The Calm Before the Consent Order
Banking-as-a-Service (BaaS) has reshaped how financial products reach consumers, allowing fintechs, digital platforms and even gaming companies to offer bank-like functionality without holding a charter. But as the market matures, regulators are making one thing clear: you can outsource the technology, not the compliance risk.
Recent FDIC and OCC actions—many involving sub-$10 billion sponsor banks—underscore that AML/BSA accountability remains with the bank, even when a fintech manages onboarding and customer experience. For fintechs, the consequences can be equally severe: losing a sponsor bank relationship can disrupt product launches, payment flows halt payments and damage customer confidence overnight.
Both sides can prevent those outcomes by aligning compliance programs before regulators intervene.
#1: Know Where Accountability Lives
In every BaaS arrangement, the sponsor bank retains legal responsibility for AML, sanctions and suspicious-activity monitoring. Examiners expect to see:
- Documented ownership of AML/BSA obligations within contracts and procedures
- Transparent data sharing between bank and fintech systems
- Demonstrated, ongoing oversight of partner activities
Fintechs often assume that strong internal controls satisfy requirements on their own. Yet without a shared governance framework, both entities face exposure—and enforcement rarely distinguishes who missed the warning signs first.
#2: Treat Each Fintech as a High-Risk Third Party
The age of “light touch” vendor management is over. Regulators expect the same third-party risk-management rigor applied to core vendors to also govern fintech partnerships. That includes:
- Comprehensive due diligence before launch, covering AML systems, sanctions filters and governance
- Ongoing risk assessments to keep pace with evolving regulatory expectations
- Mutual audit and data-access rights so both sides can validate compliance effectiveness
This shift benefits everyone. Banks gain confidence that fintechs are operating safely; fintechs gain credibility with investors, partners and regulators.
#3: Fix the Data Disconnect
Many recent enforcement cases stem from inconsistent transaction data or opaque fintech systems that banks cannot independently validate. To build a BaaS-ready program:
- Maintain synchronized data views for KYC, onboarding and transaction monitoring
- Define responsibilities clearly—who verifies identities, reviews alerts, files SARs and escalates cases?
- Pair automation with governance and human review; AI-driven detection without oversight is a red flag
The objective is a compliance technology environment that is explainable, traceable and audit-ready.
#4: Conduct “Readiness Reviews” Before Examiners Arrive
Simulating regulatory reviews helps identify weaknesses long before they become findings. Common gaps include:
- Outdated AML risk assessments
- Missing documentation of third-party oversight
- Undefined escalation paths between fintech and bank compliance teams
- Limited training for emerging risks such as digital assets or gaming payments
|
|
A national financial institution offering BaaS solutions faced mounting scrutiny tied to prepaid and fintech partnerships. Missing transaction feeds created tens of thousands of un-worked alerts. Regulators required an extensive lookback.
SolomonEdwards mobilized a team of 80 financial crimes professionals within two weeks. Together with the client, we:
The result: timely alert resolution, stronger governance and a modernized AML program—delivered before the next exam cycle. |
|---|
Read more about how we remediated compliance gaps and strengthened AML operations for a national financial institution.
#5: Collaborate, Don’t Just Contract
BaaS success relies on continuous collaboration. Fintechs need regular dialogue with their sponsor banks, while banks must balance control with flexibility.
Leading programs establish joint governance forums—quarterly meetings to review metrics, exceptions and policy updates—ensuring transparency and shared accountability.
#6: From Reactive to Proactive
Large-scale remediation projects can cost millions and take years. While we’re adept at this type of work, a proactive assessment program costs a fraction of that and signals to regulators that both organizations take risk seriously.
SolomonEdwards helps banks and fintechs:
- Evaluate AML/BSA capabilities before exams
- Design oversight frameworks that hold up under regulatory scrutiny
- Bridge the operational gap between traditional banking controls and fast-moving fintech models
In a tightening regulatory environment, readiness is the new differentiator.
Compliance as Competitive Advantage
The next phase of Banking-as-a-Service will favor organizations that treat compliance as strategy, not afterthought.
Fintechs that demonstrate transparency and strong controls will secure better banking partners. Sponsor banks that standardize oversight will attract innovative, lower-risk fintechs. Both will avoid the costly cycle of enforcement and remediation.
The best time to prepare for the next exam isn’t when regulators call—it’s now, before the enforcement letter arrives.
