NEW YORK—A new study has found 80% of U.S.-based sponsor banks are reportedly facing challenges in meeting embedded finance compliance requirements.
A sponsor bank is a financial institution that holds a dominant position in a syndicated loan or a bond issuance.
Despite this, embedded finance programs are driving substantial revenue for these institutions, accounting for over 50% of their income, IBS Intelligence noted, citing Alloy’s 2024 State of Embedded Finance Report.
The study, which gathered insights from more than 50 decision-makers, “underscores the critical yet complex role of compliance in the growing field of embedded finance,” IBS Intelligence said in its analysis.
‘Regulatory Scrutiny’
“The Embedded Finance Report comes at a time when sponsor banks in the U.S. face drastically increased regulatory scrutiny,” the report added. “According to data from Klaros Group, 25.6% of the FDIC’s formal enforcement actions have been directed at sponsor banks since the beginning of 2024.”
Added Tommy Nicholas, CEO and cofounder of Alloy, “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. Despite the challenge, we are already seeing sponsor banks respond to regulatory developments by investing in better controls, training, and adding to their compliance tech stack.”
Financial Consequences
According to IBS Intelligence, recent compliance violations have resulted in financial consequences for sponsor banks: 75% have lost $100,000 or more due to compliance violations, while 39% reported losses of $250,000 and 6% lost $1 million or more.