Banks turn fintech partnerships into deposits and fee revenue

Banks are beginning to show more of the financial impact from embedded finance partnerships, with recent results from Fifth Third, The Bancorp and Pathward tying fintech and platform relationships to deposit growth, payments volume and servicing income. The figures point to a broader shift in which banks are not only supplying regulated infrastructure to software firms and fintechs, but also capturing balances and transaction revenue created through those channels.

Fifth Third reported that deposits linked to Newline, its embedded finance platform, rose by $2.1 billion in the second quarter. The bank also said Newline fee revenue increased 35% from a year earlier.

Newline connects fintechs and enterprises with Fifth Third’s banking and payments systems. That structure allows the bank to reach customers through third-party products rather than relying only on branches or direct corporate relationships. For a bank, the economics can include deposits, payments activity and fees tied to the use of its infrastructure.

The Bancorp reported a more concentrated model. In its first-quarter results, the company said fintech partnerships accounted for 93% of total deposits. Average deposits were $8.32 billion, an increase of $721.1 million, or 9%, from the previous quarter, which the company attributed mainly to continued growth from fintech-sourced deposits.

The Bancorp also reported $52.51 billion in gross dollar volume across prepaid, debit and credit cards, up 18% year over year. Fees from prepaid, debit card, ACH and other payment activity increased 5% to $32.5 million, according to the company.

Different structures for partner banking

Pathward uses a different version of partner banking. The company holds some deposits tied to Partner Solutions relationships on its own balance sheet and also serves as custodian for customer deposits placed at other banks.

At the end of its March quarter, Pathward said it managed $1.07 billion of customer deposits at other banks in a custodial capacity. Those balances produced $7.8 million in servicing fee income during its fiscal second quarter, compared with $6.5 million a year earlier and $3.4 million in the previous quarter. Pathward said the rise reflected higher average deposit balances held at partner banks.

The models differ in how the bank earns revenue. A bank may hold deposits directly, earn fees from payments and account activity, or receive servicing income for administering balances placed elsewhere. In each case, embedded finance gives non-bank companies a way to offer financial products while relying on a regulated banking partner for core functions such as deposit handling, payments movement or custody.

Demand from companies for these capabilities remains elevated, according to PYMNTS Intelligence. Its 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 embedded finance capabilities within 12 months. Among companies with more than $1 billion in revenue, the share was 63%, a lower figure that the report linked to more developed existing systems among larger firms.

The report also found differences in how companies choose providers. Most companies with more than $1 billion in annual revenue use a single third party for embedded finance, while 26% of companies with less than $250 million in revenue do so. Middle-market firms were more evenly divided among internal development, one-provider arrangements and multi-provider approaches.

PYMNTS Intelligence said 32% of middle-market companies considered a bank charter necessary for an embedded finance partner, the highest share among the revenue groups studied. A charter allows a provider to hold deposits, extend credit and move funds directly, placing regulated banks close to the revenue and balances generated by embedded financial products.

This story draws on original reporting from PYMNTS.