Embedded Finance's Remarkable Revenue Boom For US Banks
Banks were reluctant to embed, but those who did are now reaping the rewards.
Embedded finance is a money maker and sponsor US banks are raking in some 51% of revenue and deposits from their embedded partnerships. That’s a shocker!
Alloy Labs hits us with big numbers for how much money embedded finance is making for sponsoring banks in a survey that raised my eyebrows and will likely raise yours.
Of course, making money with embedded finance isn’t without peril. Compliance isn’t as easy as banks thought, with 75% of banks losing over $100k to compliance violations!
Who’d have guessed that fintechs would be lax in compliance? So it’s no wonder 80% of respondents report that meeting embedded finance compliance requirements is challenging!
The numbers are impressive, particularly as banks were reluctant to start embedding their services.
That said, I remain slightly skeptical and think more details are required to confirm these numbers are real, but I will take them at face for now.
👉TAKEAWAYS
🔹 94% say that it is “very or somewhat important” for their organization to invest in new compliance technology and increase compliance training
🔹 51% of sponsor banks’ revenue and deposits, on average, are driven by embedded finance partnerships
🔹 80% agree that meeting sponsor bank compliance requirements is challenging
🔹 39% of sponsor banks lost at least $250K to compliance violations in their embedded finance partnerships
🔹 92% of sponsor banks believe that there is a need for more adaptable embedded finance partnerships between banks and fintechs
🔹 Sponsor banks top motivators for embedded finance partnerships: 41% Innovation and acceleration, 39% Customer acquisition, 37% Cost reduction and efficiency
🔹 Most sponsor banks report 6 to 10 embedded finance partnerships
🔹 88% of sponsor banks agree that recent regulatory scrutiny has turned up the heat on embedded finance partnerships
👊STRAIGHT TALK👊
Embedded finance partnerships work and offer banks who use them a way to increase deposits without increasing customer acquisition costs.
The idea that fintech partners can handle customer acquisition for them is compelling.
That said, the compliance part of this relationship is fraught with danger, and the reality is that fintechs will often do “whatever it takes” to bring in the money regardless of compliance.
This leaves banks increasingly clamping down on fintech and, in the most severe model, actually controlling their fintech partners' risk management processes and handling compliance themselves.
Can you blame them?
What is interesting is that embedded finance isn’t just about deposit growth. Banks can also engage in fee-based partnership models, showing how they have more than one way to monetize fintech partnerships.
It’s good to see that fintech works!
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