Why Strong Compliance Is Now the Competitive Advantage in Bank & Fintech Partnerships

In just two years, the bank–fintech partnership conversation has been turned on its head.

One data point captures the shift: in Q1 2023–Q1 2024, fintech partner banks had roughly a 9%–15% chance of drawing a formal enforcement action, versus just 1.8% for non‑partner banks.

What was once framed primarily as a growth and innovation story has now become a risk‑management and governance imperative. Regulators have made it clear that bank‑as‑a‑service (BaaS) and embedded banking models are here to stay but only for institutions willing to operate them responsibly.

As a bank that supports fintech innovation, Academy Bank views this moment not as a setback, but as a necessary evolution and an opportunity to lead.

A New Era of Regulatory Expectations for Embedded Finance

U.S. banking regulators have significantly increased scrutiny of bank–fintech arrangements. In just the last 18–24 months, supervisory actions have accelerated across the industry, particularly for institutions supporting fintech programs without sufficiently robust controls.

Recent developments underscore this shift:

• Federal banking agencies finalized comprehensive interagency third‑party risk management guidance in June 2023, reinforcing that banks remain fully accountable for activities conducted by fintech partners.
• In 2024, regulators issued a formal Request for Information (RFI) on bank–fintech arrangements, signaling heightened supervisory focus on governance, compliance accountability, and risk ownership.
• Several sponsor banks serving fintechs have faced enforcement actions tied to anti‑money‑laundering (AML) deficiencies, ineffective oversight, and breakdowns in third‑party controls with at least one being deemed in “troubled condition” due to unresolved compliance issues.

The message from regulators is unmistakable:
Innovation without strong compliance is no longer acceptable.

Why This Matters in Embedded Banking Right Now

In the early stages of the BaaS boom, many banks underestimated the operational and compliance demands of supporting fintech partners. The appeal of deposit growth, transaction volume, and fee income sometimes overshadowed the reality of:

• Continuous AML monitoring at scale
• Fintech‑specific customer due diligence
• Complex transaction flows and data governance
• Ongoing model validation and independent testing
• Mature third‑party risk programs with real teeth

In today’s environment, regulators expect sponsor banks to demonstrate evidence of execution, not just policies.

At the same time, recent fintech failures and market volatility have heightened concerns around safety, soundness, and contagion risk. Regulators are acting decisively to prevent weak controls at one institution from putting the broader system at risk.

As a result, the bar for being a sponsor bank has been permanently raised.

Compliance Is No Longer a Cost Center. It’s a Market Signal.

Here’s the shift we’re seeing firsthand:

Strong compliance is now a strategic differentiator.

Fintechs are increasingly selective when choosing bank partners. They are asking tougher questions:

• Can this bank withstand regulatory scrutiny?
• Does the compliance program scale with our growth?
• Will we face disruption if an examiner identifies gaps?
• Is this a partner who invests in controls or reacts after findings?

No fintech wants to wake up to program pauses, forced off‑boarding, or reputational fallout because their sponsor bank wasn’t prepared.

Banks that have proactively invested in compliance, governance, and risk infrastructure are now best positioned to succeed in this environment.

Academy Bank’s Perspective: Innovate Responsibly

At Academy Bank, we believe responsible innovation is not a slogan, it’s an operating principle.

Supporting embedded banking and fintech partnerships requires more than enabling technology. It demands:

• Experienced BSA/AML professionals with direct oversight of fintech programs
• Advanced regulatory technology (reg-tech) to support transaction monitoring, governance, and testing
• Strong third‑party risk management aligned with interagency guidance
• Clear accountability frameworks across bank and fintech stakeholders
• Ongoing examiner‑ready documentation and controls testing

We have deliberately built our embedded banking program with these expectations in mind because we know that sustainable fintech partnerships depend on trust, transparency, and regulatory alignment.

Turning Scrutiny into Leadership

Rather than viewing heightened oversight as a constraint, Academy Bank sees it as a moment to help shape best practices across the industry.

There is a real need for sponsor banks to share insights on questions like:

• What does “good” look like in a compliant BaaS program?
• How do banks scale fintech partnerships without scaling risk?
• Where should governance lines be drawn between bank and fintech?
• How do institutions operationalize third‑party risk not just document it?

By contributing thoughtfully to this conversation, banks can elevate the entire ecosystem.

Regulatory scrutiny of bank–fintech partnerships is not a passing phase. It reflects a more mature, realistic understanding of the risks and responsibilities embedded in these models.

For fintechs, the takeaway is clear: choose bank partners who are built to last.

For banks, the opportunity is just as clear: Those who invest in compliance, governance, and accountability today will be the trusted innovators of tomorrow.

At Academy Bank, we remain committed to doing embedded banking the right way because in today’s market, strong compliance isn’t just good risk management.

It’s good business.