It’s nice to be again writing on Fintech Nexus once more. As a lot of you already know we closed down Fintech Nexus final 12 months after which bought our property to COMMAND. We labored collectively throughout the acquisition course of, making certain a clean transition, and the group at COMMAND relaunched the web site a couple of weeks in the past. And so they have invited me to put in writing 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 looking out on the unintended penalties of the brutal adjustments that the trade has gone by way of prior to now 12 months or two. I’m not going to rehash any of the small print of the collapse of Synapse aside from to say the truth that the fallout remains to be ongoing virtually a 12 months later is just staggering and a large failure of the banks, fintechs and regulators concerned.
Many, if not most, lively BaaS banks have acquired enforcement actions of some sort over the past two years. A few of these actions got here out earlier than the Synapse fiasco however many have occurred since. Now, one may argue that a few of these actions are probably 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 firms right now.
The truth that we’ve a brand new administration in america isn’t going to vary a lot in how each banks and fintechs method BaaS over the approaching 4 years. I don’t assume any financial institution goes round saying, “Nice! The CFPB has been defanged! We will return to the way in which we have been doing issues in 2021.” We aren’t going again.
In fact, vital adjustments to the way in which fintechs work together with banks may have unintended penalties. Listed here are a number of the challenges the brand new establishment will carry.
The Compliance Price Spiral
Regulators now demand that banks investing in BaaS allocate $3M–$5M over six years to construct compliance infrastructure, with profitability delayed till at the very least 18 months into operations in accordance with this piece by Alex Johnson in Open Banker. This has created a twin drawback:
- Provide Crunch: Whereas there are nonetheless banks trying 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 most of the newer packages wrestle to search out well-capitalized fintechs.
- Price to Fintechs: Whereas prior to now a fintech may have the financial institution or an middleman do the compliance heavy lifting, that’s now not the case. Many new fintechs discover themselves having to speculate 2x to 3x extra in compliance than would have been the case a couple 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 may create a brand new fintech product and begin testing it comparatively shortly. They may elevate a small seed spherical, rent a accomplice financial institution after which roll out their minimal viable product to start out getting suggestions from the market.
These days are probably behind us now. For many monetary capabilities a fintech has to accomplice with a financial institution, there isn’t any option to construct a working product with out that. So, what considerations me most is that the nice new firms of tomorrow won’t ever get off the bottom as a result of they’ll’t discover a financial institution accomplice. This implies much less competitors, much less innovation and a monetary system that isn’t evolving as a lot.
As with the frog gradual boiling within the pot, we in all probability gained’t discover the impression of this drawback for a few years. There are tons of of fintech firms that jumped over this primary hurdle earlier than the BaaS crackdown, and lots of are simply now reaching their progress part. However what number of startups launching this 12 months or in 2026 won’t ever make it to market as a result of they might not discover a financial institution accomplice?
Now, I don’t wish to reduce the significance of compliance. Some might argue it’s a good factor two youngsters in a storage can’t unleash a fintech product on the world. However that’s how most of the dominant fintech firms of right now started their life.
Given we’ve probably the most complicated regulatory equipment of any developed nation, we want a option to hold good concepts flowing whereas on the identical time making certain that compliance stays middle stage.
I’m optimistic that we are going to discover a manner, and AI might certainly be the motive 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. Possibly in Regulation 2.0, the place Generative AI performs a much bigger function, the price of compliance will come down whereas sustaining sturdy client protections.
Innovation thrives when the price of entry right into a market is low. We have to hold that in thoughts when contemplating how we handle bank-fintech partnerships over the long run.
