Banking-as-a-Service (BaaS): Regulatory Framework, Critical Due Diligence, Contract Structure, Risk Mitigation

Description

Advancements in technology and open banking regulations have provided new models for the delivery of banking services. BaaS is a newer model that enables non-bank entities in collaboration with licensed banks to offer financial services, including banking infrastructure, payments capabilities, lending and deposit products, and account management with third-party businesses.

Despite the tremendous growth and opportunities with BaaS, banks and fintechs must understand the risks and intensified regulatory scrutiny surrounding these collaborations. Specifically, recent consent orders and enforcement actions have cautioned that if not done correctly, collaborations in the BaaS space can run afoul of the Bank Secrecy Act and state and federal consumer protection and truth in lending laws.

To ensure compliance with the regulatory framework both banks and fintechs must perform comprehensive due diligence on their BaaS partners, which includes evaluating their compliance history, risk management practices, and overall financial health.

Structuring BaaS arrangements requires a complex allocation of roles, risks, and responsibilities between the bank and its fintech partner. The parties to a BaaS arrangement will want to ensure that their agreement follows regulator guidance, provides for ongoing monitoring of the parties' policies and procedures, and precisely outlines what happens when a termination or separation occurs.

Listen as our authoritative panel examines BaaS trends and provides guidance for financial institutions and their counterparties for navigating the evolving and complex regulatory landscape.