How Community Banks Can Stay Competitive with Embedded Banking

Banking experts share how smaller banks can go toe-to-toe with larger institutions by partnering with enterprise businesses
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Patrick Wong
Content Manager
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January 5, 2023
An image of community banks connected to a Treasury Prime logo.

There are roughly 4,500 community banks in the United States— banks that are generally managed by and serve a local community with less than $10 billion in assets — making up 97% of the banking industry. However, these banks only account for 14% of total assets held by all banks nationwide. The lion’s share, roughly $20 trillion, is in the hands of larger and national banks.  As the number of bank branches hits an all-time low and while neobanks and traditional banks pose a persistent threat, how can community banks compete and grow?

The role of community banks

The role of community banks in the American financial system shouldn’t be overlooked. They play a major role in financial inclusion and equity, providing a banking lifeline to the smaller and oftentimes rural communities in which they’re located. A recent report from the Federal Deposit Insurance Corporation (FDIC) found that community banks were especially successful in “areas with growing economies and populations while they continued to meet the credit needs of less economically vibrant areas, such as rural counties and areas with declining populations.”

Community banks also provide important lending opportunities that far exceed their relatively small share of the banking industry. The FDIC report found that while community banks account for just 15 percent of the banking industry’s total loans, they hold 30 percent of all commercial real estate loans, 36 percent of small business loans, and 70 percent of agricultural loans.

BaaS Solutions

One avenue for growth is reflected in the corresponding growth of banking-as-a-service (BaaS), which has delivered promising results for community banks. A recent S&P Global analysis shows that community banks within the $1 to $3 billion assets range that acted as partner banks for fintechs and enterprises saw double-digit growth in their deposit volume. This not only out-paces commercial banks of a similar size but surpasses the expected 1.8% forecasted growth estimated for the community banking space as a whole. These community banks are out-performing industry expectations, even with an increasingly likely recession and an unstable macroeconomic environment. 

As bank fintech partnerships grow, community banks are also working to balance out increasing regulatory expectations. It’s important to work with a BaaS provider that has deep banking experience like Treasury Prime, which has a track record of helping banks and fintechs stay compliant, and banks can also seek advice from other industry organizations. 

The benefits of embedded banking and BaaS for community banks

Embedded banking is a quickly growing industry, expected to reach $51 billion in the next five years, and it’s powered by banking APIs — software that connects to a bank’s core and allows it to integrate with enterprise businesses. Treasury Prime is a BaaS provider that builds the embedded banking software that connects the two parties, and these partnerships have proven to be beneficial.  Banks that work with Treasury Prime report lower deposit acquisition costs and increased deposits.  

Entering into an embedded banking relationship with companies looking to offer financial services to their customers creates new income streams for community banks. Fintechs and enterprises need a partner bank to provide the financial services that their customers want and need, and community banks can provide those services in exchange for the added deposit volume and revenue. 

Community banks also have the added perk of expanding beyond their geographic limitations thanks to their partnerships. Community banks don’t typically have the luxury of having multiple branches across different geographies like larger national banks and are often bound to the locale in which their physical branch has been built. This severely limits the audience to which the bank can sell. Working with a fintech, which likely has a wider reach and a strong digital and social media presence gives community banks a significantly bigger pool of customers.

Customer behaviors are also shifting. Many want to only interact digitally with their finances and they also want an all-in-one experience that doesn’t require them to leave the platforms they’re already using to — for instance — pay for services or to get paid themselves.

Though community banks may not have the capacity to build the full online banking experience today’s customers want, they can still offer their financial services through the modern embedded banking interfaces of their fintech and enterprise clients.

In many ways, community banks who partner strategically with fintechs and enterprises can greatly expand their footprint and get more customers — and consequently higher deposit volume — without having to put in the work on physical or digital expansion themselves.

Interested in getting started with embedded finance? Start with the best. Learn more about Treasury Prime and why we’ve won the Best Banking as a Service Platform for two years running.

Why community banks need BaaS

However, offering these financial services to eager businesses isn’t easy. Banks generally operate using legacy technology that isn’t readily compatible with the tools and systems of modern fintechs and enterprises. Some fintechs have tried — and failed — to integrate directly with a bank for years. This ends up draining time and resources.


These technological hurdles can be even more apparent in smaller community banks that may lack the internal technical resources to even begin the process of integrating with a fintech or enterprise.

Many of these smaller banks need an embedded banking software company to act as that facilitator between them and the companies they’re integrating with. 

“Working with a BaaS provider like Treasury Prime allows banks to augment its legacy tech stack in a more time and cost-effective way,” Treasury Prime Business Development Manager Shane Geisslinger explained. “Community banks tend to not have the technical capabilities or internal expertise to integrate with fintech companies. Working with an embedded banking software platform like Treasury Prime cuts down on the number of new resources it would need to employ to both launch and scale an embedded banking program.”

Treasury Prime has also partnered with bank core providers FIS and Jack Henry to help banks like Grasshopper Bank go to production with fintechs and enterprises faster than any other option, while being cost effective.

Advice and resources for community banks starting out with BaaS and embedded banking

For community banks, it can feel like a big leap to go from operating a single or handful of branches to also working purely digitally with fintechs and enterprises. Thankfully, some organizations help banks make the transition.

The JAM FINTOP funds, which have raised $312 million, invest primarily in banktech and blockchain infrastructure companies on behalf of regulated financial institutions. Treasury Prime is one of JAM FINTOP’s portfolio companies. Adam Aspes is Managing Partner at JAM Special Opportunity Ventures, co-sponsor of the JAM FINTOP funds.  Aspes says that teams should be prepared to change how they think about their offerings and consider their team's makeup.

“Having an innovation mindset is critical,” Aspes advised. “Every bank should have a Digital Officer that reports directly to the CEO. Additionally, banks need to add more technologists to their boards. For an industry moving from branch maps to tech stacks, this type of expertise inside the bank should be mandatory.”

The limited partners in the JAM FINTOP funds comprise a network of over 90 community banks, and the team has facilitated over 1,000 connections between member banks and fintechs. Organizations like JAM FINTOP are an important resource for community banks as they not only support the areas of need for community bankers but provide resources and events that bring fintechs to the banks directly.

“Our investment process includes actively engaging with our bank limited partners to understand their needs, introduce them to new technology, and foster [that] innovation mindset to remain relevant and competitive,” Aspes said.

Of course, choosing the right BaaS provider and embedded banking software platform is also important and banks should take note of a few things before making a final decision.

Geissler recommends looking for embedded banking software providers who aren’t just technological partners but provide a full suite of services like compliance, sales, and key partnerships. 

Compliance and risk mitigation for bank fintech partnerships 

For instance, Treasury Prime offers banks tools and pre-integrated partner services that can help banks with fraud and transaction monitoring. Compliance for some BaaS providers is treated as a one-off that they take on themselves. This leaves little room for direct bank oversight, which puts the bank and fintech at risk, especially in light of increasing regulatory scrutiny. 

Treasury Prime provides its partner banks with a comprehensive compliance framework that hinges on a direct connection to their fintech and enterprise clients. Many BaaS providers tend to act as the middle layer separating the partner bank and fintech which makes managing transaction monitoring and compliance difficult. Direct relationships between partner banks and fintechs are facilitated by Treasury Prime, allowing banks and their clients to work collaboratively on compliance. Treasury Prime also provides a suite of partner services that power transaction monitoring, KYC, and KYB, and has an in-house team of experts ready to advise on best regulatory practices.

“We work to give community banks best practices on how to build a proper compliance program,” Geisslinger said.

Sourcing your own fintech deals

Similarly, Treasury Prime also has a dedicated sales team that can not only bring well-suited deals to community bank partners but also coach the bank partners on how to find and close fintech and enterprise deals themselves.

“Our sales team is always out there working on deals with fintechs and other companies who are looking to embed financial services and products into their offering,” Geisslinger said. “We can be a sales arm and a source of deal flow for banks while we help them become better educated on how to go out and sell their own deals.”

Learn more about how Treasury Prime can help your bank stay competitive and not only survive the changing economic landscape but thrive in the face of changing customer behaviors, tightening regulatory scrutiny, and competition from larger banks.

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