Community banks aren’t just watching the fintech train speed by anymore — they’re jumping aboard. A new report says most of them now believe embedded finance might be their ticket to survival in a banking world that’s changing faster than ever.
More than half of the community bank leaders surveyed are actively considering banking-as-a-service (BaaS) or embedded finance tools. It’s not just a curiosity. It’s a matter of longevity.
Embedded Finance Moves from Buzzword to Business Plan
This week’s report from Treasury Prime puts real numbers behind what many in the banking industry have suspected for a while: embedded finance is no longer some niche trend.
Sixty percent of executives at community banks called it “extremely important” to their long-term strategy.
That’s a big deal for a sector known more for local roots than flashy innovation. But with shrinking margins, an aging customer base, and big banks eating up more digital ground every year, community lenders are looking for new tools to stay relevant — and solvent.
The math checks out. BaaS and embedded finance models let banks offer services like payments, checking accounts, or loans directly through fintechs, retail platforms, or apps — essentially plugging their infrastructure into new digital pipes.
A Lifeline Through Partnerships, Not Platforms
Community banks can’t afford to build a consumer-facing app that rivals Chime, Robinhood, or Apple Wallet. But they can provide the banking backend.
That’s where embedded finance comes in.
By partnering with tech companies — often startups hungry for financial products — these banks can offer digital services to a whole new user base. They get access to cheap deposits, new fee streams, and broader exposure, without having to reinvent themselves.
• For many banks, this means flipping the script: becoming the silent partner behind an app that customers might not even know is connected to a bank at all.
Some critics say this turns traditional banks into “dumb pipes.” But community lenders see it differently. They see access, volume, and relevance — things they desperately need right now.
Regulatory Warnings Haven’t Derailed Interest
The big “but” hanging over all this? Regulation.
Earlier this year, the Office of the Comptroller of the Currency (OCC) and other regulators signaled they were watching BaaS relationships more closely. That sent a chill through parts of the industry, especially after high-profile incidents involving fintech partners led to scrutiny at multiple banks.
But the Treasury Prime report shows that community banks aren’t backing away. In fact, many are doubling down.
One reason? The alternative is worse. Without new tech partners, many local banks say they’ll struggle to compete — or worse, survive — in a market dominated by giants like JPMorgan and fintech unicorns backed by Silicon Valley billions.
This one-line statement from a mid-sized Texas bank CEO in the report cuts through the noise: “We’re more afraid of being irrelevant than we are of regulators.”
What’s Driving the Push: Deposits, Data, and Customer Stickiness
It’s not just fear driving this shift. There’s a real business case here.
Community banks have always relied on deposits to fund loans. But those deposits are getting harder to come by. People are stashing their money in higher-yield online accounts, crypto platforms, or even treasuries.
BaaS gives banks access to deposits gathered by fintech partners — often at lower costs than they could achieve on their own.
The Treasury Prime report also noted how embedded finance improves customer experience. Instead of dragging users into a clunky bank portal, the bank can live inside the apps people already use. This “stickiness” matters.
In one part of the study, executives highlighted three main benefits they expect from embedded finance adoption:
| Top Benefits Cited by Community Banks | Percentage of Respondents |
|---|---|
| New Revenue Streams | 68% |
| Lower Cost Deposits | 61% |
| Improved Digital Reach | 59% |
Not Every Bank Is Ready for the Leap
Of course, not every small bank is charging full steam ahead.
Some are wary of the tech complexity. Others are still recovering from compliance lapses involving BaaS partnerships in the past. And a few just aren’t convinced the economics will work long term.
Still, the report makes clear that the majority are at least exploring it.
There was also a noticeable generational split. Bank executives under 50 were far more likely to say embedded finance was essential — while older leadership skewed more cautious.
One executive summed it up in a way that probably resonates across a lot of boardrooms: “I don’t want to be the guy who blocked this and then watched our deposits walk out the door.”
The Clock Is Ticking for Community Banks to Choose a Side
Whether embedded finance saves small banks or simply buys them time is still up for debate.
But this much is clear — the industry’s slow-moving middle is starting to fade. Banks are either moving into digital partnerships or bracing for consolidation. And with hundreds of community institutions still operating on aging core systems and fading local footprints, the pressure’s rising fast.
Will all of them make it through this shift? Probably not.
But the ones that bet on embedded finance — and play their cards right — might just find themselves in a better place than where they started.
