Analyzing the current ‘drought’ in banking partnerships and the anticipated resurgence of new providers.
TL;DR:
The U.S. fintech ecosystem, particularly Banking as a Service (BaaS), is under intense regulatory scrutiny. Banks like Evolve and CrossRiver face challenges due to risky fintech partnerships. As a result, smaller banks and new entrants may emerge by 2025, seeking safer, low-risk fintech collaborations.
Executive Summary:
The fintech landscape in the United States, particularly within the realm of Banking as a Service (BaaS) regulatory scrutiny. Recent disputes, such as those between Evolve Bank and Synapse, have highlighted the risks associated with fintech partnerships. A report from the Office of the Comptroller of the Currency (OCC) has revealed that 64-65% of U.S. banks may be ill-prepared to manage these risks, leading to heightened oversight by federal regulators. Notably, banks like CrossRiver are under consent orders, complicating their ability to establish new fintech relationships.
Evolve Bank, which has heavily invested in international transactions and compliance services, is under particular scrutiny. The sheer volume of fintech partnerships has raised concerns about the systemic risks Evolve poses to U.S. consumers. Consequently, fintech companies are now seeking backup banks, although such alternatives are scarce.
In response to these challenges, some smaller, more agile banks are exploring opportunities to partner with fintech program managers to grow their deposit bases. These partnerships are expected to gradually develop, with significant growth anticipated by 2025. The current environment can be described as a “drought” in new banking relationships, with the industry likely to remain in this holding pattern until mid-2025.
This report provides a comprehensive overview of the current challenges and future opportunities in the BaaS sector due to the regulatory scrutiny, emphasizing the importance of strategic partnerships and regulatory compliance in navigating this evolving landscape.
1. Overview of the Current Fintech and BaaS Landscape
In recent times, the fintech ecosystem in the United States has been under increased scrutiny, particularly regarding banks’ relationships with fintech companies. A growing number of banks have started rejecting or closing fintech accounts, with the most prominent case involving a dispute between Evolve Bank and Synapse. This disagreement has also affected Mercury, bringing to light broader issues within the Banking as a Service (BaaS) sector. As a result, many banks are being urged by regulators to reassess their relationships with fintech companies and program managers.
2. Regulatory Concerns and Reports
A recent report from the Office of the Comptroller of the Currency (OCC) indicates that around 64-65% of banks are not adequately prepared to manage the risks associated with fintech partnerships. These relationships have been identified as potential threats to the stability of the banks involved, leading to increased regulatory scrutiny. CrossRiver Bank, for instance, is currently under a consent order from the Federal Deposit Insurance Corporation (FDIC). This means that any new relationships they seek to establish require regulatory approval, making it increasingly difficult for them to move forward.
3. The Case of Evolve Bank
Evolve Bank, which has significantly expanded its exposure through international transactions, remittances, cross-border banking, and compliance services, is another institution under the regulators’ watch. While many fintech companies have partnered with Evolve, the sheer number of these partnerships is raising concerns about systemic risks. The regulators are questioning whether Evolve can effectively manage the risks posed to U.S. consumers and the bank itself. Recent client rejections by Evolve suggest that it may be becoming a less viable partner for fintech companies.
4. Market Response: New Entrants and Vendor Partnerships
As these regulatory pressures mount, other banks are exploring opportunities to enter the BaaS space. These banks are actively seeking reliable vendors beyond the usual names like Fiserv, FIS Global, and Jack Henry to support their BaaS offerings. Companies such as Modern Treasury and Treasury Prime have maintained successful relationships with certain banks, but services related to credit, lending, and foreign exchange are facing heightened scrutiny.
Program managers are now being asked by their clients whether they have backup banks available, given the increasing number of rejections. However, alternative options are limited. In response, many program managers are reaching out to smaller, more agile banks, offering to bring them low-risk fintech clients to help grow their deposit base. These program managers are leveraging their expertise in banking integration to propose these partnerships as beneficial for both parties.
5. Future Outlook and Industry Predictions
While these developments won’t result in immediate changes, by 2025, we can expect a surge in new banking solution providers. These new entrants will likely focus on expanding their deposit bases by partnering with fintech companies that have a national customer reach. This will allow them to grow beyond their regional limitations and better compete in the market.
Currently, the industry is experiencing a “drought” in new banking relationships, which is expected to persist until at least the spring or summer of next year. Even then, it will take around six to nine months for new partnerships to fully develop. The industry is in a holding pattern, but significant changes and new opportunities are expected in the near future.
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This page was last updated on September 3, 2024.
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