Why Banks Still Matter: Navigating Innovation & Trust in a Changing Financial Landscape

This article was first published on the Paypers and is reprinted here with permission.

Who still needs banks? It’s a question that’s been asked with increasing frequency in recent years — though the answer is far from straightforward. The growth of fintechs offering digital-first, customer-centric services has led some to view traditional banks as slower to adapt to changing expectations.

Adding to this evolving landscape has been the shifting of regulations around new banking charters in the U.S., which has led to a rise in de novo banks — newly established institutions built from the ground up — and prompted fresh debate about the long-term role of traditional banks. While the current environment may appear more favorable for new entrants, history shows that regulatory tides can turn quickly. And when they do, it’s the institutions with experience in navigating risk and uncertainty that are best positioned to adapt.

That principle is reflected in the rising popularity of Banking-as-a-Service (BaaS) models — enabling fintechs and other third parties to offer financial products by leveraging traditional banks’ infrastructure. The BaaS market, valued at $21.27 billion in 2023, is projected to quadruple to $85.73 billion by 2032.¹

This surge in popularity is, in part, driven by the mutual benefits offered by BaaS. Customers gain access to innovative financial solutions; emerging players tap into robust infrastructures they would otherwise be unable to access; and incumbents have the opportunity to unlock new revenue streams by monetizing their regulatory expertise, compliance frameworks and trusted status.

This evolving BaaS model, however, is not without its challenges. In the U.S. particularly, the regulation landscape is in constant flux, and innovation using real-time payments, tokenized deposits and blockchain integration will continue to reshape the industry. This ongoing evolution means that uncertainty persists around which party must assume each responsibility — from compliance and risk management to consumer protections. What’s more, future changes are likely as new technologies and business models emerge.

To ensure the BaaS market reaches its full potential, banks and fintechs must foster productive, transparent and accountability-driven relationships. But what does this look like in practice?

Establishing a productive BaaS partnership

Successful BaaS relationships are built on early alignment — well before contracts are signed. Prospective partners should share compatible values, business objectives and risk appetites to lay the groundwork for trust and collaboration. The structure of the relationship should also reflect the maturity of the fintech. Early-stage firms, for instance, may require support and oversight, while more experienced fintechs may benefit from greater operational freedom.

Critically, each party’s roles and responsibilities — particularly around compliance, risk and oversight — must be clearly defined from the outset. This isn't just about meeting regulatory expectations; it’s about enabling sustainable innovation and ensuring the partnership can scale successfully.

Delegating effectively: The duties of banks vs. fintechs

So, how exactly should the respective responsibilities between BaaS partners be delegated?

One way to approach this is to see the bank’s role as being most effective when focused on delivering core strengths, such as custodial services, payments infrastructure and compliance capabilities. The fintech, meanwhile, can bring additional value by innovating and delivering distinctive, user-centric financial experiences.

Such arrangements come with notable complexities in practice, not least those related to compliance — the burden of which largely falls on the BaaS provider. The reason is straightforward: banks are generally better equipped for this role, thanks to their capital adequacy, established risk frameworks and deep experience operating under regulatory supervision. Expecting emerging fintechs to fully shoulder these responsibilities from the outset can be both costly and counterproductive — and potentially hinder innovation.²

In addition to leading on compliance, BaaS providers must be equipped to support their partners’ growth. This involves investing in scalable infrastructure, establishing robust oversight processes and maintaining strong internal controls. Keeping pace with payments innovation is also essential to meeting partners’ needs, which increasingly center on seamless, modern experiences and the ability to innovate on top of payment rails and other banking products in a rapidly evolving ecosystem. Without these foundations in place, there’s a risk that the fintech could outpace their provider’s capabilities and look elsewhere for support.

These challenges are particularly acute for business models involving consumer-facing services, which carry regulatory expectations, greater reputational risk and increased scrutiny. For fintechs, a pragmatic approach may be to initially focus on business clients and enabling them to build compliance maturity in collaboration with their BaaS provider before expanding into more sensitive areas.

Collaboration is key

With the course of regulation always changing, BaaS partnerships must remain flexible. While every bank has its own interpretation of regulatory requirements, fintechs may be more willing to test boundaries. This dynamic can favor BaaS providers that are ready to engage constructively in an evolving marketplace. Regardless of how these dynamics unfold, collaboration between banks and non-banking partners remains instrumental to the success of BaaS ventures.

Even when the written rules are the same, banks may translate broad obligations, such as mitigating concentration risk or protecting customer data, into very different policies and controls. Jurisdictional nuances, business models, risk appetites and technological capabilities all influence how banking obligations are translated into policies and controls. Indeed, history has shown us why banks’ depth of experience is so vital. Traditional banks remain the cornerstone of financial safety and stability, and this safety net is essential as new technologies and business models continue to reshape the financial ecosystem.

The early days of the de novo banking movement illustrated what can happen when innovation outpaces regulatory understanding — ultimately raising concerns about market stability and compliance. With the rise of BaaS, the pendulum is gradually swinging back to a more balanced position. Both banks and fintechs increasingly recognize that collaboration is essential to building a resilient financial ecosystem.

At BNY, we manage this complexity through ongoing dialogue with regulators, embedding compliance with the design of our systems, and participating in industry forums to help shape best practices. This multi-layered approach ensures that we remain ahead of emerging expectations and stay adaptable. In a rapidly changing environment, the partners that do well are those that embrace complexity — balancing risk management, innovation and operational capability, while building trust through collaboration and shared expertise.