Banking-as-a-service (BaaS) providers in the fintech sector are feeling the regulatory heat as the Office of the Comptroller of Currency (OCC) and Federal Deposit Insurance Corp (FDIC) enforce stricter compliance standards. The number of banks that partner with fintech companies to provide banking services accounted for 13.5% of severe enforcement actions by federal bank regulators in 2023. This is a significant number considering the limited number of US banks that engage in BaaS. In response, fintech firms are diversifying their sponsor bank relationships and pursuing more than one sponsor bank to mitigate risks. The top considerations for fintech firms looking for bank sponsors are the ability to sustain their business, how these partners differentiate themselves in the market and whether these sponsors have regulatory approval for new activities. Rohit Arora, partner at Klaros Group, believes the future lies in partnerships between fintech firms and multiple sponsor banks to preserve flexibility and reduce the impact on customers when facing regulatory challenges. However, it is not easy for fintech firms to switch banks given that they sign multi-year contracts with their existing sponsors, and it takes time to launch or wind down relationships. “With all the pressures, it’s hard to move,” said Curt Queyrouze, president of Coastal Community Bank. Fintech firms primarily rely on their relationships with these banks to offer products such as deposits, credit, lending or international payments, and their BaaS partners play a crucial role in managing risk and compliance. As a result, fintech firms are more cautious in selecting banking partners and are placing greater emphasis on unit economics rather than the number of customers. The shift in focus is accompanied by a greater emphasis on transparency with banks and the need to prove the fintech firm’s ability to comply with regulatory protocols and requirements.
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