Regulatory and Legal Risks in Fintech Investing: A Call for Rigorous Due Diligence and Governance

The fintech sector, once celebrated for its disruptive potential and rapid scalability, now faces a complex web of regulatory and legal challenges that demand heightened scrutiny from investors. Between 2023 and 2025, regulatory bodies such as the Consumer Financial Protection Bureau (CFPB) and the Federal Deposit Insurance Corporation (FDIC) have recalibrated their oversight strategies, imposing stricter compliance requirements and imposing significant penalties for non-adherence. For investors, these developments underscore the critical need for robust due diligence and corporate governance frameworks to mitigate risks and preserve value.

CFPB Enforcement: A Harsh Reminder of Compliance Obligations

The CFPB has emerged as a central force in shaping fintech compliance landscapes. In 2025 alone, the agency secured a landmark $175 million settlement with Block (parent company of Cash App), citing failures to address rampant fraud and unauthorized transactionsBlock agrees to pay up to $120 million in refunds to^[2]. As part of the resolution, Block agreed to refund $120 million to affected users and pay a $55 million fine. This case highlights the CFPB's expanded authority over non-bank payment platforms, particularly under its December 2024 rule defining “larger participants” in digital payment marketsBlock agrees to pay up to $120 million in refunds to^[2].

Similarly, in August 2025, the CFPB permanently barred a fintech service provider from deposit-taking and payment processing after it failed to maintain accurate records of consumer funds, leaving users without access to their moneyEnforcement Actions Roundup: August 2025^[1]. Such enforcement actions signal a clear message: investors must prioritize fintechs with robust compliance infrastructure, including real-time transaction monitoring and transparent customer service protocols.

FDIC's Brokered Deposit Rule: A Looming Threat to BaaS Models

The FDIC's proposed revisions to its brokered deposits rule, announced in July 2024, threaten to upend the Banking-as-a-Service (BaaS) ecosystemFDIC’s Proposed Brokered Deposit Rule Could Adversely Impact Fintech Bank Partnerships^[3]. By redefining “deposit broker” to include entities receiving fees for deposit placements and narrowing exemptions for third-party arrangements, the rule would classify more fintech deposits as brokered. This shift could force banks to restructure BaaS partnerships or absorb higher liquidity risks, potentially limiting fintechs' ability to offer deposit servicesFDIC’s Proposed Brokered Deposit Rule Could Adversely Impact Fintech Bank Partnerships^[3].

Critics argue that the rule fails to account for the nuanced nature of modern fintech-bank collaborations. For instance, the elimination of the 25% exemption—now reduced to 10%—could disproportionately affect smaller fintechs reliant on diversified deposit structuresFDIC’s Proposed Brokered Deposit Rule Could Adversely Impact Fintech Bank Partnerships^[3]. Investors must assess how target companies plan to adapt, whether through regulatory lobbying, technological innovations, or strategic realignments with compliant banking partners.

Investor Due Diligence: Beyond Financial Metrics

Traditional due diligence in fintech investing often focuses on user growth, revenue models, and technological differentiation. However, regulatory risks now demand a paradigm shift. Investors should:
1. Audit Compliance Infrastructure: Evaluate a fintech's adherence to evolving rules, such as the CFPB's digital payment guidelinesBlock agrees to pay up to $120 million in refunds to^[2].
2. Stress-Test Partnerships: Scrutinize BaaS arrangements for vulnerabilities under the FDIC's proposed brokered deposit ruleFDIC’s Proposed Brokered Deposit Rule Could Adversely Impact Fintech Bank Partnerships^[3].
3. Monitor Enforcement Trends: Track CFPB and FDIC actions to anticipate sector-wide impacts. For example, the CFPB's 2023 $3.5 billion in fines for consumer protection violationsEnforcement Actions Roundup: August 2025^[1] underscores the financial and reputational costs of non-compliance.

Corporate Governance: Building Resilience

Fintechs must embed regulatory resilience into their governance frameworks. This includes:
- Board-Level Oversight: Establishing compliance committees to monitor regulatory changes and allocate resources for adaptation.
- Third-Party Risk Management: Implementing rigorous due diligence for banking partners and technology vendors.
- Consumer-Centric Policies: Aligning with CFPB mandates by prioritizing user transparency and dispute resolution mechanismsBlock agrees to pay up to $120 million in refunds to^[2].

Investors should favor companies that demonstrate proactive governance, such as those with certified compliance officers or those participating in regulatory sandboxes to test innovations under controlled environments.

Conclusion: Navigating Uncertainty with Vigilance

The fintech sector's regulatory landscape is no longer a static backdrop but a dynamic force shaping competitive advantage. As the CFPB and FDIC continue to assert their authority, investors must move beyond traditional metrics and adopt a governance-first mindset. By prioritizing compliance, fostering resilient partnerships, and staying attuned to enforcement trends, investors can mitigate risks while capitalizing on fintech's transformative potential.