The banking landscape is currently weathering a period of intense transformation as the lines between traditional finance and agile technology continue to blur. Natalie Poirain explores the complexities of this shift with Priya Jaiswal, an expert in banking and regulatory compliance, to dissect how institutions are navigating the high-stakes world of Banking-as-a-Service (BaaS). They examine the recent insights shared by Wendy Cai-Lee of Piermont Bank, focusing on why the prestige of obtaining a national charter is only the beginning of a much more rigorous journey. The conversation delves into the necessity of regulatory discipline, the fallout of high-profile fintech failures, and how emerging technologies like artificial intelligence are forcing a total re-evaluation of what it means to be a financial partner.
As we see a surge in fintechs and nonbanks aggressively pursuing national bank or industrial loan charters, what are the primary challenges these entities face once they move past the initial approval phase?
It is one thing to celebrate the granting of a charter, but as industry leaders like Wendy Cai-Lee emphasize, the real test of endurance begins with the first annual safety and soundness exam. Newly chartered entities must prove they can secure a high CAMELS rating, which meticulously evaluates their capital, asset quality, management, earnings, liquidity, and sensitivity to market risk. The internal structure of federal banking agencies often catches these firms off guard because the staff who approve charter applications are completely separate from the risk management groups who conduct the examinations. This divide means that while a fintech’s business plan may look revolutionary to an approval committee, the examiners are only interested in how well that plan is executed under the weight of real-world risk. For these companies, the next two years will be a defining period that determines whether they can actually function as a bank or if they will succumb to the pressures of regulatory oversight.
Piermont Bank has reported specific financial losses over the last few years, including a $5 million loss in the first half of 2026. How do these figures affect the bank’s long-term goal of becoming a full, omnichannel embedded banking provider?
Despite the $5 million loss recorded in the first half of this year, which follows a $4.6 million loss in 2025 and a $5.3 million loss in 2024, the bank remains committed to its strategy as a $505 million-asset lender. These numbers reflect the heavy investment and the regulatory hurdles associated with building a “full, omnichannel” infrastructure that includes card issuance, embedded lending, and specialized “for benefit of” (FBO) accounts. The leadership views these financial results within the context of a broader commitment to the BaaS segment, even after facing a 2024 FDIC consent order regarding alleged deficiencies. Rather than retreating, the bank is focusing on bridging gaps with regulators and understanding their concerns to ensure that the infrastructure they are building today is compliant for the decade ahead. This persistence suggests that they see these early losses as the price of entry for a highly disciplined, long-term position in the digital commercial lending market.
With the recent announcement of partnerships with firms like BlxckPay and MassPay, how does a bank balance the desire to grow its client base with the risks inherent in serving niche industries like seasonal agricultural workforces?
The strategy here is centered on “deepening” rather than “broadening,” which allows the bank to risk-manage much more efficiently by becoming experts in specific sectors. When partnering with BlxckPay to link employer bank accounts with employee payroll cards for agricultural workers, the bank is diving into a very specific operational flow that requires granular knowledge. Similarly, the partnership with MassPay for global payout capabilities allows the bank to master payment rails and settlement services for burgeoning businesses. By focusing on a few niche sectors, they can account for the “industry risk overlay” that many generalist banks tend to ignore until it is too late. This approach ensures that they aren’t just adding names to a list but are instead building integrated systems where the bank and the fintech are deeply entwined in a way that minimizes surprises.
The collapse of the fintech Parker earlier this year served as a cautionary tale for many in the industry, yet some partners managed to escape without financial loss. What does this situation teach us about the importance of setting boundaries in a bank-fintech partnership?
The Parker bankruptcy is a prime example of how a bank’s discipline can act as a shield during a partner’s failure. Piermont Bank was a partner for Parker’s banking products, yet they did not lose a single penny because they were “uncomfortable” with certain aspects of Parker’s business and refused to handle those segments. By limiting their involvement to the FBO accounts and allowing other institutions like Patriot Bank to handle riskier commercial credit products, they insulated themselves from the eventual fallout. This illustrates that a bank must be willing to walk away from parts of a client’s business that do not fit its risk appetite, even if it means that client takes their business elsewhere. When a fintech fails, the bank’s internal teams must conduct a deep dive into the lessons learned to ensure their onboarding and ongoing monitoring protocols remain airtight.
One of the most difficult scenarios in embedded banking is when a fintech partner breaches their reserve requirements but fails to top them up. How should a bank handle the tension between contractual rights and the operational reality of “pausing” a client?
This is a high-stakes moment of truth where a bank’s discipline is truly tested against the “market noise” of partnership dynamics. If a large, supposedly well-funded client fails to top up their reserve and offers excuses for a week or two, the bank is faced with the agonizing decision of whether to actually shut them down. Contractually, the bank usually reserves the right to pause services, but executing that pause can have massive ripple effects for the end-users and the bank’s own reputation. However, failing to act allows a breach of discipline that can quickly lead to regulatory scrutiny and a decline in the bank’s own safety ratings. Maintaining a firm line in these instances is essential, as it reinforces to all partners that regulatory compliance and risk appetite are not negotiable, regardless of the size of the client.
As artificial intelligence continues to advance and automate banking functions, how do you expect the relationship between traditional banks and fintech service providers to evolve?
The integration of AI is likely to significantly impact the value proposition of many fintechs, as banks begin to use these tools to achieve greater internal automation and efficiency. Banks are starting to question whether they still need certain fintech intermediaries if AI can handle the same tasks faster and with less third-party risk. This creates a survival-of-the-fittest environment where fintechs must think about how they can move up the value chain to provide services that a bank cannot easily replicate with its own technology. We are moving toward a period where “being a partner” isn’t enough; fintechs must offer a unique, high-value proposition that integrates seamlessly with the bank’s increasingly sophisticated digital core.
What is your forecast for the banking-as-a-service (BaaS) sector?
I forecast that the next two years will be defined by a “flight to quality,” where only the most operationally disciplined banks and fintechs will survive the tightening regulatory environment. We will see a shift away from the rapid, broad-scale onboarding of partners in favor of highly specialized, deep-tier relationships that prioritize CAMELS ratings over sheer transaction volume. As AI matures, it will bridge many of the service gaps that fintechs currently fill, forcing a consolidation in the market where only those offering truly proprietary technology or unique market access remain relevant. Ultimately, the successful institutions will be those that view regulation not as a hurdle to be cleared, but as the very foundation upon which their digital infrastructure is built.
