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The Front Page of Global Fintech

The the largest fintech community in the world. Subscribe to our newsletter to stay up to date on the latest in news opinions, and all things financial technology.

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Signals: "Direct" vs "Indirect" BaaS - Misreading the regulatory message

Direct. Indirect. Truly direct. In the context of Banking-as-a-Service (BaaS) partnership models, what do these three have in common?

Signals: "Direct" vs "Indirect" BaaS - Misreading the regulatory message

Direct. 

Indirect. 

Truly direct. 

In the context of Banking-as-a-Service (BaaS) partnership models, what do these three have in common?

Answer: None of them describes a partnership model that inherently addresses bank examiners’ concerns about the safety and soundness of BaaS partnerships. 

In August 2022, I wrote about how regulatory scrutiny on the weaknesses of the bank-fintech relationship was casting a shadow on the BaaS space. Since then, a handful of events have underscored the significance of the issues I raised. To highlight a few:

With each new consent order or negative news report, the supervisory directive seemed straightforward: Banks must ensure these partnerships do not adversely impact the banks’ ability to manage risk and fulfill compliance obligations.

However, a new narrative is emerging in panel discussions, industry thinkpieces, and my LinkedIn feed. A narrative built around the concepts of “indirect”, “direct”, and even “truly direct” partnerships. The narrative is that regulators are cracking down on “indirect” BaaS partnerships and demanding “direct” relationships between banks and fintechs. Presumably, regulators are also giving top marks for “truly direct” partnerships? 

This perspective misses the point and creates a dangerous misdirection in the market.