Banks Tap FinTechs and Embedded Finance for Deposits

Embedded finance and the impact of FinTech pacts are showing up on bank balance sheets.

There are different paths toward getting here. The latest earnings results from companies including Fifth Third, The Bancorp and Pathward illustrate a range of models for turning relationships with FinTechs and platforms into deposits and fee income.

Fifth Third, which shared second-quarter earnings results Friday (July 17), indicated the continued scaling of an embedded finance platform inside a diversified bank. The Bancorp has built a banking model in which FinTech partnerships supply most of its deposits. Pathward combines partner-generated deposits on its own balance sheet with a custodial model that generates servicing fees on customer deposits held at other banks.

The common thread is that the economics of embedded finance increasingly extend beyond selling access to banking infrastructure.

That comes as demand for infrastructure continues to grow. The PYMNTS Intelligence report “The Embedded Finance Scale Factor: How Firm Size Shapes Strategy, Technology and Partnership Decisions” found that 79% of middle-market companies and 80% of companies with less than $250 million in annual revenue plan to upgrade their embedded-finance capabilities within 12 months. The figure fell to 63% among companies with more than $1 billion in revenue, many of which already have more developed capabilities.

For banks, the expansion creates opportunities to capture the money and transactions flowing through the financial products that businesses embed.

Fifth Third trained a spotlight on building its own embedded finance distribution channel. The bank said in Q2 that Newline deposits, tied to its embedded finance platform, increased $2.1 billion in the second quarter and Newline fee revenue rose 35% year over year. Newline connects FinTechs and enterprises to Fifth Third’s banking and payments infrastructure, giving the bank a way to generate deposits and fees through customers acquired outside its conventional branch network.

The Bancorp’s model is built heavily around the FinTech ecosystem itself. In its first-quarter earnings results, and in a nod to the FinTech Solutions segment, which includes embedded finance but is not limited to it, the company said FinTech partnerships generated 93% of its total deposits. Average deposits reached $8.32 billion, up $721.1 million, or 9%, sequentially, with the increase driven primarily by continued growth in deposits sourced from FinTech relationships.

Payments are another part of the economics. The Bancorp reported $52.51 billion in gross dollar volume on prepaid, debit and credit cards, an 18% year-over-year increase, while prepaid, debit card, ACH and other payment fees rose 5% to $32.5 million.

Embedded Finance Delivery Models Diverge With Scale

Pathward adds a third variation.

The company operates a partner-banking model in which deposits associated with Partner Solutions relationships can sit on Pathward’s balance sheet, while it also acts as custodian for customer deposits placed at other banks.

As of the end of its most recent quarter, in March, Pathward managed $1.07 billion of customer deposits at other banks in its capacity as custodian. Those balances generated $7.8 million in servicing fee income during its fiscal second quarter, up from $6.5 million a year earlier and $3.4 million in the preceding quarter. Pathward attributed the increase to higher average deposit balances held at partner banks.

The different approaches put the PYMNTS Intelligence findings into a broader context.

As companies grow, many move toward outside providers to handle embedded finance. Most companies with more than $1 billion in annual revenue rely on a single third party, compared with 26% of companies generating less than $250 million. Middle-market companies are split more evenly among building internally, working with one provider and using multiple providers.

The report also found that 32% of middle-market companies said an embedded finance partner must hold a bank charter, the highest rate among the revenue groups studied. A chartered provider can hold deposits, issue credit and move money directly, putting the regulated bank closer to the underlying economics of the embedded relationship.

As more companies upgrade embedded finance capabilities and turn to outside providers, banks have several ways to capture the economics underneath those products.