The Evolving Regulatory Environment for Embedded Finance in the US: Preparing for Future Changes and Staying Compliant


In today’s rapidly evolving financial landscape, embedded finance, open banking, and Banking as a Service (BAAS) are transforming the way businesses and consumers interact with financial services. Embedded finance integrates financial services directly into non-financial applications, providing a seamless and frictionless experience for users. Open banking, on the other hand, allows third-party developers to access and use financial data through APIs, fostering innovation and collaboration in the financial sector. BAAS enables fintech companies and other businesses to outsource key banking functions, making it easier for them to launch innovative financial products and services.

As these new technologies and business models continue to disrupt the traditional financial industry, regulatory compliance becomes increasingly important. Financial services providers must adhere to a complex array of laws and regulations to ensure the safety and stability of the financial system, protect consumers, and maintain a level playing field among market participants. In the rapidly changing world of embedded finance, open banking, and BAAS, staying updated and adaptable to the evolving regulatory landscape is crucial for businesses to stay competitive and avoid potential risks.

This article will explore the current regulatory environment for embedded finance in the US, discuss the potential future changes in regulations, and provide insights on how businesses can stay compliant and prepare for the evolving regulatory landscape. By understanding and proactively managing the regulatory challenges, businesses can better navigate the complexities of embedded finance, open banking, and BAAS, and capitalize on the opportunities these innovations present.

The Current Regulatory Framework for Embedded Finance in the US

As the embedded finance industry continues to grow, it is essential to understand the regulatory landscape that governs its activities in the United States. Several key agencies and regulations play a vital role in overseeing and guiding the development of embedded finance, open banking, and BAAS.

Overview of the key regulatory agencies involved:

Office of the Comptroller of the Currency (OCC): The OCC supervises and regulates national banks, federal savings associations, and federal branches of foreign banks. It ensures that these institutions operate in a safe and sound manner, provide fair access to financial services, and comply with applicable laws and regulations.

Look, bank-fintech partnerships, they’re here to stay. I’m not trying to do away with them,» Hsu said on Wednesday. «This is the future, so let’s do the future right.» — Michael Hsu, Office of the Comptroller of the Currency.

Consumer Financial Protection Bureau (CFPB): The CFPB is responsible for protecting consumers from unfair, deceptive, or abusive practices and ensuring that consumers have access to transparent information about financial products and services. It oversees a wide range of financial institutions, including banks, credit unions, and non-bank financial services providers.

Federal Deposit Insurance Corporation (FDIC): The FDIC insures deposits at banks and savings associations, promoting public confidence in the banking system. It also supervises and examines state-chartered banks and thrift institutions for safety, soundness, and consumer protection.

Securities and Exchange Commission (SEC): The SEC regulates the securities industry, including broker-dealers, investment advisers, and investment companies, ensuring fair and efficient markets, and protecting investors from fraud and abuse.

Financial Crimes Enforcement Network (FinCEN): FinCEN combats money laundering, terrorist financing, and other financial crimes by administering the Bank Secrecy Act (BSA) and implementing anti-money laundering (AML) regulations for financial institutions.

Brief on the main laws and regulations affecting embedded finance, open banking, and BAAS

  1. Dodd-Frank Wall Street Reform and Consumer Protection Act: This comprehensive legislation was enacted in response to the 2008 financial crisis and aims to promote financial stability, enhance consumer protection, and improve market transparency. It established the CFPB and introduced several key regulations affecting financial institutions, including those involved in embedded finance, open banking, and BAAS.
  2. Bank Secrecy Act (BSA): The BSA requires financial institutions to maintain records, file reports, and implement internal controls to detect and prevent money laundering and other financial crimes. Embedded finance providers and other businesses involved in financial transactions must adhere to BSA regulations, including customer identification, transaction monitoring, and reporting suspicious activities.
  3. Electronic Fund Transfer Act (EFTA): The EFTA establishes consumer protection and disclosure requirements for electronic fund transfers, including debit card transactions, ATM withdrawals, and direct deposits. Financial institutions, including those involved in embedded finance, must comply with EFTA provisions to ensure transparency and protect consumer rights.
  4. Fair Credit Reporting Act (FCRA): The FCRA governs the collection, use, and dissemination of consumer credit information. It ensures that consumer credit reports are accurate, complete, and fairly used by credit reporting agencies, lenders, and other entities. Embedded finance providers that use consumer credit data in their services must comply with FCRA regulations to protect consumer privacy and prevent discrimination.

Understanding the roles and responsibilities of these regulatory agencies and the key laws governing embedded finance in the US is critical for businesses to ensure compliance and mitigate potential risks. As the industry continues to evolve, it is essential to stay informed about regulatory updates and changes to maintain a compliant and successful operation.

Anti-Money Laundering (AML) and Know Your Customer (KYC) Reg

As embedded finance becomes increasingly prevalent in the financial landscape, it is essential for businesses to adhere to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. These regulations are critical in preventing and detecting financial crimes, protecting the integrity of the financial system, and maintaining trust among customers and regulators.

Importance of AML and KYC in embedded finance:

  1. Preventing financial crimes: AML and KYC regulations help prevent money laundering, terrorist financing, and other illicit activities that could undermine the stability and security of the financial system.
  2. Safeguarding reputation: Compliance with AML and KYC regulations helps businesses protect their reputation, maintain customer trust, and avoid the negative consequences of being associated with financial crimes.
  3. Regulatory compliance: Adhering to AML and KYC regulations is essential for businesses to avoid fines, penalties, and other regulatory actions that could result from non-compliance.
  4. Access to markets and partnerships: Compliance with AML and KYC regulations enables businesses to establish relationships with banks, payment processors, and other partners, which is crucial for the success of embedded finance services.

Key components of a robust AML/KYC program:

  1. Customer Identification Program (CIP): A CIP involves verifying the identity of customers, collecting necessary information, and maintaining records to ensure compliance with KYC requirements.
  2. Customer Due Diligence (CDD): CDD involves assessing the risk profile of customers based on factors such as their business activities, geographic location, and transaction patterns. Enhanced Due Diligence (EDD) is required for high-risk customers to mitigate potential risks.
  3. Transaction monitoring: Businesses should establish systems to monitor customer transactions, identify unusual or suspicious activities, and report them to relevant authorities as required by AML regulations.
  4. Employee training and awareness: A robust AML/KYC program should include regular employee training and awareness initiatives to ensure that staff members understand their responsibilities and are equipped to detect and report suspicious activities.
  5. Periodic review and updates: Businesses should regularly review and update their AML/KYC policies and procedures to ensure compliance with the latest regulations and industry best practices.

Challenges and opportunities in implementing AML/KYC in embedded finance:

  1. Balancing customer experience and compliance: Implementing robust AML/KYC measures may increase the complexity of onboarding and transaction processes, potentially affecting the customer experience. Businesses must strike a balance between compliance and maintaining a frictionless user experience.
  2. Data privacy concerns: Collecting and storing customer information for AML/KYC purposes may raise data privacy concerns. Businesses should ensure that their data management practices comply with applicable privacy regulations and maintain transparency with customers about how their data is used.
  3. Technological innovation: Advanced technologies, such as artificial intelligence and machine learning, can help businesses improve the efficiency and effectiveness of their AML/KYC processes by automating tasks, enhancing risk assessments, and detecting patterns indicative of financial crimes.
  4. Collaboration and information sharing: Businesses can benefit from collaborating with other industry players, regulators, and law enforcement agencies to share best practices, insights, and intelligence related to AML/KYC compliance.

By understanding the importance of AML and KYC regulations and implementing a robust compliance program, businesses in the embedded finance space can effectively mitigate risks, protect their reputation, and maintain a strong relationship with customers and regulators.

Data Privacy and Security Regulations

In the world of embedded finance, data privacy and security are paramount concerns for businesses, customers, and regulators. Financial services providers must adhere to a range of data privacy laws and regulations to protect sensitive customer information and maintain trust in the financial ecosystem.

Brief on the key data privacy laws:

  1. General Data Protection Regulation (GDPR): The GDPR is a comprehensive data privacy regulation that governs the collection, processing, and storage of personal data of individuals in the European Union. It applies to businesses worldwide that offer goods or services to EU residents or monitor their behavior. The GDPR emphasizes transparency, accountability, and the protection of individuals’ rights concerning their personal data.
  2. California Consumer Privacy Act (CCPA): The CCPA is a state-level data privacy law that grants California residents specific rights concerning their personal information, such as the right to know, the right to delete, and the right to opt-out of the sale of their data. Businesses that collect or process the personal data of California residents must comply with the CCPA’s requirements, regardless of where they are located.
  3. Forthcoming US privacy legislation: As concerns about data privacy grow, there is a push for a comprehensive federal privacy law in the US. Although no such legislation has been enacted yet, businesses should stay informed about potential developments and be prepared to adapt to new privacy requirements.

Data protection and security requirements for embedded finance providers:

  1. Data minimization: Embedded finance providers should collect only the necessary data required for their services and limit data processing to the stated purposes.
  2. Data encryption: Financial data, especially sensitive information like account numbers and transaction details, should be encrypted during transmission and storage to prevent unauthorized access.
  3. Access controls: Businesses should implement strict access controls to ensure that only authorized personnel can access customer data.
  4. Regular security audits: Embedded finance providers should conduct regular security audits to identify vulnerabilities, assess risks, and implement appropriate safeguards.
  5. Incident response planning: Businesses should have a well-defined incident response plan to effectively manage and mitigate potential data breaches or security incidents.

Best practices for ensuring data privacy and security in embedded finance services:

  1. Stay informed about the latest regulations: Businesses should stay up-to-date with the latest data privacy and security regulations and ensure their practices comply with all applicable laws.
  2. Develop a comprehensive data protection strategy: Embedded finance providers should develop and implement a data protection strategy that encompasses all aspects of data collection, processing, storage, and sharing.
  3. Provide clear privacy notices and consent mechanisms: Businesses should provide transparent and easily accessible privacy notices to customers, informing them about how their data is collected, used, and shared. Additionally, businesses should implement mechanisms for customers to provide or withdraw their consent, as required by applicable regulations.
  4. Conduct regular risk assessments: Businesses should regularly assess the risks associated with their data processing activities and implement appropriate measures to mitigate potential risks.
  5. Collaborate with stakeholders: Embedded finance providers should collaborate with partners, regulators, and industry associations to share best practices and stay informed about the latest trends and developments in data privacy and security.

By adhering to data privacy and security regulations and implementing best practices, embedded finance providers can protect customer data, maintain trust in the financial ecosystem, and minimize the risk of data breaches or regulatory penalties.

Navigating the Evolving Regulatory Landscape: Tips and Best Practices

The regulatory environment for embedded finance, open banking, and BAAS is constantly evolving as new technologies and business models emerge. To stay compliant and successfully navigate the changing landscape, businesses must adopt proactive strategies and best practices. Here are some tips for staying ahead of the curve:

  1. Staying informed about the latest regulatory developments: Regularly monitoring regulatory updates and staying informed about the latest developments is crucial for businesses to ensure compliance with all applicable laws and regulations. Businesses should subscribe to newsletters, attend webinars, and follow industry news to stay current on the changing regulatory landscape.
  2. Engaging with industry associations, regulators, and other stakeholders: Active engagement with industry associations, regulators, and other stakeholders can help businesses better understand the regulatory environment and gain valuable insights into upcoming changes. Joining industry associations, attending conferences, and participating in industry roundtables are effective ways to stay connected and informed.
  3. Collaborating with experienced legal and compliance professionals: Working with experienced legal and compliance professionals can help businesses navigate the complex regulatory environment and ensure compliance with all applicable laws and regulations. Hiring in-house legal and compliance experts or partnering with external law firms and consulting firms can provide valuable guidance and support in implementing compliant policies and procedures.
  4. Investing in employee training and development on regulatory compliance: Employee training and development are essential to ensure that all team members understand their responsibilities and the importance of regulatory compliance. Businesses should invest in regular training programs, workshops, and seminars to educate employees about the latest regulatory requirements and best practices. This investment will not only help businesses maintain compliance but also foster a culture of accountability and transparency.

According to Jovi Overo, the esteemed leader in Banking-as-a-Service (BaaS) at Unlimint,  «BaaS operates within the framework of Open Banking, facilitating businesses to confidently provide financial solutions to their clientele. Third-party providers (TPPs) employ APIs to access established banking infrastructure and subsequently deliver their products directly to customers through API-driven platforms.»

By adopting these tips and best practices, businesses can effectively navigate the evolving regulatory landscape for embedded finance, open banking, and BAAS, ensuring compliance and minimizing the risk of regulatory penalties. As the industry continues to grow and innovate, staying proactive and adaptable to regulatory changes will be key to success in this dynamic market.


The rapidly evolving world of embedded finance, open banking, and BAAS presents both challenges and opportunities for businesses operating in this dynamic landscape. Staying up-to-date with the latest regulatory developments is critical to maintaining compliance and fostering trust among customers, partners, and regulators.

Embracing change and adapting to new regulations is not just about avoiding penalties and risks; it is a crucial component of long-term success in the industry. Businesses that proactively address regulatory changes and incorporate them into their operations are better positioned to thrive in the fast-growing embedded finance market.

By adopting a proactive approach to compliance, businesses can minimize risks, capitalize on opportunities, and contribute to the development of a sustainable and inclusive financial ecosystem. As the embedded finance industry continues to expand and innovate, staying agile and adaptable to the ever-changing regulatory environment will be key to maintaining a competitive edge and driving growth in this exciting market.

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