Embedded Finance Regulatory Outlook: 2024 Year End Review

Embedded finance has reshaped how banks deliver financial services to the average consumer. The ability to integrate banking services into digital products — from ridesharing and delivery apps to e-commerce stores and travel booking sites — enables banks to reach beyond geographic boundaries and enter new markets. 

But given the highly regulated nature of these products and services — coupled with the rapid growth of digitized banking products and services post-pandemic — regulators are understandably seeking to clarify how the traditional body of laws and regulations apply to bank-fintech partnerships.

This year we saw a continued trend of regulators scrutinizing community and regional banks partnering with technology companies, particularly in relation to embedded banking partnerships. 

In fact, since the start of 2024, more than a quarter of the FDIC’s enforcement actions have targeted sponsor banks involved in embedded finance partnerships. The Synapse collapse in April marked a critical tipping point, sparking new concerns and mobilizing regulatory efforts intended to protect end customer funds. 

In particular, Synapse’s failure exposed the crucial importance of transaction visibility among all parties since data-sharing and recordkeeping gaps between Synapse and sponsor bank Evolve left millions of dollars of customer funds unaccounted for. It also highlighted the importance of banks developing business continuity and disaster recovery plans when partnering with venture-backed startups. 

Consequently, recent regulatory actions and proposed rule making have aimed to strengthen oversight of banks’ third-party relationships and ensure banks can operationalize key regulatory and business requirements because they are ultimately responsible for holding consumer funds.

While it is unclear if this regulatory momentum will continue in the Trump administration, recent events underscore a need for strategic alignment, product controls and transparent communication between banks and their technology partners. 

By aligning on what a bank intends to achieve through alternative channels, building controls into the technology to mitigate risk and maintaining a clear understanding of each other’s key business policies, banks, fintechs and technology providers can together innovate responsibly — and build a more resilient, accessible embedded finance ecosystem.

‍Lessons learned from 2024 events 

Regulatory activity — from consent orders to proposed rulemaking — introduced additional demands for both sponsor banks and their fintech and technology partners. However, regulators have already signaled a desire to collaborate with industry experts to create more robust standards, and they are seeking feedback and guidance directly from the participants in the ecosystem.

As banks, fintechs and technology providers move forward, insights from the past year offer a framework for secure and transparent embedded finance partnerships. 

‍Banks must have visibility and take ownership of all parts of program management — from reconciliation to compliance.‍

In the wake of the Synapse bankruptcy, regulators are focused on preventing future data accessibility failures to ensure consumer funds are accounted for at all times. The FDIC’s recently proposed rule would require banks to maintain ledgers of For Benefit Of (FBO) accounts opened by third-party fintechs for continuous visibility into account activity. Put simply, banks would need to maintain constant access to third-party ledgers and reconcile fintech accounts daily. 

In targeting third-party reconciliation challenges, the proposed rule further solidifies banks' role as the primary compliance owners. 

Ultimately, banks operate under a regulatory charter, which authorizes them to provide financial services and holds them accountable for safeguarding customer funds. In today’s traditional paradigm, fintechs are often viewed as third-party technology partners and are therefore not directly regulated.  

Moving forward, banks engaging in fintech partnerships will need to strengthen their investment and oversight in assessing their partners' operational risk. This includes increasing headcount for bank compliance teams and securing buy-in across all levels of the organization, especially from the board.

In turn, this also shifts responsibility to fintech and technology partners seeking bank partnerships. Specifically, banks are becoming more selective about the quality and maturity of fintechs they choose to partner with. 

Banks will also likely vet embedded finance technology partners with a higher degree of scrutiny to confirm key governance and infrastructure controls — specifically robust data sharing, reporting systems and business continuity programs — are in place. 

‍High-quality technology is key to avoiding compliance issues.

As the FDIC’s proposed rule indicates, transparency between parties in bank-fintech partnerships is a top focus for regulators. This means banks need real-time visibility into the movement of customer funds in third-party accounts, enabled by the underlying technical infrastructure that supports embedded finance partnerships.

For example, not all embedded finance technology platforms support the real-time reconciliation of funds, which offers constant visibility to the ledgering process. In many cases, banks only receive an end-of-day settlement from their technology partner, making it difficult to spot inconsistencies in fund movements and locations. 

Real-time reconciliation, on the other hand, gives banks a continuous flow of transaction data so they can keep accurate records and verify transactions at all times. Technology providers can also take transparency a step further, creating separate settlement accounts for each payment rail to help banks quickly identify the source of discrepancies.

Regulators will expect to see improved connectivity between stakeholders in bank-fintech partnerships. Here, embedded finance technology providers will play a crucial role by designing products with data structures that offer banks the same visibility into third-party account activity as they have with their own core accounts.

‍Product-level controls are essential to responsible innovation. 

The success of bank-fintech partnerships lies in empowering all parties to execute their key functionalities. For embedded finance technology providers, this means focusing product development on building essential controls for banks to leverage. 

For example, banks need robust account management features that allow them to lock bank accounts, set transaction limits and identify accounts with negative balances. Similarly, they need the ability to perform key compliance activities — like running KYC checks on potential customers. 

Software that integrates with the bank’s core enables banks to maintain full oversight of customers who open accounts through their fintech partners, just like they do with their own direct account holders.

An established compliance framework is crucial for managing risk and building trust between banks and their fintech partners. By innovating proactively, embedded finance technology providers can offer compliance-first solutions that empower banks to extend their services without compromising their core responsibility to the end customer. 

Preparing for the future of embedded finance

The events of 2024 have reinforced the importance of effective risk management to build trust in bank-fintech partnerships. In particular, we were repeatedly reminded that banks cannot maintain the level of compliance needed to protect end customers without complete visibility and control. 

At Treasury Prime, our technology has always been informed by a deep understanding of what defines a successful bank-fintech relationship: clearly defined roles for each party. 

Banks are in the driver’s seat to manage their fintech programs, while our software provides the tools they need to ensure full oversight and control commensurate with the product and enterprise risk appetite. 

Though it remains to be seen how 2025 and a new administration will impact regulatory activity, Treasury Prime is committed to responsible innovation. We remain focused on leading the way in embedded finance technology, empowering banks to launch innovative fintech partnerships — and maintain robust compliance at every step of the process. 

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