When a company (fintech or brand) wants to launch a financial product in the US, there are basically no alternatives other than to partner with a traditional bank. This is due to the fact that there are no licences like the e-money licence that we have in Europe and because it’s really hard to apply for a bank licence on your own. Those banks that work with a fintech or brand to offer financial products are called ‘partner banks’ (or sponsor banks).
Now take a look at the graphic above again (Source) and you will understand that a bank that partners with a fintech company or a brand is a lot more likely to receive formal enforcement actions compared to a bank without such partnerships. As mentioned before, an embedded finance or even fintech product in this matter requires many different partners, and it relies on the fact that every party is doing what they are supposed to do. In an ideal world, this works smoothly, but reality can be different.
And there is one bank that is getting a lot of attention from the US regulator: Blue Ridge Bank, which just received its second enforcement action from the federal regulator, the OCC. The bank is known for its fintech partnerships, including its partnership with Unit, an embedded banking provider in the US. The link above mentions the different points the regulator addresses, but at the end, most of them fall into the category of failures in overseeing and enforcing compliance requirements (i.e., how does my fintech partner onboard its customers, how do they angle certain processes around processes, and so on). The model of embedded finance requires a well-working partnership of frontend, technology, and compliance (or non-financial brands, infrastructure providers, and licence holders). Many banks have become sponsor banks in the last few years, and they might have underestimated the complexity and effort required. But they need to catch up because fintech companies and non-financial brands are now more likely than ever to take compliance into their decision making matrix when choosing a partner bank.
