Cover Your BaaS: Building Proactive Compliance into Fintech Partnerships

The Rise of BaaS—and the Risk Behind It

Banking-as-a-Service (BaaS) has reshaped the financial services landscape. By allowing non-bank fintech companies to offer deposit accounts, cards, lending, and payment services through APIs connected to sponsor banks, BaaS enables fast innovation, faster go-to-market strategies, and expanded access to financial products. But that convenience comes with significant risk—especially for the bank providing the underlying infrastructure.

In the rush to compete with digital disruptors and monetize excess charter capacity, many traditional institutions have leaned into BaaS without fully appreciating the compliance implications. These arrangements often scale quickly—sometimes too quickly—and without proper oversight, they can expose banks to violations of BSA/AML laws, consumer protection rules, fair lending expectations, and reputational damage.

BaaS isn’t inherently risky. What makes it dangerous is when growth outpaces governance. And that’s where proactive compliance comes in. Institutions that want to remain competitive in the embedded finance space must learn how to balance agility with accountability. Because in the eyes of regulators, it’s still your charter—and your responsibility.

Why the Bank Still Holds the Bag

It’s a common misconception that in BaaS arrangements, fintechs own the risk. After all, they’re the ones onboarding customers, designing the product, and engaging with users. But from a regulatory perspective, it’s the bank that holds the charter—and with it, the ultimate liability for everything that touches its systems.

When regulators conduct exams or issue enforcement actions related to BaaS relationships, it’s the sponsoring bank that’s in the hot seat. That means your institution is expected to understand and monitor the full customer lifecycle, even when a third-party fintech is performing most of the front-end operations. You’re responsible for ensuring that KYC is being conducted correctly, that transactions are being monitored for suspicious activity, and that marketing practices don’t cross regulatory lines.

And this isn’t theoretical. Recent enforcement actions have made it clear: banks can’t outsource accountability. You can delegate tasks, but not responsibility. If a fintech partner cuts corners or lacks a mature compliance program, it’s your institution that pays the price—sometimes literally.

That’s why ClearPath urges sponsor banks to approach BaaS relationships with the same scrutiny as any other core business line. If your fintech partners are driving volume through your systems, then those relationships deserve the same level of oversight, due diligence, and risk management as your traditional banking activities.

Due Diligence is the Front Line

Every successful BaaS compliance program begins with rigorous, risk-based due diligence. Before you ever sign an agreement or integrate an API, your institution should have a full picture of the fintech partner—its leadership, ownership structure, business model, target customer base, and overall compliance philosophy.

This goes far beyond simply reviewing a pitch deck or assessing financial projections. It means conducting background checks on founders and executives. It means evaluating whether the fintech has appropriate policies and procedures in place, including privacy, data security, anti-money laundering, and fraud prevention. And it means understanding their customer acquisition strategy—because how they plan to grow will directly affect your risk exposure.

Red flags at this stage should not be ignored. A fintech with no in-house compliance officer, no independent audit function, or no awareness of regulatory obligations should give you pause. It’s far easier to say “no” upfront than to spend months remediating a broken partnership after the fact.

Due diligence is not just a legal formality—it’s your first and best opportunity to determine whether a potential partner is a true extension of your compliance culture or a liability waiting to happen.

Oversight Can’t Be Optional

Even the best due diligence won’t protect your institution if you’re not actively monitoring the relationship once it begins. Unfortunately, too many banks treat BaaS like a set-it-and-forget-it arrangement, relying on periodic reports or summary dashboards to keep tabs on growing fintech portfolios. That’s not enough.

Regulators expect sponsor banks to have a formalized oversight framework that includes real-time access to transaction activity, regular review of customer complaints, and the authority to take immediate action when needed. Your institution should be conducting ongoing partner monitoring—not just for BSA/AML compliance, but also for consumer protection, marketing practices, complaints, error resolution, and adherence to SLAs.

This kind of oversight requires dedicated resources and specialized expertise. It also requires clear, enforceable terms in your legal agreements that give you access to necessary data and control over the customer relationship. Without it, you’re flying blind—and putting your institution at serious risk.

ClearPath has seen firsthand how banks get caught off guard when fintech partners change business models, expand into higher-risk areas like crypto, or scale too fast for their compliance function to handle. The best way to avoid surprises is to build continuous oversight into the DNA of your BaaS program.

Compliance Starts at the Drawing Board

By the time a fintech is ready to go live, it’s often too late to retrofit compliance. That’s why successful BaaS banks require compliance integration during the product design phase—not as an afterthought. You need to ask: What risks does this product present? Who is the target customer? What jurisdictions will it operate in? How will identity be verified? What transaction types will be permitted, and how will anomalies be detected?

The answers to these questions must shape the architecture of the product from the beginning. For example, if your fintech wants to serve underbanked communities with thin credit files, that has direct implications for your CIP/KYC strategy. If the product includes peer-to-peer payments or instant disbursements, your transaction monitoring thresholds may need adjusting. And if the platform will be used for gig workers or international users, you’ll need to think carefully about sanctions screening and fraud detection.

Waiting until the last minute to ask these questions is a recipe for compliance gaps—and potentially for regulatory intervention. That’s why ClearPath emphasizes early-stage compliance planning as part of every BaaS partnership we support. The earlier compliance enters the conversation, the smoother (and safer) the rollout.

Ownership Must Be Clearly Defined

One of the most common pain points in BaaS arrangements is confusion over customer ownership. While fintechs may design the user interface and manage the customer relationship day-to-day, the bank is still considered the legal account holder. That comes with significant responsibilities—and the need for ultimate control.

Your institution must retain the right to close accounts, freeze transactions, reject high-risk clients, and review or veto marketing campaigns. These rights should be clearly spelled out in your contracts, but more importantly, they should be actively enforced. Too many banks give fintechs too much leeway, only to realize too late that their name is attached to risky or misleading behavior they didn’t approve.

Banks must also maintain direct access to all relevant customer data—not just periodic snapshots or summaries. Full visibility into onboarding activity, account usage, and suspicious transactions is critical for satisfying regulatory expectations and for making informed risk decisions.

If your institution doesn’t clearly own and control the relationship, then you don’t truly have a handle on the risk. And in BaaS, that’s a dangerous position to be in.

Expect Regulatory Heat—And Prepare for It

The message from regulators is loud and clear: BaaS relationships will be scrutinized. From the OCC’s warnings about third-party risk to the FDIC’s recent focus on fintech partnerships, sponsor banks are under the microscope. And the expectations are rising fast.

Examiners want to see more than a policy—they want proof of execution. That means maintaining an up-to-date inventory of fintech partners, documenting oversight activities, conducting independent audits, and showing how compliance findings are tracked and resolved. It also means demonstrating that your institution has the staffing, systems, and senior management engagement necessary to oversee these programs at scale.

If you’re not already conducting thematic reviews, partner-level risk assessments, and periodic control testing, now is the time to start. A “wait and see” approach is no longer viable. The cost of inaction is too high.

At ClearPath Compliance, we work with institutions to build audit-ready, exam-proof BaaS programs that meet regulators where they are—and where they’re going. Being prepared is not just about avoiding penalties. It’s about protecting your institution’s charter, brand, and future growth.

Cover Your BaaS—Before It’s Too Late

The potential of BaaS is enormous. It enables banks to reach new markets, drive revenue, and position themselves as critical infrastructure in the next wave of financial innovation. But that potential can only be realized if compliance is taken seriously from the start.

Proactive compliance is no longer a nice-to-have. It’s a competitive advantage—and a survival strategy. Institutions that implement thoughtful, risk-based frameworks will not only avoid regulatory pitfalls but also attract stronger fintech partners who value stability and structure.

At ClearPath Compliance, we help banks design, launch, and refine BaaS programs that scale safely. Whether you’re onboarding your first fintech or managing a large portfolio of embedded finance relationships, we’ll help you stay ahead of the curve—and ahead of the regulators.

Don’t wait for the knock on your door. Cover your BaaS now, and build something that lasts.

🔗 Get in touch with our team today to schedule a BaaS program review or learn more about our advisory solutions.