Why banking-as-a-service margins never covered the cost of knowing whose money it was

The week

On June 14, 2024, the Federal Reserve Board announced an enforcement action against Evolve Bancorp and Evolve Bank & Trust, an Arkansas bank that sponsored many fintech programs. The cease and desist order, dated June 11 and issued jointly with the Arkansas State Bank Department, cited unsafe and unsound practices. The bank lacked an effective risk management framework for its fintech partnerships, with gaps in anti-money laundering, sanctions and consumer compliance. Evolve now needed supervisory approval before adding fintech partners or offering existing partners new products. The order landed while Synapse, a middleware firm linking fintech apps to banks including Evolve, was in Chapter 11 after filing on April 22. Many end users of Synapse-connected apps could not reach their money, because the bank and middleware records did not reconcile.

Banking-as-a-service had attractive unit economics on paper. A small bank could gather deposits and card interchange from dozens of fintech programs without building consumer products or branches. Revenue scaled with balances and transaction volume. The costs that mattered most scaled differently. They grew with the number of programs, the number of systems holding records, and the complexity of each partner’s flows. The Evolve order and the Synapse failure arrived within weeks of each other. Together they exposed three such costs: keeping a ledger the bank could stand behind, overseeing what partners did under the bank’s charter, and absorbing a partner’s exit. The first is a running cost of records. The second is a running cost of compliance. The third is a tail cost that arrives all at once. Together they cover what a sponsor bank pays to be the bank.

The ledger

In the common model, end-user money sat in pooled custodial accounts at one or more banks, held for the benefit of the fintech’s customers. The bank’s core system knew the pooled balance. Which individual owned how much often lived only in the middleware provider’s ledger. Money also moved between partner banks inside the model, which meant no single bank saw the whole picture.

Reconciling that structure daily is real work. It needs a sub-ledger or shadow ledger the bank controls, a daily feed of end-user balances, automated matching against pooled account activity, and staff to work exceptions before they age. It needs an audit trail that would survive the partner’s disappearance. In a program earning thin spreads on modest balances, those costs can exceed the margin. So they were often assumed to sit with the middleware provider, whose own economics were no stronger.

Ownership is the design choice that matters. A sponsor bank that treats the end-user ledger as its own record, even when a partner operates it, assigns a named owner in finance or deposit operations. It tracks a small set of metrics: unreconciled amount, number of open breaks, and age of the oldest break. A break older than a few days is a warning that the partner’s records and the bank’s have started to drift.

When Synapse failed, the bankruptcy trustee and the banks could not agree on who was owed what. The gap between bank-held funds and what end users believed they had ran to tens of millions of dollars, according to the trustee’s reports. Pass-through deposit insurance did not help, because it depends on accurate records of beneficial ownership and protects against a bank’s failure, not a middleware firm’s.

The oversight

The Evolve order turned on oversight. Customer due diligence, transaction monitoring, sanctions screening, complaint handling and disclosures can be performed by a fintech under contract. The legal obligation stays with the chartered bank. Each new program adds a distinct customer base, product design and risk profile to supervise.

That makes oversight cost roughly proportional to program count, while revenue depends on which programs grow. A bank with thirty programs needs to test thirty onboarding flows, tune monitoring for thirty customer populations, review thirty sets of marketing and fee disclosures, and answer examiners on all of them. Many sponsor banks grew partner lists faster than compliance teams. Earlier consent orders against other sponsor banks in 2023 and 2024 had signaled this. Evolve showed that the supervisory response could include a freeze on new partners, which halts the revenue model itself.

Pricing oversight properly changes program selection. A bank can charge a fixed per-program oversight fee, not only a revenue share, so small programs pay their own supervision. It can set a minimum expected balance or volume before onboarding. It can require partners to fund specific controls, such as real-time transaction data feeds to the bank’s own monitoring system. Programs that cannot bear those charges are telling the bank something about their risk-adjusted value.

The exit

The third cost is rare and large. When a fintech or middleware partner fails, the bank needs to identify every end user, freeze or release funds correctly, communicate, handle complaints, and answer regulators. It must do this while the partner’s staff, systems and records may be in the hands of a bankruptcy trustee.

Exit cost is set at signing. A contract can give the bank a complete, current copy of customer-level records in a usable format, delivered daily. It can grant step-in rights to systems and data if the partner fails, and require escrow of ledger software or documentation. It can define who contacts end users, with pre-approved messages. None of this is expensive to negotiate up front. After a partner enters bankruptcy, the same rights can take months of litigation to obtain, and customers wait in the meantime.

A sponsor bank can also hold an explicit reserve or capital allocation for program wind-down, sized from a rehearsed scenario. That number turns an unpriced tail risk into a known cost per program. It belongs in the pricing model next to the oversight fee and the reconciliation budget. Organizations should check with counsel on how their custodial account structures and disclosures handle deposit insurance and beneficial ownership.

With hindsight

Regulators followed the same three costs. In July 2024 the federal banking agencies issued a joint request for information on bank-fintech arrangements and a joint statement on deposit products offered through third parties. In September 2024 the FDIC proposed a recordkeeping rule for custodial deposit accounts with transactional features, aimed at the ledger problem. Evolve also disclosed a data breach in late June 2024.

Many sponsor banks reduced partner counts, raised fees or left the business. End users waited a long time. In August 2025 the CFPB sued Synapse and filed a stipulated judgment with a nominal penalty, which allowed it to use its Civil Penalty Fund. In November 2025 it allocated about $46 million from that fund to affected end users, roughly half the estimated shortfall, according to Bloomberg Law’s reporting. Policy direction on fintech partnerships loosened in 2025. The economics did not change. Reconciliation, oversight and exit planning remain costs of holding the money.