Alloy, the identity risk management company behind nearly 600 leading banks and fintech companies, today announced Alloy for Embedded Finance, a new product custom-designed for sponsor banks, BaaS providers, and their fintech partners to collaboratively manage identity risk and stay ahead of regulatory requirements.

Oftentimes, sponsor banks have not had sufficient oversight or control over whether their fintech partners have adhered to the banks’ government-mandated compliance requirements. Alternatively, in models where sponsor banks have taken on all compliance responsibilities, they have often forced their fintech partners into a one-size-fits-all approach to compliance that doesn’t suit fintechs’ evolving risk needs and often adds unnecessary friction to their user experiences.

Alloy for Embedded Finance solves these challenges. The new product leverages the strength of Alloy’s existing platform while introducing a new parent/child account configuration. Sponsor banks (or ‘parent accounts’) have the ability to designate different levels of autonomy and guardrails for each of their fintech partners (or ‘child accounts’), depending on how mature the fintech is, how much of the process the fintech wishes to own, and the risk appetites of both parties. With this construct, sponsor banks can seamlessly build compliance policies, then issue and enforce them to each of their fintech partners all at once. More mature or ‘autonomous’ fintechs can customize their controls on top of these baseline policies, giving them the flexibility to tailor risk measures that don’t add unnecessary friction for end users. Regardless of the autonomy level a fintech partner has, their sponsor bank retains total oversight of their policies to ensure they are fully compliant.

“Sponsor banks can’t operate without controlling the CIP/KYC and AML/BSA policies of the fintechs in their program—recent enforcement actions make this clear,” said Tommy Nicholas, CEO and Co-founder at Alloy. “At the same time, risk programs that are ‘one size fits all’ result in terrible user experiences for fintechs that pride themselves on providing a frictionless interface. Alloy for Embedded Finance solves both sides of this problem.”

Alloy for Embedded Finance arrives during a period of massive potential for the embedded finance industry: Ernst & Young predicts that the global embedded finance market across the entire value chain will grow to $606B by 2025. However, the industry has been plagued by compliance challenges, with regulators increasing pressure on sponsor banks to ensure their third-party partners meet compliance requirements. According to data from advisory firm Klaros Group, sponsor banks drew one-third of all formal enforcement orders by federal banking agencies in the fourth quarter of 2023. With regulatory attention unlikely to slow down, it is more critical than ever for sponsor banks and their fintech partners to work collaboratively to meet compliance requirements so they can truly capture the full potential of the embedded finance market. Alloy already works with many of the leading sponsor banks, BaaS providers, and fintechs in this space, including Grasshopper, Evolve Bank & Trust, Liberis, Treasury Prime, and Marqeta.