How Fintech Partnerships Can Help Mid-Sized Banks Solve Their Funding Problems
BY JONAH CRANE
Over the past year, the Federal Reserve has raised interest rates at the fastest pace in history, and quickly rolled back its program of bond purchases. What had been a large excess of liquidity in the banking system is quickly draining away, and banks that recently had no use for deposits, or worried about a lack of earning assets against which to deploy them, are now scrambling after strategies to retain the deposits they have and find new deposit sources to support their growth.
In the current environment, banks in need of additional deposits will likely need to take a multi-pronged approach. Attracting rate sensitive depositors is always an option, but it's expensive and unlikely to be reliable over time. Deposit networks can be effective and flexible deposit sources, and are likely to be a part of any solution. But heavy reliance on brokered deposits can get expensive and raise supervisory eyebrows.
One potential source of reliable and relatively cost-effective funding, so far overlooked by most mid-sized banks, is the fintech sector. To date, deposit-oriented fintechs have mostly partnered with small banks in order to benefit from Durbin-exempt interchange rates on the debit cards they typically issue in connection with deposit accounts. But many fintech programs—savings accounts, business accounts, treasury management, and other programs—do not need to optimize for debit interchange. These programs provide an attractive opportunity for mid-sized banks looking to expand their deposit sources.
In comparison to other sources of deposits available to mid-size banks in the current environment, fintech partnerships can provide at least three important advantages:
Qualification as “core” deposits (when properly structured);
Greater stability than typical brokered deposits, because the fintech partner—unlike traditional deposit brokers—seeks stability in its relationships with deposit customers; and
Lower cost of customer acquisition than retail deposits, because customer acquisition is handled through the fintech partner.
Photo by Benjamin Sutter