What Rising Interest Rates Mean for Fintech-Bank Partnerships

Cost of capital is increasing, but fintechs and banks can work together to generate more value
Headshot of Meghan Ryan
Meghan Ryan
Chief Financial Officer
July 27, 2022
Collage image showing rising interest rates graphs and charts

The Federal Reserve raised interest rates another 0.75% in an effort to combat inflation. How do these hikes impact partnerships between fintechs (which include embedded finance companies) and banks?

While capital will become more expensive for fintechs, the outlook isn’t all bleak. In fact, banks — which serve as the backbone of most fintech businesses — typically experience strong growth in a rising rate environment. Thoughtful partnerships between banks, fintechs, and embedded finance companies, while leveraging banking as a service (BaaS), can help all sides grow their businesses in a high interest rate environment.

Fintech and embedded finance business models may shift

Over the last decade, fintech and embedded finance business models were supported by an extended period of low interest rates, which stimulated growth and investments. This environment had varying impacts on different business models: 

  • Investment platforms benefited from strong equity market performance, which drove increased assets-under-management and fee income. 
  • HR and payroll tech companies were supported by strong corporate investment, resulting in low unemployment rates.
  • Mobile payments and digital wallet businesses were easily able to attract deposits — customers valued ease of use and convenience over the relatively low annual percentage yield (APY) they might earn on their savings accounts. 

With interest rates on the rise, we’ve seen a pullback in equity markets and corporate investment, and a rise in savings account APYs. This means business models may shift to maintain customer and revenue growth. 

To learn more about how a BaaS provider can help fintechs connect with banks, contact us.

Deposit-hungry banks — collaboration with fintech

Banks typically do well in a rising rate environment because they earn more profit from lending. According to Reuters, US banks expect growth in net interest income in the back half of this year. This is because the interest rates banks earn from lending increase at a faster pace than the rate they are paying out on deposits. This increased revenue opportunity drives competition for deposits, so banks will focus on strategies to attract and retain deposits. It also drives competition for lending opportunities. Banks can leverage fintech partnerships to reach new customers, grow their deposit base, and source lending opportunities.

Customer-centric fintechs — efficient banking products

We’ve learned over the last decade that fintechs are generally more adept at creating a strong customer experience than traditional banks. The rise of neobanks is a great example of how a customer-centric approach to financial services can increase customer satisfaction by leveraging technology to offer simple, transparent, and efficient banking products. This customer-centric approach is critical to building long-term, sticky customer relationships.

Fintechs can leverage their strengths to work with BaaS providers to find bank partners that are mutually aligned with their success. These strengths include:

  • Technical expertise that increases access (online and mobile) and efficiency
  • National reach
  • Low-friction onboarding driving high conversion rates 
  • Tailored onboarding experiences and product offerings to better reach under-banked and niche markets
  • Specifically for embedded finance companies, existing customer bases that benefit from an integrated financial product, which drive customer loyalty

Power of fintech-bank partnerships

To tie everything together: Higher interest rates mean more motivation for banks to seek out deposits and lending opportunities, and more motivation for customers to be thoughtful about where they place their deposits. This creates more competition for a limited supply of deposits.

So how do banks attract deposits, lend money, and drive profit? 

  • Broaden customer acquisition channels
  • Offer competitive rates
  • Seamless onboarding
  • Tailor products and services to meet customer needs
  • Low friction user experience

Fintechs excel in these areas and can help banks meet their objectives. Banks that work with Treasury Prime for BaaS report lowering deposit acquisition costs by 50 percent, and increasing deposits by 30 percent.

Alternatively, banks can help fintechs by providing access to lower-cost capital to drive their growth. Examples may include deposit balance incentive revenue, cost-sharing, or business loans at attractive rates.

BaaS providers can bring these parties—fintechs, embedded finance companies, and banks— together to grow their businesses. BaaS APIs connect fintechs directly to a bank’s core, enabling fintechs to launch products in weeks vs. months. On the fintech side, all this means banks may be more willing to invest in relationships with your company. This can be great news if you are at an early stage and looking for your first partnership, or even if you already work with a bank and are looking to scale your product across additional bank partners.

Ultimately, higher interest rates will require adjustment — but with change also comes new opportunities. By assessing how this transition will impact your company’s unique business model and market, you can find ways to thrive. 

If you want to be the next unicorn, you need a direct bank relationship and the best Baas company. To discuss how we can help your fintech or embedded finance company scale, contact us here. Want to learn more about our process? View our API reference or play around with our Developer Sandbox.

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