Banks relied more heavily on service fees to buoy income levels in 2010 as interest payments on loans declined in the midst of a sluggish lending market, data analysis firm Market Rates Insight said. The research firm said fees on banking services generated 30.6% of banking revenue in 2010, up from 24.3% in 2007. This transition occurred as  mortgage lending slowed, resulting in a situation where banks are collecting fewer interest payments on loans. By the end of 2007, interest income on loans made up 75.7% of the banks' total income, compared to 69.4% in late 2010. "This is a classic Catch-22 scenario for banks," said Dan Geller, executive vice president at Market Rates Insight. "Soft lending reduces interest income, causing fee income to become a bigger part of total revenues," he said. "Increasing fees to generate revenues can drive some customers away, which reduces the number of potential customers for lending. Smaller customer base reduces interest income further, causing noninterest income to become an even bigger part of total revenues.” Income generated from loan interest payments fell from $725 billion in 2007 to $537 billion last year, the report concluded. Write to Kerri Panchuk.