The embedded finance playbook: Partner banks need quality not quantity
- As consumer demand grows, sponsor banks—especially smaller ones—face intensified FDIC enforcement actions on third-party relationships.
- By prioritizing a "quality over quantity" mindset, Grasshopper Bank is navigating complex regulatory demands while realizing embedded finance growth.
70% of consumers believe that more than half of financial services will be offered via non financial services platforms in the near future. And while rising consumer comfort with embedded finance is a good signal for the industry, its maturity has also come with certain complications: 25.6% of FDIC’s enforcement actions have been aimed at sponsor banks since the start of 2024.
A lot of this regulatory heat has been focused on smaller banks and FIs. For example, the FDIC’s order against Piermont Bank stated that the regulatory body determined the bank to be engaged in “unsafe and unsound” banking practices concerning its controls and processes regarding third-party relationships. Similarly, Sutton Bank has also been ordered to create a plan for the assessment of its current and future partners.
So, banks have to find a way to build embedded finance programs that benefit their bottom lines but are also resilient in the face of rising regulatory scrutiny. One case study of note is by Grasshopper Bank, which surpassed $1 billion in program deposits and supported over $10.7 billion in transaction volume with over 20 fintech programs in 2023.
Grasshopper Bank launched its embedded finance platform in Q1 2022 using Treasury Prime as its technology provider. At the time the bank focused primarily on providing depository account enablement with payment processing. But it has since evolved its offerings to include enhanced FDIC insurance in response to the banking crisis in March 2023, said Lauren McCollom, Head of Embedded Finance at Grasshopper Bank.
For Grasshopper, deposit growth is a primary driver for its embedded finance program, and McCollom sees two types of fintech profiles emerge in the bank’s program:
- Fintechs that want to avoid any single point of failures in their partner bank relationships and add redundancies by diversifying bank partnerships.
- Fintechs that want to build their embedded offerings on long term and stable relationships with their bank partner.
How Grasshopper runs its embedded finance program
From the outset of the program Grasshopper’s approach was to be measured and deliberate. “While startups like to move fast and break things, we utilized our “crawl, walk, run” approach to launch our platform by developing our strategy, building our regtech stack, and selecting the right launch partner,” said McCollom.
This means that the bank takes stock before onboarding new fintechs and its partnership with Treasury Prime has played a role in its ability to “control the speed of growth,” said McCollom.
Grasshopper’s approach to running its embedded finance program has two main pillars:
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