Signals: Misreading the Regulatory Message in BaaS Partnerships

In the evolving landscape of Banking-as-a-Service (BaaS) partnerships, the terms «direct,» «indirect,» and even «truly direct» have sparked confusion and misinterpretation regarding regulatory expectations, according to This Week in Fintech.. These terms, while popular in industry discussions, fail to address the core concerns of bank examiners regarding the safety and soundness of BaaS partnerships.

Recent events have highlighted the regulatory scrutiny on bank-fintech relationships. Banks such as Blue Ridge Bank, Lineage Bank, and First Fed Bank have faced regulatory actions due to insufficient compliance and risk management practices related to their partner banking activities. In response, several banks and platforms, including Metropolitan Commercial Bank (MCB), Piermont Bank, and Treasury Prime, have either reevaluated their BaaS strategies or exited the space entirely.

Operational breakdowns in partnerships between Synapse and Evolve Bank & Trust, as well as Choice Financial Group’s consent order and the sale of CBW Bank, further underscore the importance of regulatory compliance in BaaS partnerships.

Despite these developments, a narrative has emerged suggesting that regulators are cracking down on «indirect» BaaS partnerships and advocating for «direct» relationships between banks and fintechs. This narrative, which implies that regulators may favor «truly direct» partnerships, misses the regulatory intent and could lead to misdirection in the market.

It is crucial for banks and fintech companies to understand that regulatory scrutiny focuses on ensuring that BaaS partnerships do not compromise risk management or compliance obligations. The distinction between «direct» and «indirect» partnerships, while relevant in certain contexts, should not be misinterpreted as a regulatory mandate.

The regulatory message for BaaS partnerships is clear: banks must prioritize risk management and compliance in all partnerships, regardless of the directness of the relationship. Failure to do so could result in regulatory action and reputational damage for all parties involved.