Banks Shift BaaS Focus to Deposits and Fees

Fifth Third Bank is growing both deposits and fee revenue through its Newline embedded finance platform. The Bancorp relies on FinTech partnerships for nearly all its deposits, while First Internet Bank is boosting BaaS fees as it moves billions in FinTech deposits off its balance sheet.

These approaches, detailed in second-quarter earnings, show how regulated banks are tailoring their BaaS offerings. Banking-as-a-service generally involves a bank supplying products that a nonbank, like a FinTech, distributes through its own interface. Other companies can handle technology, recordkeeping, payments, and compliance functions.

Fifth Third's Dual Growth Strategy

Fifth Third's earnings revealed a rare case of balanced growth. Newline deposits increased by $2.1 billion, and fee revenue from the platform rose 35% year over year. This gives the bank both a source of funds from the deposits and direct fee income generated by the embedded finance business.

The Bancorp's FinTech Funding Model

The Bancorp has built its funding base around FinTech. Its average deposits reached $8.41 billion, up 4.4% from a year earlier, primarily driven by these partnerships. FinTech fees hit $40.9 million, up from $35.6 million, representing 25% of total quarterly revenue.

FinTech partnerships generate 96% of The Bancorp's total deposits. The bank also reported $1.12 billion in off-balance-sheet deposits as of June 30. These deposits were swept to other institutions to manage the bank's balance sheet composition and deposit diversity.

First Internet's Fee-Focused Approach

First Internet Bank demonstrates that BaaS growth doesn't require holding all deposits. Its BaaS fee revenue surged 172% year over year as it added and expanded FinTech partnerships. Concurrently, it moved approximately $2.4 billion of FinTech deposits off its balance sheet into a deposit network. The bank said this provides flexibility to manage its balance sheet size.

FV Bank's Managed Account Launch

FV Bank launched its Global Managed Accounts offering on August 26, targeting the operational side of BaaS. Eligible FinTechs and payment platforms can offer accounts held directly at FV Bank. The bank handles account provisioning, KYC/KYB onboarding, transaction monitoring, and reviews, while the partner retains its customer interface.

Regulatory Risks and Responsibilities

These operating models carry regulatory consequences. The Federal Reserve, FDIC, and OCC outlined risks in a joint statement on banks' third-party arrangements for deposit products. The agencies said third parties may maintain systems of record, process payments, perform compliance functions, and service accounts.

They did not prohibit these arrangements but identified risk factors. These include fragmented operations, inadequate bank access to records, and over-reliance on third parties for compliance. Banks remain ultimately responsible for complying with all laws and regulations, even when functions are delegated.

Verification processes add complexity to information sharing between parties. A March PYMNTS Intelligence report surveyed 350 companies and found businesses use digital identity verification across an average of 4.4 workflows. The most common applications were:

The research was not BaaS-specific but showed significant identity activity occurs after initial onboarding. For banks in embedded finance, this makes customer and transaction data an ongoing concern, not only an account-opening issue. The federal agencies specifically flagged customer identification, due diligence, suspicious activity monitoring, and sanctions compliance as functions third parties may perform.