Will Banking-As-A-Service (BaaS) Survive In The U.S.?

Zareef Hamid, entrepreneur and former strategy consultant.

Until recently, banking-as-a-service (BaaS) was celebrated as a transformative force in finance, promising simplified, embedded financial services that enhanced customer experiences. However, high-profile failures in the space have forced the industry to confront deep-rooted operational and regulatory issues. These failures, while damaging, are catalyzing necessary changes. The question now is: Can BaaS survive in the U.S.?

Despite these setbacks, consumer demand remains strong. According to Juniper Research, global BaaS platform revenue from account and card issuing, as well as transaction fees, is projected to grow by 158% over the next four years—from $36.4 billion in 2024 to $94 billion by 2028. This growth is largely driven by e-commerce companies and digital-first consumers that have embraced embedded finance products, seeing them as integral to an enhanced shopping experience.

The trend is clear: More people are turning to familiar brands for financial services. Embedded banking products have become not only expected but anticipated, particularly by younger, tech-savvy consumers. However, recent industry failures are prompting a reckoning, driving a shift away from the “grow fast and break things” mentality toward a more responsible, compliance-focused approach.

At its best, BaaS puts the customer at the center of financial services. It moves the focus away from standalone financial products and toward solving customer problems in real time. For instance, consumers don’t go online to shop for Buy Now, Pay Later (BNPL) products; they go online to buy a new winter coat and are delighted to find an easier way to pay. The ability to embed these solutions at the right moment within the customer journey is a powerful draw for both businesses and consumers.

Not All BaaS Providers Are Created Equal

Despite its promise, not all BaaS providers are equal. Many don’t hold full banking licenses, instead offering limited services via IT, EMI or payment licenses. These differences create a fragmented landscape, where the quality of compliance and risk management varies widely across providers.

This inconsistency has led to operational challenges, with many BaaS providers struggling to meet necessary regulatory requirements. The root of many recent failures lies in poor compliance practices—an area that regulators are now targeting more aggressively.

To survive, BaaS providers must prioritize compliance, ensuring they have the proper licenses and risk management processes in place. Without this, they risk repeating the mistakes of the past.

Regulatory Scrutiny: A Cautionary Tale

The increased regulatory scrutiny facing BaaS providers in the U.S. is already reshaping the landscape. Severe enforcement actions and consent orders have been issued against banks involved in BaaS over the past several years. What’s more, in September of this year, the FDIC proposed new rules requiring sponsor banks to track fintech customers' identities and balances, adding regulatory complexity to BaaS partnerships.

Synapse is perhaps the most egregious example of BaaS gone wrong, demonstrating how reconciliation (or lack thereof) and other operational failures damage relationships with partners, cause reputational injury to fintech startups as a whole and hurt consumers.

Once a prominent player in the BaaS space, Synapse filed for Chapter 11 bankruptcy in 2023 after an $85 million shortfall in user funds came to light. The issue was exacerbated by the company's inability to reconcile transactions with its banking partners, leading to frozen accounts and widespread customer frustration.

The partnership between Synapse and Evolve Bank & Trust disintegrated over a $13 million deficit in Synapse’s For Benefit Of (FBO) accounts. Both companies blamed each other for the operational and reconciliation failures, while fintech clients like Mercury abandoned Synapse, opting instead to work directly with Evolve.

These operational shortcomings highlight the need for robust reconciliation and risk management practices within BaaS. The lack of accountability in handling customer funds is a cautionary tale for the entire sector.

Appetite For BaaS Remains Strong

Despite the setbacks, the appetite for BaaS among businesses and consumers remains robust. Businesses and their end customers are still seeking out embedded finance solutions in droves, and many big banks are starting to view BaaS as a cost-effective way to scale customer acquisition through B2B2C models. Rather than abandoning the space, larger financial institutions may increasingly invest in BaaS providers, provided they demonstrate strong compliance and risk management practices.

Conversely, smaller, less compliant BaaS providers may struggle to survive as regulatory scrutiny intensifies. The expectation is that only those providers that demonstrate both operational excellence and regulatory alignment will succeed in the long run.

The Future of BaaS: Aligning Compliance And Operations

BaaS providers must address operational and compliance challenges head-on. Automation and enhanced risk management technology are key to achieving this. BaaS is inherently complex, requiring sophisticated systems to manage customer transactions, reconcile accounts, and ensure compliance with regulatory requirements such as Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures.

Artificial intelligence (AI) and automation will prove critical in simplifying compliance processes, reducing human error and ensuring regulatory standards are met without adding friction to the customer experience. However, this transformation will be costly, as BaaS providers need to invest heavily in technology to remain competitive and compliant.

The Road Ahead For BaaS

The future of BaaS in the U.S. will depend on clearer regulatory frameworks and better risk management solutions. Providers must embrace operational reforms and digital transformation to handle the growing complexity of the industry. AI and automation will be essential in enhancing compliance, improving customer experiences and scaling operations.

As the dust settles around recent enforcement actions and regulatory changes, the BaaS market is likely to see some players exit while others innovate. These changes could pave the way for a more mature, stable BaaS ecosystem, where compliance is a baseline expectation rather than an afterthought. The hope is that this regulatory tightening will weed out weaker players without stifling the innovation that makes BaaS so appealing.

The sector’s long-term survival hinges on its ability to evolve and meet the increasing demands of regulators and consumers alike. BaaS has the potential to revolutionize financial services—but only if it learns from past mistakes and adapts to the new realities of compliance and operational rigor.

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