It’s nice to be again writing on Fintech Nexus once more. As lots of you understand we closed down Fintech Nexus final 12 months after which offered our property to COMMAND. We labored collectively through the acquisition course of, guaranteeing a easy transition, and the crew at COMMAND relaunched the web site a number of weeks in the past. They usually have invited me to write down right here as soon as once more. After penning greater than 2,000 articles on this web site over the previous 15 years it’s an honor to be again.
Right this moment, I’m diving into Banking-as-a-Service (BaaS) and searching on the unintended penalties of the brutal modifications that the business has gone by means of prior to now 12 months or two. I’m not going to rehash any of the small print of the collapse of Synapse apart from to say the truth that the fallout continues to be ongoing virtually a 12 months later is solely staggering and an enormous failure of the banks, fintechs and regulators concerned.
Many, if not most, energetic BaaS banks have acquired enforcement actions of some variety during the last two years. A few of these actions got here out earlier than the Synapse fiasco however many have occurred since. Now, one might argue that a few of these actions are doubtless warranted given the sorry state of recordkeeping that got here to mild with the Synapse chapter.
The impression of those actions has been swift and dramatic. Banks are way more risk-averse when taking up new fintech corporations as we speak.
The truth that now we have a brand new administration in the USA shouldn’t be going to vary a lot in how each banks and fintechs method BaaS over the approaching 4 years. I don’t suppose any financial institution goes round saying, “Nice! The CFPB has been defanged! We are able to return to the way in which we have been doing issues in 2021.” We’re not going again.
In fact, vital modifications to the way in which fintechs work together with banks can have unintended penalties. Listed here are a few of the challenges the brand new established order will deliver.
The Compliance Value Spiral
Regulators now demand that banks investing in BaaS allocate $3M–$5M over six years to construct compliance infrastructure, with profitability delayed till no less than 18 months into operations in accordance with this piece by Alex Johnson in Open Banker. This has created a twin downside:
- Provide Crunch: Whereas there are nonetheless banks seeking to begin BaaS packages in 2025, there are in all probability 15-20 well-known banks which have the overwhelming majority of the fintech relationships. This has resulted in vital demand at these prime banks whereas lots of the newer packages battle to search out well-capitalized fintechs.
- Value to Fintechs: Whereas prior to now a fintech might have the financial institution or an middleman do the compliance heavy lifting, that’s not the case. Many new fintechs discover themselves having to take a position 2x to 3x extra in compliance than would have been the case a number of years in the past.
The Hit to Innovation
The second knock-on impact of those relationships cooling is the hit to innovation. Till lately, a few entrepreneurs might create a brand new fintech product and begin testing it comparatively rapidly. They could increase a small seed spherical, rent a associate financial institution after which roll out their minimal viable product to begin getting suggestions from the market.
These days are doubtless behind us now. For many monetary capabilities a fintech has to associate with a financial institution, there isn’t a option to construct a working product with out that. So, what considerations me most is that the nice new corporations of tomorrow won’t ever get off the bottom as a result of they will’t discover a financial institution associate. This implies much less competitors, much less innovation and a monetary system that’s not evolving as a lot.
As with the frog sluggish boiling within the pot, we in all probability received’t discover the impression of this downside for a few years. There are lots of of fintech corporations that jumped over this primary hurdle earlier than the BaaS crackdown, and plenty of are simply now reaching their development section. However what number of startups launching this 12 months or in 2026 won’t ever make it to market as a result of they may not discover a financial institution associate?
Now, I don’t wish to reduce the significance of compliance. Some could argue it’s a good factor two youngsters in a storage can’t unleash a fintech product on the world. However that’s how lots of the dominant fintech corporations of as we speak started their life.
Given now we have probably the most advanced regulatory equipment of any developed nation, we’d like a option to preserve good concepts flowing whereas on the similar time guaranteeing that compliance stays middle stage.
I’m optimistic that we are going to discover a manner, and AI could certainly be the driving force that permits the following nice fintech to leap over these hurdles. The concepts that Jo Ann Barefoot put out earlier this 12 months give me hope. Perhaps in Regulation 2.0, the place Generative AI performs an even bigger position, the price of compliance will come down whereas sustaining sturdy client protections.
Innovation prospers when the price of entry right into a market is low. We have to preserve that in thoughts when contemplating how we handle bank-fintech partnerships over the long run.
