing number of sophisticated third-party nonbank competitors emerging there is pressure for banks to find niches where they can add more value to customers and generate fee income. For instance, the payment space is under fierce competition with the emergence of products such as Square, PayPal, Google Wallet and now Apple Pay. As innovation continues to influence customer behavior, banks are at risk of being viewed as payment processing centers similar to a utility company.

So, what should banks do to drive noninterest income and profitability?

Focus on providing value, not just an experience

The majority of banks will highlight customer experience as part of their 2015 business strategy. But what few will address is what improving the customer experience entails and whether or not it will provide a return. One of the challenges with customer experience is that it typically becomes a question of measuring and not a goal of delivering value in the eyes of the customer. This mindset leads to a great deal of time and resources being allocated to establish quantification for a subjective measurement rather than actually focusing on direct drivers of return on investment, which is achieved when servicing a need the customer is willing to pay for.

While quantifiable data provides helpful insights, banks need to focus on the original goal--generating income with customer experience. An all-encompassing experience involves two perspectives: the customer's perception of the institution as well as the institution's perception of the customer. Banks often fall short...