With a quarter of FDIC enforcement actions targeting sponsor banks in 2024 and Synapse’s high-profile collapse revealing serious risks, embedded finance partnerships face a pivotal moment. Even if regulatory pressure eases under the new administration, banks are doubling down on risk management and transparency. Sheetal Parikh, general counsel and chief compliance officer at Treasury Prime, explores how industry stakeholders are developing new standards to strengthen these critical relationships.
In 2024, more than a quarter of the FDIC’s enforcement actions targeted sponsor banks involved in embedded finance partnerships. But for industry insiders, increased regulatory attention is not surprising given the accelerated growth and mounting compliance challenges of bank-nonbank partnerships.
The regulatory focus on bank-fintech relationships has peaked amid rapid expansion in the embedded finance industry. As more banks look to leverage venture-backed fintech innovations to extend their financial services, regulators are moving to determine how traditional laws and regulations pertain to these new, complex models.
In particular, community and regional banks have faced increased scrutiny as regulators seek to understand how third-party relationships are structured and managed.
Following the high-profile collapse of financial technology company Synapse in April 2024, regulatory focus turned to sponsor banks’ transaction oversight and reconciliation practices. Synapse’s technological breakdown exposed the direct risks to consumers when bank-fintech partnerships lack the guardrails to manage and oversee third-party accounts.
In 2025, the evolution of regulatory action remains to be seen. However, current trends indicate a continued push toward more comprehensive frameworks to strengthen oversight of bank-fintech partnerships. In fact, efforts driven by industry players are already underway to align on best practices for managing third-party risk and ensuring compliance across embedded finance programs.
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Read moreDetails3 trends to monitor
Compliance will remain a central focus for the embedded finance industry, with regulators seeking direct feedback from participants in the ecosystem to develop more robust standards. Based on the events of the past year, it’s also likely sponsor banks will double down on refining risk management and compliance infrastructures to ensure the long-term viability of their fintech partnerships.
With that in mind, we can expect the following trends to emerge as the year unfolds:
Transparency in recordkeeping and reporting will remain top of mind
In the wake of the Synapse collapse, regulators have zeroed-in on key vulnerabilities that contributed to the failure, particularly in the oversight and management of for-benefit-of (FBO) accounts opened by third-party fintechs.
In September, the FDIC proposed a rule that aims to address data-sharing gaps. If passed, banks — not fintechs — would be required to maintain complete oversight of customer funds and ensure transactions are reconciled accurately and in real time.
While the scope and enforcement of the FDIC’s proposed regulation may change in the new presidential administration, focus on third-party reconciliation challenges reinforces a key principle: FBO accounts are bank accounts, and their holders are — first and foremost — bank customers.
Fintechs may control the acquisition channels and user experience, but ultimate responsibility for safeguarding customer funds resides with the sponsor bank as the chartered institution.
Going forward, a sustained focus on transparency stands to bolster trust and resilience in the embedded finance ecosystem. Even if the proposed rule is not codified, banks will likely prioritize transparency and accountability when evaluating embedded finance partners. Banks will also assess potential fintech partners with greater scrutiny, particularly in terms of their compliance knowledge, awareness of banking procedures and infrastructure controls for data-sharing and reporting systems.
Industry stakeholders will collaborate to develop compliance standards
The need for clear guidelines to support safe partnerships between banks and nonbank fintech and technology entities is increasingly evident. Consequently, industry stakeholders are working to align on best practices for non-banks participating in financial services.
The Coalition for Financial Ecosystem Standards (CFES) — representing a cross-section of the financial service ecosystem — has collaborated internally and alongside regulators to develop rigorous standards for these third-party relationships since launching in the fall of 2024.
In 2025, continued engagement among industry stakeholders, regulators and compliance experts will support the operational success of embedded finance partnerships. For example, the coalition is currently developing a standardized assessment for risk management and compliance framework, which aims to define expectations for risk management and compliance while offering guidance on due diligence and ongoing assessment against the established standards.
As regulatory oversight evolves, alignment within the industry will ensure innovation in bank partnerships can proceed responsibly while upholding compliance standards and consumer protections. Moreover, ongoing dialogue between industry stakeholders and regulators enables the continuous refinement of operational standards to build a more resilient financial ecosystem.
Banks will invest more resources in risk management
Following a year marked by heightened scrutiny of embedded finance partnerships, banks have a more robust understanding of the operational risks of third-party fintech relationships. As a result, many financial institutions already engaged in embedded finance partnerships will allocate more resources to proactive risk management. And those still contemplating becoming sponsor banks may become more cautious.
To set themselves up for success, banks should approach potential embedded finance partnerships deliberately. This starts with securing buy-in from their boards and performing a thorough audit of the resources needed to support the compliance needs of the program.
Banks must also determine whether they need to add headcount to their compliance teams and how they’ll manage the technology that enables them to oversee critical functions, such as account limits and Know Your Customer (KYC) checks.
Some banks may become more risk-averse in 2025, renewing their focus on the operational aspects of their embedded finance partnerships. However, the banks that forge ahead with these partnerships will position themselves for sustainable growth if they keep compliance front and center.
Navigating the future of embedded finance regulation
It’s too early to tell if the regulatory momentum that began in 2024 will continue into the new year under a new presidential administration. However, heightened scrutiny in the embedded finance space underscores the importance of seamless collaboration between sponsor banks and their nonbank partners to ensure both can fulfill their key responsibilities.
No matter what happens on the regulatory front, that’s not going to change. Looking ahead, expect sponsor banks to further strengthen their compliance frameworks and risk management practices to keep pace with evolving regulations. At the same time, fintechs and technology providers will continue innovating solutions that enhance transparency and provide banks greater control.
Together, these efforts can foster a more resilient embedded finance ecosystem, enabling banks to navigate future regulatory shifts with agility and confidence.
Sheetal Parikh is general counsel and chief compliance officer of Treasury Prime, an embedded banking software provider. She has nearly 20 years of experience practicing law in the financial services sector since starting her career in the securities and commodities litigation group at Neal, Gerber & Eisenberg.
