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Many community financial institutions (FIs) steer clear of cryptocurrency, viewing it as a speculative trend outside of their core business. However, dismissiveness toward digital assets might mean missing a major shift in the competitive landscape. If competitors like Square and SoFi are wrong about the future of crypto, they will still peel away customers and payment revenue. If they are right, they could fundamentally reshape the lending market by turning unsecured loans into highly secure, collateralized assets.
For community banks, the real danger is not just deposit outflows; it is the long-term strategic play these fintech giants are executing right under their noses.
The Win-Win Fintech Strategy: Heads They Win, Tails You Lose
While fintech platforms frequently champion the revolutionary potential of digital assets, their actual success does not depend on crypto’s ultimate survival. Their main objective is account acquisition and customer engagement.
By offering crypto services, fintechs attract a tech-savvy user base, satisfy venture capital demands, and drive up corporate valuations. Much like traditional brokerage giants like Vanguard or Charles Schwab do not need to predict the success of individual meme stocks, they simply want to be the primary gateway for the transaction.
For Square and SoFi, this binary strategy presents three highly favorable scenarios:
- If crypto gains value: These fintechs establish a massive pool of digital collateral, enabling a new, highly efficient collateralized lending market that directly competes with community bank portfolios.
- If crypto stabilizes: The digital assets remain parked on their platforms, securing primary financial relationships and locking in customer loyalty.
- If crypto declines: Fintechs have still successfully used the asset class as a low-cost customer acquisition tool, onboarding users onto their advanced digital platforms.
How Square and SoFi Are Securing Primary Bank Status
To win the relationship, fintechs are aggressively funding initiatives that make digital asset adoption frictionless for both consumers and merchants.
Square has enabled Bitcoin transactions for more than 800,000 merchants, offering zero processing fees on these transactions through 2027. This strategy is quickly turning Bitcoin into a business savings vehicle rather than just a payment novelty. In fact, data shows that 89% of Square sellers using the auto-conversion feature plan to use Bitcoin as a long-term savings account. This is a massive shift, keeping funds entirely within the Square ecosystem.
At the same time, SoFi is leveraging its national bank charter to offer unprecedented security. In late 2025, SoFi became the first FDIC-insured, nationally chartered institution to offer crypto trading on a bank-grade platform. Shortly after, they introduced SoFiUSD, a dollar-backed stablecoin on public blockchains. Within the first ten days of relaunching their crypto services, SoFi attracted over 63,000 new users, proving that consumers prefer holding digital assets within a licensed banking ecosystem.
The Real Threat: The Rise of Crypto-Backed Lending
While community banks worry about payment fees and minor deposit migration, the biggest structural threat lies in the future of lending.
Historically, small business and consumer credit has been dominated by unsecured lending. However, if digital assets maintain or grow their value, they become highly liquid collateral. Fintechs holding these assets can easily offer loans backed by cryptocurrency.
According to industry experts, Bitcoin-backed loans typically operate on an over-collateralized basis at a 50% loan-to-value (LTV) ratio. Because crypto markets operate 24/7, lenders can monitor collateral in real time, automate margin calls, and instantly liquidate assets if thresholds are breached. This drastically reduces credit risk compared to traditional unsecured personal or business loans.
Managing this type of collateral is highly complex for traditional banks due to custody rules and volatility. However, for Square merchants and SoFi users who already hold their assets on-platform, the process is seamless and automated.
The Bottom Line for Community Banks
Deposit outflows to digital asset platforms—which currently impact up to 5% of community bank deposits—are only the tip of the iceberg. The deeper, more permanent threat is to the core lending business.
If consumers and small businesses build up significant cryptocurrency balances on fintech platforms, they will choose to borrow against those assets rather than liquidate them. If community FIs cannot accept or leverage digital collateral, they risk losing their most lucrative borrowing relationships to the fintechs that can.
Source: thefinancialbrand.com