Alloy, the identity risk management company trusted by over 600 leading banks, credit unions and fintech companies, has released its 2024 State of Embedded Finance Report.
The Report examines the year’s top trends in embedded finance risk management and compliance. Alloy surveyed more than 50 professionals at financial institutions operating bank sponsorship programs in the United States to learn how their businesses are responding to compliance challenges.
The Report is being published at a time when sponsor banks in the US are facing increased regulatory scrutiny. A reported 25.6% of the FDIC’s formal enforcement actions have been directed at sponsor banks since the beginning of 2024.
Alloy’s report found that while embedded finance programs drive significant revenue (over 50%) for sponsor banks, a majority (80%) of respondents reported that meeting embedded finance compliance requirements as a sponsor bank is challenging in the current environment.
“Running a sponsor bank program is inherently complex because you have banks who are highly regulated working with companies that are often new, fast-growing, and creating entirely new ways for consumers to interact with money,” said Tommy Nicholas, CEO and co-founder of Alloy.
“Despite the challenge, we’re already seeing sponsor banks respond to regulatory developments by investing in better controls, training, and adding to their compliance tech stack.”
State of Embedded Finance Report 2024
Here are five of the key findings from Alloy’s State of Embedded Finance Report:
1. Over half of sponsor banks’ deposits and revenue come from embedded finance partnerships.
Partnerships between banks and fintechs are a cost-efficient approach to catalyze growth through increased deposits, seamless UI, and accelerated innovation.
2. As regulatory scrutiny grows, embedded finance partnerships are becoming harder to maintain.
The embedded finance boom resulted in many banks testing the waters of bank sponsorship programs. As the complexity of managing these programs grows, we may see sponsor banks with less sophisticated embedded finance programs and tech stacks leave the space entirely.
3. Respondents cite reputational damage as the top consequence of compliance violations.
Reputational damage often results in increased regulatory scrutiny, including more frequent examinations and document requests. This heightened oversight can strain resources and pose ongoing operational challenges.
4. 90% of financial institutions face challenges when meeting compliance requirements as a sponsor bank.
Lack of control and audibility over fintech partners’ policy controls were cited as top challenges to meeting compliance requirements. Managing compliance across multiple jurisdictions and adapting to evolving regulatory changes were also top concerns.
5. 94% of respondents say they plan to invest in new compliance technology to help them manage their embedded finance partnerships.
As attention surrounding compliance missteps has grown over the past few years, there are new tech solutions available to help bridge the gap between sponsor banks and fintechs.
Download the Report
Respondents included 51 decision-makers from financial institutions operating bank sponsorship programs in the United States.
Surveys were conducted by The Harris Poll, a leading survey platform for over 60 years.
For further insights you can download the full report here
- Embedded Finance
