Key Insights
- The fee income gap is structural, not cyclical.
- Treasury and payments are the biggest missed fee opportunities for community financial insitutions.
- Closing the gap requires rethinking what banks charge for.
In 2026, it’s easy to imagine a Netflix documentary-style interview about overdraft and ATM fees: a customer sitting down, clipping on a microphone, and recounting the moment they realized how much they were paying to access their money. The drama may be exaggerated online, but the underlying frustration is real.
That frustration traces back at least 30 years. In April 1996, Cirrus and PLUS, the two largest US ATM networks owned by MasterCard and Visa, dropped their long-standing prohibitions on member banks charging non-customers a fee to use ATMs. Within weeks, Bank of America, Wells Fargo, and other big banks began to impose surcharges of around $1.50 per transaction.
Consumers called it “double-dipping” and pushed for state legislation to reverse it. Neither the outcry nor the legislation stopped the trend. Within 18 months, the number of banks and thrifts charging surcharges rose by 300%. This was valuable revenue that community banks, with far smaller ATM networks, were not able to fully capitalize on.
30 years later, the pattern is repeating on an even larger scale. The FDIC’s Q1 2026 Quarterly Banking Profile shows industry noninterest income rose $5B (5.8%) QoQ, but the FDIC noted that those gains were “attributable to larger institutions.” Community bank net income also rose 3.9% QoQ to $8.1B, driven by lower provisions and expenses rather than fee income growth.
Five Reasons Why the Fee Income Gap Is Weighing on CFIs
The data from Q1 2026 isn’t a single-quarter anomaly. Here are five reasons the fee income gap has become a drag on community financial institution (CFI) performance and where the highest-leverage opportunities might be found.
1: The Fee Income Gap Is Structural
The FDIC’s 2020 Community Banking Study documented that noninterest income accounted for 20.2% of net operating revenue at community banks in 2019, versus 34.2% at noncommunity banks: a 14-point gap. Composition also differed:
- Community banks lean on service charges, ATM fees, wire transfers, and safe deposit box rentals, all durable but slow-growing lines.
- Noncommunity banks draw a much larger share of their revenue from trading, investment activities, and market-sensitive sources that community banks structurally can’t replicate.
The gap didn’t emerge in the current cycle. It emerged during the digital transformation of the 1990s and 2000s and has been more or less stable since. Closing the gap will not happen via a rate cut or economic recovery. It requires deliberate reconfiguration of what a community bank charges for.
2: Treasury Management Keeps Growing
When larger banks describe their fee income playbook, treasury management sits at the center. Western Alliance disclosed at its 2026 Investor Day that its commercial banking fee income grew from $72MM in 2023 to $153MM in 2025. It more than doubled in two years, driven by growing adoption of treasury management.
The product-level growth across 2023–2025 tells the story. ACH volume was up 74%, positive pay up 42%, wire transfer up 30%, and lockbox up 18%. None of those are exotic products. All of them are staples of small-business banking: the exact customer base that CFIs serve.
The difference between community bank treasury management performance and Western Alliance’s isn’t a product gap, but rather a pricing-and-positioning gap. Community banks routinely offer treasury management services but underprice, undersell, or bundle them as a small part of larger relationships. Repricing for value rather than cost recovery is one of the fastest, lowest-risk fee income moves a community bank can make.
3: Merchant Services, Interchange Are Table Stakes
The second concentration of fee income growth is in payment processing. Larger banks derive substantial revenue from interchange fees and merchant services, traditional payment processing services sold to business customers. CFIs often participate on the issuer side but rarely capture the merchant side of the equation, ceding that revenue to specialist firms like Fiserv, Global Payments, and Elavon.
But in 2026, small-business customers expect their local bank to handle payment processing rather than send them to a separate provider. For the commercial banking customer, it’s a point of friction that isn't their problem. So when a CFI doesn’t offer competitive merchant services, the customer sets up processing with another vendor. Over time and across hundreds of customers, this has an outsized cumulative effect.
Referral partnerships with merchant services providers can capture meaningful referral revenue while keeping the deposit and treasury relationship at CFIs — a middle-path option many may not have fully explored.
4: Online Customers Don’t Want Legacy Fees
Traditional community bank fee schedules were built for a paper and brick-and-mortar era that has all but disappeared after the pandemic. Paper statement fees, check-clearing fees, in-branch service charges, and safe deposit box rentals are all shrinking revenue streams because more customers simply won’t tolerate them anymore. Why would they, if they know they can get a better deal at a larger bank or a fintech?
Replacement categories exist but require a top-to-bottom rewrite of the fee schedule. Think expedited digital wires, account aggregation feeds for small-business customers, premium mobile banking tiers, and integrated data services and reporting.
The trait that separates community banks that enjoy growing fee income from those that see it shrink is the schedule itself. Even a once-a-decade audit of fee lines to retire what’s eroding, reprice what’s underpriced, and add more of what customers want can surface upside opportunities without any new product development. Many community banks haven’t conducted this audit since the pandemic forced them to do so, and now may be the right time to rethink how customers actually use their banking services.
5: Today’s Fees Have a Squat Ceiling
Overdraft and non-sufficient funds fees have been a meaningful non-interest income stream for community banks for decades now, and the regulatory landscape shifted in favor of CFIs in 2025 when Congress overturned the Consumer Financial Protection Bureau’s overdraft rule. Industry overdraft revenue rebounded above $12B in 2025 after falling roughly 50% from 2020 to 2023, per CFPB research.
For community banks, which rely on overdraft revenue as a larger share of noninterest income than large banks do, the temptation to lean back in is real. But regulatory pressure is only one factor. Reputational risk, account attrition, and the growing number of fee-free alternatives from neobanks continue to weigh on the long-term viability of this revenue line.
Banking product innovations that emerged after 2021, such as grace periods, low-balance alerts, and capped daily fees, are now customer expectations rather than competitive differentiators. True sustainable fee income growth comes from services customers value, not charges they will increasingly resent.
How and When to Close the Fee Income Gap
With net interest margins under pressure and Fed rate cuts increasingly unlikely this year, fee income is where CFIs may find their next leg of profitability. The opportunity is real, but it is not instantaneous. Closing the gap requires sequencing, starting with what can be fixed quickly, then building toward structural change.
- Near-term (next 6–12 months): Fix pricing and positioning. The biggest gains aren’t coming from new products. They’re coming from how you price and sell what you already offer. Many community banks already offer treasury management services, but treat them as relationship add-ons rather than revenue drivers. Repricing for value, unbundling where appropriate, and training frontline teams to position treasury services as essential, and not optional, can move fee income within a single planning cycle.
At the same time, a comprehensive fee schedule audit can surface immediate wins. Retiring low-yield legacy fees, adjusting underpriced services, and aligning charges with how customers actually bank today can unlock revenue without requiring new infrastructure. - Mid-term (12–24 months): Capture payments and digital demand. Once pricing is addressed, the next step is to capture revenue streams that are currently leaking out of the franchise. Merchant services is the clearest example. Whether through direct offerings or structured referral partnerships, CFIs need a defined strategy to participate in small-business payment flows rather than cede them to third parties. In parallel, fee structures need to reflect digital usage. This includes monetizing expedited payments, enhanced reporting, and data-driven services that align with how small businesses and consumers increasingly interact with their bank. These are not new products so much as reconfigurations of existing capabilities into fee-generating services.
- Long-term (24+ months): Rebuild the fee mix. The structural gap will only close when community banks shift what they charge for. Legacy fee categories (overdraft, paper-based services, and branch-centric charges) face both regulatory and customer-driven ceilings. Long-term performance depends on replacing those lines with revenue tied to activity, access, and insight.
This means building a fee model anchored in treasury management, payments, and value-added digital services. It also requires ongoing iteration: regular reviews of what customers are willing to pay for, and a willingness to evolve pricing accordingly. Banks that treat this as a one-time adjustment will fall back into the same gap.
CFIs that approach fee income as a staged transformation rather than a quarterly fix are better positioned to close the gap over time. Those that delay may find that the revenue is not just shrinking, but steadily migrating to institutions and providers that have already aligned their pricing with how customers bank today.
