What BaaS companies learned the hard way in 2024 — and what’s coming next

Is BaaS the land of the dead? Actually, not so much. 2024 was admittedly a difficult time for partner banks and fintechs alike when it came to BaaS. But through the fires of consent orders and lost customer deposits came a realization that all firms involved needed to look more deeply into how they structured their relationships.

Lauren McCollom, SVP and Head of Embedded Finance at Grasshopper, called 2024 an “enlightening and chaotic year” for BaaS players. As consent order numbers climbed into double digits, hitting institutions like Evolve Bank & Trust, Sutton Bank, and Blue Ridge Bank, many fintechs decided they had to pivot and find new partner banks to ensure their programs’ longevity and survival.

On the other hand, affected partner banks had to dig deep into their existing programs and look for weaknesses, while non-affectees saw more and more fintechs queuing up for partnerships. “This fintech outreach wave which fueled pipelines and enabled partner banks to engage with leading fintechs looking for safety and stability in long-term programs with an established partner bank,” said McCollom.

In today’s story, we look at the major challenges partner banks and fintechs faced in 2024 and what trends may emerge in the new year for these firms.

Recap: 2024’s BaaS trials

Here is a top down view of all the challenges partner banks and fintechs faced last year.

The regulators and BaaS programs: One major difficulty BaaS partners faced was dealing with enforcement actions, reconciliation issues born out of underbaked BaaS programs, and a desire by fintechs to build redundancy in their bank partnerships.

“What came from this period in early 2024 were inquiries and clarification questions from fintechs trying to cut through the noise. Overall this permitted the education of the industry and alignment on what ‘direct’ can mean in BaaS,” McCollom added.

Compliance became top of mind and ultimately led to a reinvigoration of compliance technology providers and a deeper look at how these tools could be used to strengthen existing BaaS partnerships in the face of regulatory scrutiny.

On the other hand, fintechs that foresaw trouble decided they needed a change of partners and sought to migrate their programs leading to a few partner banks seeing more traffic. And while this narrowed the number of partner banks operating in the BaaS landscape, those that continued built much stronger foundations in compliance.

Balancing act: Given the regulatory focus on the industry, firms had to carefully manage building better compliance capabilities while looking after the bottom line. “The balancing act of investing in the necessary infrastructure, controls, and capabilities while maintaining a profitability model added further complexity to the equation,” said Richard Rosenthal, Principal at Deloitte.

The solution to evolving BaaS programs to be resilient to regulatory headwinds for many was putting in place the right infrastructure. There is a class of partner banks and fintechs emerging now that focus on implementing the right controls and processes, added Rosenthal.

Expectations and trends for 2025

Regulators aren’t done yet: Industry experts like McCollom expect a continuation of enforcement actions in the new year, as well as changes in regulations and policies, like the proposed brokered deposit rules as well as any changes by the new administration.

For partner banks, this means that their work on compliance is not done yet and that these firms need to “button up their respective fintech programs where deficiencies may reside,” said McCollom. The best approach here is to develop a strategy specific to BaaS and “align on what specific types of activities or fintech programs [banks] will support,” she added.

This means that the number and types of fintechs partner banks are interested in working with has decreased and may continue to fall, leading to fintechs having to be more competitive from the outset. Here, partner banks can help interested fintechs by clarifying whether they will enter into a BaaS relationship with a given fintech as soon as possible. “Giving a fintech a quick ‘no’ is more helpful than a long drawn-out ‘maybe,’” she added.

Building a strong tech foundation: BaaS players are now contending with changing regulatory requirements as well as growing customer expectations in a digital-first environment. In 2025, a significant challenge for partner banks will likely be ensuring that the right technological infrastructure is in place to support program growth as well as rigorous compliance demands. “Partner bank legacy systems may often require significant upgrades to support modern technology and partnership needs,” said Rosenthal.

This emphasis on using technology to bolster compliance processes may make fintechs that are built on newer and more robust technological infrastructure more attractive partners. “Banking regulators will hold the partner bank ultimately accountable for the risks triggered by their role and functions in the BaaS model, as a bank owns what it books,” he added.

Fintechs niche down: With fewer partner bank options out there and an increase in selectiveness, fintechs will need to find ways to differentiate themselves from their competition. The key here may be focusing on targeting niche customer segments. Products that bring in a new segment of customers like underserved populations into the system may be more effective in gaining a ‘yes’ from partner banks, according to Srinivasan Seshadri, Chief Growth Officer and Global Head of Financial Services at HCLTech.

Have the right customers: While partner banks focus on onboarding the right fintechs, fintechs on their part will have to focus on acquiring the right customers. To do so, fintechs will have to translate their partner bank’s expectations into their own context. “This means going beyond checking a box on a bank due diligence checklist when you are first onboarded by a partner bank, and developing a core risk and compliance program that addresses the risks faced by the products offered,” said Rosenthal.

Softening attitudes on Capitol Hill: Trump’s new administration may create a friendlier environment for BaaS players in 2025, shifting policies towards a more “commercial focus” according to Deloitte’s Rosenthal. “This may include the finalization of a pending FDIC proposed regulation on custodial recordkeeping,” he added, speaking to FDIC’s proposed rule first set out in October in 2024, which helps ensure that customers don’t lose money in case of reconciliation issues among BaaS partners.

Finalization of such a rule may bolster consumer trust and engagement with BaaS products as well as better prepare the industry for addressing the sticky issue of who really owns the customer.

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