Banks reliant on embedded finance considered essential for longevity, according to a new report
Community Banks Embrace Embedded Finance for Survival and Growth
Embedded finance is revolutionizing the future of community banks in the United States, enabling them to transition from traditional branch-based banking models to becoming essential digital infrastructure partners within digital platforms. This shift is crucial for the long-term survival of community banks, according to a report published by Treasury Prime [1].
In a survey of over 300 U.S.-based community and regional banks and credit unions with assets of less than $100 billion, more than half of the respondents indicated they were considering offering BaaS (Banking as a Service) or embedded banking capabilities [2]. This openness to innovation is driven by the desire to meet modern consumer expectations for seamless, invisible financial services integrated within familiar apps and ecosystems [5].
By partnering with fintech companies, community banks can tap into new revenue streams and customer bases through the integration of financial services into various industries beyond traditional banking sectors [4]. This approach allows banks to extend their reach and relevance in the increasingly digital economy.
One of the key challenges in adopting embedded finance is maintaining risk management and compliance standards throughout the lifecycle of an embedded finance program [3]. To navigate this regulatory uncertainty, many community banks partner with fintech firms that embed compliance and risk management within their systems, ensuring innovation without compromising safety.
Embedded finance also positions community banks as trusted infrastructure in a digital asset-enabled future. As embedded finance moves toward digital asset-native models, such as stablecoins and tokenized payments, community banks serve as the crucial regulated trust anchors providing KYC, transaction monitoring, and fiat-crypto on/off ramps, ensuring security and regulatory compliance while embracing innovation [3].
However, the adoption of embedded finance in community banks is not without its hurdles. The inflexibility of legacy systems for real-time data exchange and the lack of API-readiness pose significant challenges [7]. Additionally, cultural resistance towards disrupting traditional community branch models and the need to revisit existing policies and procedures to align with a digital-first approach are barriers to adoption [8].
Despite these challenges, community banks have an edge over larger established banks due to their local insights, which can serve as a "competitive superpower" for embedded finance [6]. To ensure a successful transition, Brandon Oliver, a financial services industry expert, recommends being pragmatic in the timeline of launch, ensuring the fintech partner has the financial backing to support the timeline, and maintaining daily communication with the partner throughout the entire process [9].
In summary, embedded finance is reshaping the survival and growth strategies of community banks by enabling them to become infrastructure providers within digital platforms. This transformation supports their survival by enhancing relevance in a rapidly digitizing financial landscape while opening pathways for diversified offerings and greater operational efficiency [1][2][3][4][5].
References: [1] Treasury Prime. (2021). The State of Community Banking: Embedded Finance and Digital Transformation. [2] American Banker. (2021). More than half of bank respondents considering BaaS, embedded banking: report. [3] CoinDesk. (2021). Community Banks See Embedded Finance as Key to Survival in Digital Asset Era. [4] Banking Dive. (2021). Community banks see embedded finance as crucial for survival, report finds. [5] Finextra. (2021). Community banks embrace embedded finance to stay relevant in digital economy. [6] Banking Exchange. (2021). Community banks’ local insights give them an edge in embedded finance. [7] Banking Dive. (2021). Community banks face hurdles in adopting embedded finance. [8] American Banker. (2021). Cultural resistance a barrier to embedded finance adoption for community banks. [9] Banking Dive. (2021). Brandon Oliver: Tips for community banks launching embedded finance.
- The integration of financial services into various industries beyond traditional banking sectors, powered by fintech companies, offers community banks new revenue streams and customer bases, thereby promoting business growth and survival in the technology-driven economy.
- By becoming essential digital infrastructure partners within ecosystems, community banks can leverage their local insights as a competitive superpower in the fintech industry, ensuring a seamless and invisible experience for modern consumers and maintaining regulatory compliance throughout an embedded finance program.
