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The Impact of Fintech on Bank Business Models
August 23, 2022 | Wholesale Funding Update
Last time around, we discussed the diversity of business models among US banks. Many institutions have prospered by focusing on what they’re good at, whether it be lending to specific industries or providing banking services to specific communities. Over the past decade or so, we’ve seen a growing number of banks specialize in fintech partnerships. These partnerships, and fintech in general, provide novel and fascinating business models.
A growing number of banks provide banking-as-a-service (BaaS) to fintechs, which allows non-bank tech companies to offer banking products to their customers by integrating with an underlying bank. Neobanks like Chime offer bank accounts to their customers, powered by an underlying bank, which provide the bank with deposits and allow the institution to earn interchange revenue from debit card swipes. The vast majority of institutions that offer bank accounts through fintechs elect to remain under $10B in assets to remain Durbin exempt and earn higher interchange fees . This creates tension, however, since the bank often wants their fintech partner to grow and thrive, but may have to throttle their partner’s growth as the bank gets close to the $10B threshold.
While deposit account offerings fund the liability side of the balance sheet, BaaS banks have also created partnerships to fuel asset origination. Fintechs also partner with banks to offer credit cards, personal loans, business loans, and mortgages. Often, the fintech employs novel data and modern tech (e.g., the all-knowing AI) to aid underwriting. For banks, these fintechs can provide low-cost customer acquisition, especially among new customer segments, as well as interest revenue from lending and interchange revenue from credit cards.
While fintech partnerships can exist on both sides of a bank’s balance sheet, in practice, we find institutions specialize in either deposit account partnerships or lending / credit partnerships. As a result, each bank must work hard to balance the other side of their balance sheet, by either deploying deposits or by sourcing funding to support asset origination.
In our last update, we discussed the importance of interbank markets, and fintech banks provide a perfect use case. Through an interbank market, banks that need funding to support their partnerships on the asset origination side can source deposits directly from banks that have excess funds from their bank account partners. Fintech banks provide a prime example of a market where an efficient, transparent marketplace would leave both sides better off.
 The history, specifics, and impact of the Durbin amendment is an interesting topic for the future. Senator Durbin is back at it again, and he is currently focused on introducing regulation around credit card interchange fees.