As tech companies grow and scale, they must prioritize generating new revenue and earning more revenue per user.
In recent years, leading brands like Uber and Shopify have popularized a simple solution to this problem:
This arrangement—in which a tech company like Apple partners with a bank to make high-yield accounts available to customers—is known as embedded banking. Embedded bank accounts work just like other bank accounts. They come with cards and statements; they’re covered by FDIC insurance. And, significantly, they generate interest.
Apple’s new high-yield savings accounts brought in nearly $1 billion in deposits in the first four days.
Earning interest on your customers’ deposits is particularly compelling in light of the current high-interest-rate environment. Today, rates hover around 5%, and they’re expected to continue rising through at least 2024.
If you’re a tech leader who’s thinking about how to drive more revenue per user, this guide is for you. In it, we’ll explain how to earn revenue from interest on your customers’ deposits, covering topics like:
Let’s explore how tech companies like Roofstock earn revenue from the interest on their customers’ deposits.
Banks often pay for the ability to hold and invest customer deposits; that payment is called interest. When a tech company partners with a bank to make bank accounts available to their customers, the tech company can take a fee from the interest earned on those deposits.
For example, when Stessa (a Roofstock company) makes embedded bank accounts available to their customers, those accounts earn interest. In this case, Roofstock passes the majority of that interest along to their customers in the form of a high annual percentage yield (APY).
How is interest calculated? It may surprise you to learn that there are many ways to do it; the formula in the next section is just one example. Which formula you use will depend on your business model and your bank partner.
How much you earn will depend, first and foremost, on what your bank partner is willing and able to offer. In some embedded-banking relationships, the tech company does not earn revenue from interest. In others, the bank is willing to offer interest at near-market rates.
So if revenue from interest is important to you, you should surface it early in discussions with potential banking-as-a-service platforms and bank partners.
To illustrate how much you could earn from interest on your customers’ deposits, let’s use an example.
Say you’re the VP of Product at Titan, an investment-management platform. By offering your customers bank accounts, you enable them to manage their cash and investment assets in one place.
Let’s assume that, in your first month, your customers hold $100 million of deposits in your program, and you’ve negotiated a 4% APY (annual percentage yield) with your bank partner. For the sake of simplicity, let’s also assume that the balance in the account remains constant throughout the month (i.e., there are no transactions), and that you receive monthly—rather than daily—interest payments.
Your agreement with your bank partner stipulates that you calculate interest using the following equation. At the end of your first month, you would receive $333,333.33.
Embedded bank accounts may be more appealing to your customers if they come with higher interest rates and/or offer better rewards. High-yield accounts can lead to new-customer acquisition, enhanced engagement, and increased retention.
However, that requires keeping less revenue for yourself. It’s a strategic choice that each company manages in its own way.
In the above example, Titan has a few options when thinking about how to deploy their interest revenue:
Titan could also vary their deposit fees by customer segment. As an example, they could offer a full 4% interest to customers who hold more than $100K in their accounts, while offering 3% to everyone else—and keeping the difference.
Apple’s recent launch of high-yield savings accounts is an example of option two (above). In this case, Apple passes the interest along to their customers at competitive rates—a compelling offer for new customers.
Earning revenue on your customers’ deposits is perhaps the most obvious way to make money from embedded financial products—but it’s hardly the only one. Based on our experience, these other revenue streams have the potential to be even more lucrative than revenue from interest.
Offering your customers embedded bank accounts may sound daunting—but it’s easier than you think.
Our company, Unit, is a banking-as-a-service platform. That means we help companies like yours launch interest-earning bank accounts (among other financial products). Many of our customers are able to launch quickly, with minimal engineering resources, using our White-Label UI Components.
May 1, 2023
Frequently asked questions
The Federal Reserve sets the Effective Fed Funds Rate, which impacts short-term and variable interest rates. Banks adjust their individual rates accordingly.
The Fed uses interest rates as a way either to spur economic activity (lower rates) or to curb inflation (higher rates), depending on the needs of the moment.
Inevitably, interest rates will change. The Fed raises or lowers interest rates to respond to the economic needs of the moment.
When interest rates come down, the revenue you earn from your customers’ deposits will also come down. That said, you may be able to make up for it by earning additional revenue from other embedded financial products.
For example, when interest rates fall, it becomes cheaper to borrow. At that point, lending and financing products may become more attractive to customers.
Once you’ve built a foundation of embedded bank accounts, you may consider offering additional revenue-generating financial products tailored to your customers’ needs. For example: