Friction between a regulator and financial institutions that are involved in Banking-as-a-Service or Embedded Finance could be a story in every single Embedded Finance Review edition. Because there are so many news stories around it—Solaris in Germany or Railsr in Lithuania, just to name two from the past few weeks. And now we can add none other than Goldman Sachs to this list. Goldman Sachs has received a warning from the regulator for its compliance oversight in its Fintech unit. Customers of Goldman Sachs include some of the biggest names in Fintech, including Wise (formerly Transferwise) and Stripe. The regulator identified insufficient due diligence and monitoring, which was apparently the case when working with non-regulated companies. Following this warning, Goldman Sachs has paused taking on additional customers in this ‘high-risk’ category.
We all know that compliance is a tough nut for many financial institutions. Thanks to new technology and new service providers, we do see improvements, but it’s taking a lot longer than many of us expected. The challenge is the area between technology and compliance, where everything needs to work “hand-in-hand” but so often doesn’t.
This also means that compliance in the world of BaaS / Embedded Finance is even harder because you add more parties to the mix:
Financial institution → BaaS → Non-financial brand → Customer
In this example, there are four parties involved in delivering an Embedded Finance product. Depending on the exact model (and its variations), each provider has a certain set of responsibilities. In an ideal world, everything would go according to this plan. But very often, the world is more complex than the plan, or providers are not able to perform the tasks, they said they would do. In the example above, there are many “hand-overs”, and thus, many chances for something to “fall through the crack," especially when comparing it to traditional banking. That is one of the biggest challenges in Embedded Finance. Luckily, we see many companies working on a solution for these problems, but we don’t know yet how long it will take to get there.
