Alloy surveyed more than 50 professionals at financial institutions operating bank sponsorship programs in the United States to learn how their businesses are responding to compliance challenges in embedded finance.
Embedded finance is an emerging space for banks to multiply their growth opportunities. According to our recent State of Embedded Finance Report, sponsor banks’ embedded finance partnerships drive 51% of their revenue and deposits on average.
At the same time, regulatory bodies have taken a keen interest in embedded finance partnerships, resulting in a spike in enforcement actions. „And sponsor banks are feeling the heat: nearly two-thirds of sponsor banks surveyed agree that maintaining an embedded finance program is increasingly difficult, with 29% reporting they are unlikely to maintain their embedded finance program moving forward.” – according to a company’s blog.
Alloy’s report on embedded finance and BaaS is a great view into what’s going on in BaaS compliance. Some of the highlights include:
𝗙𝗼𝘂𝗿 𝗶𝗻 𝟭𝟬 𝗼𝗳 𝘀𝗽𝗼𝗻𝘀𝗼𝗿 𝗯𝗮𝗻𝗸𝘀 𝗹𝗼𝘀𝘁 𝗮𝘁 𝗹𝗲𝗮𝘀𝘁 $𝟮𝟱𝟬𝗞 𝘁𝗼 𝗰𝗼𝗺𝗽𝗹𝗶𝗮𝗻𝗰𝗲 𝘃𝗶𝗼𝗹𝗮𝘁𝗶𝗼𝗻𝘀. Given that stat, it isn’t surprising to hear that 80% of the banks said that meeting compliance requirements is challenging.
𝗙𝗼𝘂𝗿 𝗶𝗻 𝟭𝟬 𝘀𝗽𝗼𝗻𝘀𝗼𝗿 𝗯𝗮𝗻𝗸𝘀 𝗰𝗼𝗻𝘁𝗿𝗮𝗰𝘁 𝘄𝗶𝘁𝗵 𝗳𝗶𝗻𝘁𝗲𝗰𝗵 𝗽𝗮𝗿𝘁𝗻𝗲𝗿𝘀 𝘃𝗶𝗮 𝗮 𝗕𝗮𝗮𝗦 𝗽𝗹𝗮𝘁𝗳𝗼𝗿𝗺. That number is declining, but the industry is still a far ways off from a „direct only” model. This notion of a „direct” model is misunderstood, however. As the report notes:
„While BaaS platforms are becoming less common at the contract layer, they are still prominently used as part of the tech layer.”
𝗧𝗵𝗿𝗲𝗲 𝗶𝗻 𝟭𝟬 𝘀𝗽𝗼𝗻𝘀𝗼𝗿 𝗯𝗮𝗻𝗸𝘀 𝘄𝗮𝗻𝘁 𝘁𝗼 𝘀𝗹𝗶𝗺 𝗱𝗼𝘄𝗻 𝘁𝗵𝗲𝗶𝗿 𝗲𝗺𝗯𝗲𝗱𝗱𝗲𝗱 𝗳𝗶𝗻𝗮𝗻𝗰𝗲 𝗽𝗿𝗼𝗴𝗿𝗮𝗺 𝗼𝗿 𝘀𝗵𝘂𝘁 𝗶𝘁 𝗱𝗼𝘄𝗻 𝗲𝗻𝘁𝗶𝗿𝗲𝗹𝘆. This stat is going to get twisted–it’s going to be used without the „slim down” part and people will say that 3 in 10 sponsor banks want to shut their programs down.
What does „slim down” really mean? According to the report, a third of the banks surveyed have 11 or more partnerships. Would it be surprising to find that many of them want to weed out some of the more risky and less successful fintechs they’ve taken on?
The split between „slim down” and „shut down” is important here. Wish Alloy had broken that out.
Banking 4.0 – „how was the experience for you”
„So many people are coming here to Bucharest, people that I see and interact on linkedin and now I get the change to meet them in person. It was like being to the Football World Cup but this was the World Cup on linkedin in payments and open banking.”
Many more interesting quotes in the video below:
