Compliance in Fintech & BaaS: Navigating Regulatory Challenges for Future Growth

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The financial landscape is undergoing a radical shift with the rapid rise of Banking-as-a-Service (BaaS). This model enables non-banking entities such as fintech startups, retailers, and tech companies to integrate financial products into their platforms without obtaining a banking license. This revolution is changing how banking services are delivered, fostering financial inclusion, innovation, and seamless digital experiences.

However, this innovation presents significant regulatory complexity and compliance risks. As BaaS adoption accelerates, regulators worldwide are tightening their grip on the industry. They demand greater transparency, risk management, and accountability from both licensed banks and their fintech partners. In 2024, we witnessed a marked increase in regulatory enforcement actions against BaaS banks, with penalties rising by 18.3% compared to 2023. (Castellum.AI)

For fintechs and banks alike, compliance is no longer just a regulatory necessity—it is a competitive differentiator. A strong compliance foundation ensures not only regulatory adherence but also enhanced trust, operational efficiency, and sustainable growth in a constantly evolving financial ecosystem.

Understanding the Banking as a Service (BaaS) Compliance Landscape

What is BaaS in Fintech?

Banking-as-a-Service (BaaS) is a model that enables non-bank businesses to embed financial services such as payment processing, lending, and account management into their platforms by partnering with licensed banks. These banks provide the necessary regulatory infrastructure, while fintechs leverage their digital expertise to create frictionless customer experiences.

While BaaS presents tremendous growth opportunities, it also introduces complex regulatory challenges. BaaS allows fintechs to integrate banking services like payments, lending, credit issuance, and digital wallets without becoming licensed banks themselves. Instead, they rely on regulated BaaS providers for necessary banking infrastructure and compliance oversight. However, compliance does not stop at the bank level—fintechs leveraging BaaS must also adhere to financial regulations or risk facing enforcement actions.

Why Compliance is a Make-or-Break Factor for Fintechs

Regulatory pressure on fintechs has never been more pronounced. The U.S. OCC and FDIC have warned that BaaS models need stricter oversight to prevent regulatory arbitrage. The EU's Digital Operational Resilience Act (DORA) is now extending compliance requirements to fintechs partnering with licensed banks. Moreover, the UK's FCA has started requiring fintechs to prove their financial crime prevention capabilities before launching services.

Investors and customers expect compliance maturity as a baseline. Fintech valuations are increasingly tied to risk management capabilities. Large enterprises will not partner with fintechs that have weak AML and cybersecurity protections. In a scenario where BaaS banks are passing compliance costs to fintechs, many fintechs assume their BaaS provider is handling compliance needs. However, banks are shifting risk and regulatory costs to fintech partners. Non-compliant fintechs may lose access to essential banking partnerships, disrupting their business overnight.

Top Compliance Challenges for Fintechs Using BaaS

1. Evolving Regulatory Frameworks & Global Variability

The regulatory landscape for BaaS is still maturing, which creates ambiguity for banks and fintechs. Regulatory bodies across various regions are enacting new standards and guidelines to address risks associated with embedded finance.

• U.S. Regulation:

- In 2024, the Consumer Financial Protection Bureau (CFPB) introduced new open banking rules aimed at giving consumers greater control over their financial data. While fintechs see this as an opportunity, banks remain cautious due to increased cybersecurity risks. (Reuters)

- The OCC and FDIC have tightened BaaS oversight, emphasizing that banks must actively monitor fintech partnerships instead of simply relying on contractual agreements.

• European Union (EU):

- The Digital Operational Resilience Act (DORA) and PSD2 updates are requiring BaaS providers to implement stronger risk management frameworks for non-bank entities.

- The European Banking Authority (EBA) is expanding AML obligations for fintechs offering BaaS solutions.

• United Kingdom:

- The Financial Conduct Authority (FCA) has increased due diligence requirements for BaaS partnerships, ensuring that banks are responsible for the compliance of fintech partners.

2. Third-Party Risk and Banking Relationships

Many fintechs over-rely on their BaaS partners for compliance, assuming that the bank will handle regulatory obligations. However, regulators are now requiring fintechs to take ownership of compliance functions, including:

• Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance

• Transaction monitoring and fraud prevention

• Consumer protection and dispute resolution

  
  

Regulatory trends indicate fintechs can no longer rely solely on BaaS banks for compliance. The FDIC recently fined a fintech using a BaaS provider for failing to implement proper fraud controls, even though the bank partner was compliant.

3. AML and Financial Crime Risks

With the emergence of instant payments, integration of crypto assets, and embedded finance, fintechs are prime targets for financial crime. Regulators now expect fintechs to have independent AML programs even if they rely on BaaS banks.

Recent compliance crackdowns led to the CFPB fining a fintech lender $15 million for failing to conduct proper KYC checks on BaaS-enabled credit products. The EBA is mandating stronger transaction monitoring for fintechs offering embedded finance solutions. To remain competitive, fintechs must employ AI-powered AML monitoring tools that detect fraud in real time, automate compliance tasks for KYC, risk scoring, and regulatory reporting, and keep proactive communication with regulators regarding changing laws.

4. Cybersecurity, Data Privacy, and API Risks

Fintechs depend on open banking APIs, cloud computing, and third-party integrations, which create significant cybersecurity risks and data privacy concerns.

Regulatory focus areas for 2025 include the U.S. SEC increasing cybersecurity disclosure requirements for fintechs, the UK's FCA mandating fintechs conduct resilience testing for their tech infrastructure, and the EU's DORA framework requiring fintechs to demonstrate their ability to withstand cyberattacks.

To ensure security, fintechs should encrypt transactions, apply Zero-Trust security principles, conduct regular penetration testing to prevent API vulnerabilities, and implement GDPR, CCPA, and relevant regional data protection compliance policies.

5. Changing Regulatory Expectations for Embedded Finance

Embedded finance—where fintechs offer financial services within non-financial platforms—is growing rapidly. However, regulators are concerned that fintechs operate like shadow banks without proper oversight.

New compliance rules include the CFPB's initiatives demanding embedded lenders adhere to bank-level requirements, the EU's PSD3 proposals extending financial responsibility to non-bank fintechs, and the UK's considerations regarding stricter licensing requirements for fintechs handling consumer funds.

To adapt to these changes, fintechs must prepare for stricter licensing and disclosure obligations, build compliance frameworks that scale with regulatory shifts, and adopt RegTech solutions to automate compliance workflows.

How Fintechs Can Use Compliance as a Competitive Advantage

Fintechs that view compliance as a business enabler rather than a burden will gain a significant edge in 2025 and beyond. They can:

• Win investor confidence by demonstrating strong risk controls and regulatory foresight

• Attract enterprise partners that only work with fintechs meeting compliance gold standards

• Future-proof expansion by ensuring readiness for evolving regulatory landscapes

• Reduce regulatory and legal costs by investing early in compliance to avoid penalties

  
  

A successful fintech compliance strategy incorporates embedding compliance from the outset, automating regulatory processes through AI-driven fraud prevention and AML solutions, and proactively engaging regulators rather than merely reacting to enforcement actions.

The Future of Fintech and BaaS Compliance

The future of fintech is intrinsically linked to compliance maturity. As regulators tighten their oversight on BaaS models, fintechs must enhance their compliance efforts—not just to avoid penalties but to secure long-term growth, investor trust, and customer confidence.

Fintechs that strategically address compliance will not only navigate regulatory challenges but also build sustainable, scalable, and trusted financial services. The companies that thrive will be those that integrate compliance into their operations, positioning it as a key driver of both security and innovation.

Is your fintech ready for the next wave of regulatory change? Now is the time to ensure compliance is an asset, not an obstacle, for long-term success.

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