For any company that moves money – whether that's a neobank, a payroll platform, a cross-border payments provider, or a stablecoin on-ramp – one question sits upstream of almost every other product decision: under whose regulatory authority are we operating?
There are really only two answers. You either become a regulated entity yourself, which in the United States typically means assembling a collection of state-issued Money Transmitter Licenses (MTLs), or you operate under the charter of a regulated institution that sponsors your activity – most commonly, a bank. That second path is what's known as the sponsored bank model, sometimes called "Banking-as-a-Service" (BaaS) or a bank partnership model.
This guide walks through what the sponsored bank model actually is, how it compares to the MTL route, and why a growing number of financial infrastructure companies are choosing it. At the end, we'll briefly cover how we at Conduit think about this choice and why we've made the one we have.
What the Sponsored Bank Model Actually Is
At its simplest, the sponsored bank model is an arrangement in which a non-bank company offers financial products – accounts, payments, cards, FX, custody – by operating on top of a bank's charter rather than under its own licenses.
The bank is the regulated party of record. It holds the customer funds (or ensures they are held in a compliant manner), it sits inside the federal regulatory perimeter, and it is ultimately accountable to its prudential regulator. The non-bank partner, often a fintech or payments infrastructure company, builds the technology, owns the user experience, handles integrations, and typically manages a significant share of the operational workflow – onboarding, KYC, transaction monitoring, reconciliation – under programs approved by and audited by the sponsor bank.
You can think of it as a division of labor. The bank brings the charter, the balance sheet, the access to payment rails like Fedwire and ACH, and the regulatory relationships. The fintech brings the product, the distribution, and the speed. The two are bound together by a program agreement that sets out exactly what each party is responsible for, how risk is managed, how compliance obligations are divided, and how the end customer is protected.
This model is not new. It is how most co-branded credit cards have worked for decades, how prepaid card programs operate, and how a large share of modern consumer fintech – from challenger bank accounts to earned-wage access products – is delivered today.
The Alternative: State-by-State Money Transmitter Licenses
To understand why companies choose the sponsored bank model, it helps to understand what the alternative actually looks like.
In the United States, moving money on behalf of others without a bank charter generally requires a Money Transmitter License, which is regulated at the state level. There is no single federal money transmitter license. A company that wants to operate nationwide must obtain a license in every state where it does business – a list that, depending on the activity, can run to 49 states plus several territories.
Each license comes with its own application, its own capital requirements, its own surety bond, its own "permissible investments" rules governing how customer funds must be held, its own examination cycle, and its own reporting obligations. The standards vary considerably. What satisfies one state's regulator may not satisfy another's. A rule change in Texas does not automatically apply in New York, and vice versa.
Holding a full MTL stack is a real business in its own right. Companies that go this route typically build out large compliance and regulatory affairs teams whose full-time job is managing state-by-state obligations: responding to examinations, maintaining bonds, filing quarterly and annual reports, tracking legislative changes across dozens of jurisdictions, and keeping capital locked up in low-yielding permissible investments to satisfy reserve requirements.
The MTL path is legitimate and, for some business models, the right choice. But it is slow, capital-intensive, and fragmented by design.
Why Companies Choose the Sponsored Bank Model
With that contrast in mind, the reasons to prefer the sponsored bank model cluster around five themes.
1. Federal oversight instead of fifty-state fragmentation
A bank's primary regulator is federal – the Office of the Comptroller of the Currency (OCC) for national banks, the Federal Reserve for member banks and bank holding companies, or the FDIC for state non-member banks. These regulators apply a consistent set of standards across the country. A sponsored program therefore operates under a unified federal regulatory framework rather than a patchwork of fifty state regimes.
That unified framework matters more than it sounds. Operating under one coherent rulebook is simply a different operational reality than reconciling the requirements of dozens of overlapping ones. It reduces what compliance teams sometimes call "regulatory debt" – the accumulated cost of slightly inconsistent obligations piling up across jurisdictions over time.
2. Stronger asset protection and prudential standards
Banks and money transmitters are regulated to different standards, and not in a subtle way.
Money transmitters are generally required to maintain "permissible investments" – typically government securities or similarly safe instruments – equal to their outstanding customer obligations. This is a reasonable protection, but it is narrower in scope than what banks are subject to.
Banks are regulated for safety and soundness. That means capital adequacy requirements, liquidity coverage ratios, stress testing (for larger institutions), deposit insurance through the FDIC, and regular, comprehensive examinations. Customer deposits at a bank sit inside an institution whose entire regulatory apparatus is designed around the question of whether it can meet its obligations under stress.
For end users and corporate clients, operating through a sponsor bank means funds benefit from that prudential regime rather than the narrower permissible-investments standard.
3. Capital efficiency
Every state MTL requires locked-up capital – through surety bonds, minimum net worth requirements, and permissible investments mandated for every state of operation. Multiply that across forty-plus states and the total can run into the tens of millions of dollars, all of it effectively sitting idle on the balance sheet.
In the sponsored bank model, the bank's existing charter and balance sheet do that regulatory work. The non-bank partner doesn't need to duplicate it with its own locked-up reserves in every state. Capital that would otherwise be frozen for regulatory purposes can instead be deployed into the business – into liquidity, into product development, into faster settlement infrastructure, into growth.
For a scaling company, the difference between "capital is working" and "capital is sitting in a bond" is not a small one.
4. Better positioning for regulatory change
Financial regulation is in an unusually active period. Stablecoin frameworks, cross-border payment rules, digital asset custody standards, and real-time payments mandates are all evolving quickly, and most of the meaningful action is happening at the federal level – in Congress, at the prudential regulators, and through guidance from the Treasury and its sub-agencies.
Banks sit at the center of those conversations. They are typically the first institutions required to implement new federal standards, and they have direct channels to the regulators writing the rules. A program built on a bank's charter inherits that proximity.
State money transmitter regulators, by contrast, often respond to federal developments with a lag. That lag can cut both ways – sometimes it creates breathing room, but more often it creates uncertainty, as state regimes take time to catch up and, in the interim, product roadmaps stall waiting for clarity.
5. Focus
This one is less about structure and more about strategy, but it matters. A company that goes the full MTL route commits a significant share of its organizational energy to managing regulatory obligations across dozens of jurisdictions. That's not wasted work – compliance is foundational – but it is a particular choice about what the company is actually going to be good at.
A company operating through a sponsored bank can concentrate its engineering and product effort on what it builds, and lean on its sponsor bank's regulatory infrastructure for the rest. The trade-off is that the partnership itself has to be managed well; the benefit is that the company stays closer to its core competence.
What the Sponsored Bank Model Is Not
It's worth being direct about a few common misreadings.
The sponsored bank model is not a regulatory shortcut. Sponsor banks are, if anything, more demanding of their fintech partners than many state regulators are of their MTL licensees – because the sponsor bank's own charter, and its standing with the OCC or FDIC, depends on how well its partner programs are run. Due diligence, program approval, ongoing oversight, and periodic audits are standard features of any serious bank partnership.
It is also not a way to avoid compliance work. KYC, transaction monitoring, sanctions screening, suspicious activity reporting, and the full stack of BSA/AML obligations all still apply. What changes is the regulatory umbrella under which that work is performed, and the standards the work is held to.
And it is not risk-free. The quality of a sponsored program depends heavily on the quality of the sponsor bank and the rigor of the partnership. A weak sponsor, or a poorly structured program, can create real problems – as the past few years of enforcement activity in the BaaS space have shown. The model's advantages accrue when it is done well, with strong sponsors, clear program agreements, and serious compliance investment on both sides.
When the MTL Path Still Makes Sense
None of this is to say that the MTL route is wrong. For some businesses, direct licensure is the better answer – particularly for companies whose core activity is narrowly scoped money transmission, whose economics support the capital lockup, or whose strategic positioning benefits from holding their own licenses.
The right question isn't "which model is better in the abstract." It's "which model is better given what this particular business is trying to do, at what scale, in what product categories, over what time horizon." For infrastructure companies serving other financial institutions – where clients need bank-grade assurances, broad geographic coverage, and the ability to move fast on new federal frameworks – the sponsored bank model tends to win on the merits. For a narrow consumer remittance product in a handful of states, the calculus can be different.
How Conduit Thinks About This
At Conduit, we've built our cross-border payments infrastructure on the sponsored bank model, and the reasoning follows directly from everything above.
Our customers – fintechs, banks, and financial institutions – need a partner that operates under federal-grade oversight, offers bank-level asset protection, keeps capital liquid rather than locked in state reserves, and can move quickly as federal frameworks around stablecoins and cross-border payments evolve. The sponsored bank model lets us deliver all of that while staying focused on what we're actually trying to be best at: the technology and liquidity layer that makes cross-border payments fast, reliable, and cheap.
We didn't choose this model because it was easier. In many ways, meeting a sponsor bank's standards is harder than meeting the lowest-common-denominator state requirements. We chose it because it is the model that gives our partners the strongest foundation – and because a bridge to the global economy is only worth building if it's built on something that doesn't break.