It is great to be back writing on Fintech Nexus again. As many of you know we closed down Fintech Nexus last year and then sold our assets to COMMAND. We worked together during the acquisition process, ensuring a smooth transition, and the team at COMMAND relaunched the website a few weeks ago. And they have invited me to write here once again. After penning more than 2,000 articles on this site over the past 15 years it is an honor to be back.
Today, I am diving into Banking-as-a-Service (BaaS) and looking at the unintended consequences of the brutal changes that the industry has gone through in the past year or two. I am not going to rehash any of the details of the collapse of Synapse other than to say the fact that the fallout is still ongoing almost a year later is simply staggering and a massive failure of the banks, fintechs and regulators involved.
Many, if not most, active BaaS banks have received enforcement actions of some kind over the last two years. Some of these actions came out before the Synapse fiasco but many have happened since. Now, one could argue that some of these actions are likely warranted given the sorry state of recordkeeping that came to light with the Synapse bankruptcy.
The impact of these actions has been swift and dramatic. Banks are much more risk-averse when taking on new fintech companies today.
The fact that we have a new administration in the United States is not going to change much in how both banks and fintechs approach BaaS over the coming four years. I don’t think any bank is going around saying, “Great! The CFPB has been defanged! We can go back to the way we were doing things in 2021.” We are not going back.
Of course, significant changes to the way fintechs interact with banks will have unintended consequences. Here are some of the challenges the new status quo will bring.
The Compliance Cost Spiral
Regulators now demand that banks investing in BaaS allocate $3M–$5M over six years to build compliance infrastructure, with profitability delayed until at least 18 months into operations according to this piece by Alex Johnson in Open Banker. This has created a dual problem:
- Supply Crunch: While there are still banks looking to start BaaS programs in 2025, there are probably 15-20 well-known banks that have the vast majority of the fintech relationships. This has resulted in significant demand at these top banks while many of the newer programs struggle to find well-capitalized fintechs.
- Cost to Fintechs: Whereas in the past a fintech could have the bank or an intermediary do the compliance heavy lifting, that is no longer the case. Many new fintechs find themselves having to invest 2x to 3x more in compliance than would have been the case a few years ago.
The Hit to Innovation
The second knock-on effect of these relationships cooling is the hit to innovation. Until recently, a couple of entrepreneurs could create a new fintech product and start testing it relatively quickly. They might raise a small seed round, hire a partner bank and then roll out their minimum viable product to start getting feedback from the market.
Those days are likely behind us now. For most financial functions a fintech has to partner with a bank, there is no way to build a working product without that. So, what concerns me most is that the great new companies of tomorrow will never get off the ground because they can’t find a bank partner. This means less competition, less innovation and a financial system that is not evolving as much.
As with the frog slow boiling in the pot, we probably won’t notice the impact of this problem for many years. There are hundreds of fintech companies that jumped over this first hurdle before the BaaS crackdown, and many are just now reaching their growth phase. But how many startups launching this year or in 2026 will never make it to market because they could not find a bank partner?
Now, I don’t want to minimize the importance of compliance. Some may argue it is a good thing two kids in a garage can’t unleash a fintech product on the world. But that is how many of the dominant fintech companies of today began their life.
Given we have the most complex regulatory apparatus of any developed nation, we need a way to keep good ideas flowing while at the same time ensuring that compliance remains center stage.
I am optimistic that we will find a way, and AI may indeed be the driver that enables the next great fintech to leap over those hurdles. The ideas that Jo Ann Barefoot put out earlier this year give me hope. Maybe in Regulation 2.0, where Generative AI plays a bigger role, the cost of compliance will come down while maintaining strong consumer protections.
Innovation flourishes when the cost of entry into a market is low. We need to keep that in mind when considering how we manage bank-fintech partnerships over the long term.
