Mid-Size Banks Turn to Fintech Partnerships as Traditional Revenue Streams Dry Up

Mid-Size Banks Turn to Fintech Partnerships as Traditional Revenue Streams Dry Up

Mid-size U.S. banks are pivoting to a new business model as their core revenue engine sputters, embracing "banking as a service" partnerships with fintech companies to monetize the one asset fintechs can't replicate: their bank charters.

The shift comes as these institutions face a stark reality. Over the past four years through early 2022, their performance has deteriorated significantly while private fintech companies have seen valuations soar on the back of unprecedented venture capital inflows. The contrast is particularly striking given that interest income—which makes up roughly 75% of these banks' total revenue—remains under pressure, while the remaining 25% from non-interest sources faces headwinds as overdraft fee revenue disappears and payments revenue migrates to larger banks and non-bank competitors.

Meanwhile, venture investing in fintech has exploded to the point where one in every five venture capital dollars invested in 2021 went to fintech companies. In just the fourth quarter of 2021 alone, U.S. fintech firms raised $18.2 billion, according to data cited in a recent Fintech Takes analysis.

The collision of these two trends has created what amounts to a natural market for partnerships. Fintech companies need bank charters to operate legally in the United States. Mid-size banks need new revenue streams. Enter banking as a service, or BaaS—a model where banks partner with fintechs or other non-financial brands to provide financial services to the partner's customer base, leveraging the bank's charter and operational capabilities like account management, compliance, fraud management, and payment or lending services.

According to research from Cornerstone Advisors, it's proving to be an "incredibly cost effective distribution strategy." The roughly 30 U.S. banks currently dominating the BaaS space are achieving return on equity and return on assets metrics that significantly outpace their peers, based on data from Andreessen Horowitz cited in the analysis.

The economics make intuitive sense. Rather than spending heavily to acquire and service retail customers directly—a game increasingly dominated by megabanks and digital-native challengers—mid-size banks can essentially rent out their regulatory infrastructure to fintechs that have already built customer bases and distribution channels. The bank provides the plumbing and compliance framework; the fintech handles the customer relationship and user experience.

What's particularly notable is the timing. In most industries, when incumbents struggle and well-funded disruptors proliferate, the story ends with displacement. But financial services operates under different rules. U.S. banking regulations create a moat that no amount of venture capital can bridge without either obtaining a charter (an expensive, time-consuming process) or partnering with an institution that already has one.

This dynamic has effectively transformed bank charters from a regulatory burden into a monetizable asset at precisely the moment when mid-size banks need new revenue sources. The question now is whether this represents a sustainable business model or merely a temporary arbitrage opportunity as the fintech sector matures and potentially seeks its own charters or alternative regulatory pathways.

For CFOs at mid-size banks, the calculus is straightforward: BaaS partnerships offer a path to profitability that doesn't require competing head-to-head with JPMorgan Chase or winning a marketing war against Cash App. For fintech CFOs, the math is equally clear—partnering costs less than building, and moves faster than applying for a charter. Whether this détente holds as the fintech funding environment inevitably normalizes remains the open question.