Regulatory Challenges for Banks and Fintechs in Leveraging BaaS

In April, The Fintech Times is spotlighting embedded finance, the integration of financial services into non-financial products and services. One key area of growth in this field is Banking-as-a-Service (BaaS), which allows non-banking entities to offer banking services through APIs connected to licensed banks.

While BaaS offers significant potential, regulatory compliance remains a major concern. Industry leaders emphasize the importance of understanding and addressing these challenges.

Paul Staples, group head of embedded banking at Clearbank, emphasizes that regulatory compliance is crucial for both BaaS providers and the companies using their services. He highlights the need to scrutinize providers’ compliance with banking or e-money licensing, anti-money laundering (AML) regulations, and safeguarding of customer funds.

Sergiy Fitsak, managing director at Softjourn, notes the complex regulatory landscape for BaaS, including requirements for AML, know your customer (KYC) processes, and data protection. Fintech companies leveraging BaaS must ensure their services comply with these regulations to avoid legal repercussions.

Raman Korneu, CEO of myTU, points out the regulatory challenges faced by BaaS providers, leading to a homogenized landscape that stifles innovation. He emphasizes the need for customized compliance frameworks to meet individual fintech firms’ needs and foster innovation.

Marc Milewski, CEO of Zum Rails, stresses the importance of offering BaaS in a way that enhances financial security. He highlights the need for companies to assess and comply with local and regional regulations, including anti-money laundering measures, to prevent criminal activities on their platforms.

Eric Bierry, CEO of Sopra Banking Software, discusses the varying regulatory approaches to BaaS, particularly in the US. Regulators are paying closer attention to partnerships between banks and fintechs to protect consumers from unregulated financial offerings.

Pam Kaur, head of bank technology at BankTech Ventures, emphasizes the need for thorough oversight from all parties involved in BaaS programs. Both banks and fintech companies should be aware of AML and BSA regulations and ensure they have dedicated officers overseeing these programs.

Leveraging BaaS offers significant benefits, but companies must navigate complex regulatory landscapes. Customized compliance frameworks, thorough oversight, and a strong understanding of regulatory requirements are essential for success in the BaaS space.