A week or so ago, we talked about stablecoins and briefly mentioned the issue of deposit flight. This is an issue that deserves, I think, a bit more attention from community bankers.
Community banks have long counted on deposits as their lending engine. Those deposits are, as we all know, the fuel that powers mortgages, small-business loans, and community development. But a host of new competitors is emerging, one comprised of entities that don’t always play by the same rules and could threaten the community bank’s deposit base.
The New Threats. Fintechs and Stablecoins
While stablecoins certainly play a significant part in deposit flight, fintech apps are accelerating that flight. Cash App, for one, owned by Block, Inc. (formerly Square), allows users to hold U.S. dollar balances, send peer-to-peer payments, and even “save” for yields. Other players are getting involved:
- Venmo (PayPal-owned), which lets users maintain balances for seamless transactions.
- PayPal, with its digital wallet holding billions in user funds.
- Chime, a neobank, with fee-free checking and savings and early direct deposit access.
- Robinhood, with cash management accounts that offer competitive yields, and
- Acorns, which rounds up purchases into investments, diverting cumulative deposits.
These fintech platforms, according to recent studies, have captured over $3 trillion in deposits from banks and credit unions over the past five years. Simply put: community banks face a squeeze from both sides. On one side, stablecoins offer a digital-based asset alternative to traditional banking transactions and on the other, fintech platforms offer convenient transactions, high yields, and quick-and-easy payment tools.
The Consequences Community Banks Face
- Deposit erosion and funding risk: when customers find an alternative to putting their money in a community bank account (especially if that alternative offers ease, speed, or perceived innovation), banks lose the funds they rely upon for a suite of services.
- Competitive disadvantage: community banks are subject to rigorous oversight, capital rules, deposit insurance mandates, consumer-protection laws, and local risk and compliance controls. These newcomers are not, and as they continue to grow their share of the banking consumer base—for the most part, unregulated—banks become increasingly irrelevant. While the GENIUS Act does impose reserve and disclosure requirements on stablecoin issuers, for instance, the question remains. Will all participants be regulated fairly and equally?
- Diminished importance: competitive disadvantage, of course, leads to a marginalization. When alternative providers become the hot, new way for local businesses and consumers to transact their banking business, the bank’s role in the community is significantly weakened.
Steps Community Banks can Take… Now
- Advocate for extension of regulatory guardrails: go to the ICBA website. There you can sign petitions, send letters to Congress, and ensure your institution’s perspective is included in the broader policy debate.
- Educate your leadership and board: make sure your executive team understands the implications of stablecoin competition and regulatory shifts. Familiarize yourselves with the GENIUS Act, what it requires, and what it may not yet address.
- Monitor deposit trends and risk exposure: look for early signs of funds migrating out of bank deposits into digital assets, stablecoins, or non-bank platforms. This early detection will help you adapt strategy.
- Leverage your community distinction: highlight what you offer: fully insured deposits, local knowledge, human relationships, lending to local businesses. Use the contrasts (local bank vs. app/wallet) to remind customers why your institution matters.
What’s at Stake?
At the core, what community banks are defending is their relevance, i.e., their ability to attract safe, insured deposits,; to use that capital to lend and invest in the local economy, and to maintain the trust that comes from being “your neighborhood bank.” If that deposit base migrates to fintech apps and stablecoins, banks lose much more than margin; they lose their relevance.
By participating in ICBA’s campaign and speaking up to Congress, community bankers can protect their bank, as well as their ability to serve their community as a trusted institution. In a competition that, like this one, is clearly unfair, it takes more than working harder and smarter; it takes changing the rules of the game.
Bank Marketing Center
We’re Bank Marketing Center, the leading, subscription-based provider of automated marketing services to community banks. Our goal is to help bank marketers with topical, compelling communication with customers that builds trust, relationships, and revenue.
And we do this through automating critical bank marketing functions, such as content creation, social media management, digital asset management and, of course, content routing. All of which contribute to a community bank’s ability to create and distribute content that drives business without fear of fines, brand damage, or fleeing customers.
We also want to share what we know with all our community banking friends. Whether it’s content focused on the latest AI technology, suggestions on how to attract and retain top talent, a webinar focused on operational efficiency, or the importance of data protection, we’re here to make bank marketing the best that it can be.
Want to learn more about what we can do for your community bank and your marketing efforts? You can start by visiting bankmarketingcenter.com. Then, feel free to contact me directly by phone at 678-528-6688 or via email at nreynolds@bankmarketingcenter.com. As always, I welcome your thoughts.