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You May Already be an NBFI. Here's Why that Matters.
By Thierry Coopman · Product Specialist
Regulation
Vertical SaaS
Embedded Finance
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Most companies that fall under the label of nonbank financial institution (NBFI) already know they’re in that category. But if you’re adding a marketplace payout feature, launching a universal gift card, or introducing stored balances for user convenience, you might fall under that category too. By holding user value, you’ve crossed into regulated financial territory—you’re an NBFI!
While the label NBFI literally has “nonbank” in it, the designation still means your business is expected to operate with banking-grade infrastructure: Reserve requirements, reconciliation, auditability, and consumer protections. Implementing the necessary compliance programs early can give you a competitive advantage in several respects. But putting off compliance can have serious consequences. With scrutiny mounting in the U.S. and already entrenched in Europe, ignoring obligations is no longer an option. In the EU, even “exempt” NBFIs must notify regulators, creating a short window before full licensing to prepare systems and prove control. The right infrastructure lets you use that time to fast-track compliance and stay ahead of your competition.
For finance teams, NBFI status introduces two big shifts. First, it changes how your ledgers need to be structured. Second, it changes what regulators and partners expect behind the scenes. Once, prepaid balances and gift cards could be treated as deferred revenue or accounting conveniences. Not any more.
Critical questions abound: Are we treating prepaid balances, credits, or gift cards as deferred revenue or liabilities? Are our internal ledgers reconcilable with bank statements and external audit requirements? Answering these questions is critically important for regulatory purposes; but even setting that aside, if you don’t have good answers to questions like these, you’ll never truly understand the state of your business. As a result, you may have existential risk hidden in your ledger.
And you may face tighter restrictions when dealing with cryptocurrenies, such as issuing payment stablecoins, leading to questions like: Can we demonstrate 1:1 reserve backing—and trace every cent to a specific deposit account? In Europe, this is table stakes. Under electronic money token (EMT) and payment stablecoin regimes, funds must be fully backed and clearly segregated. Even in less prescriptive markets, investors and banking partners increasingly ask the same questions.
If you can’t show good answers to these questions instantly, you risk consumer distrust, investor doubt, and regulatory action. That means ledgers must be auditable, balances reconcilable, and internal systems capable of proving, on demand, that liabilities are covered. Finance teams can’t afford to wait for quarterly reports. They need real-time visibility into flows and tight alignment with both engineering and product.
And that’s where Product and Engineering come in, because traceability starts at the design level.
Product teams are wired to think in terms of user flows, not financial obligations. But once you’re handling stored value, even indirectly, those flows come with real-world risk. A frictionless top-up experience or a clever balance system might introduce legal and operational liabilities.
The key question: What happens if a transaction fails mid-flow, and what are users entitled to, when, and how? Are balances pre- or post-funded? Can users redeem funds at will? If they can’t, what governs the delay? If a refund is due, how is it triggered, and how is it documented? And, critically, how are these various states of affairs actually recorded and tracked?
Regulators now expect protections to be explicit, traceable, and fair. That means product managers who ask the right questions early can help you dodge the regulatory crosshairs. For engineering, the shift raises equally urgent questions: What exactly are we being asked to build? Can we adapt existing systems, or do we need new infrastructure that scales and serves up the needed information at audit time? In many cases, choosing to build a ledger from scratch will only slow you down, and often makes it harder to answer the questions Finance needs answered. Starting with a solid platform that’s already been proven to work will accelerate the development process by allowing you to focus on the features unique to your business and give you the peace of mind that the ledger works and makes your Finance team happy.
So it’s good to keep in mind that when design choices intersect regulatory obligations, Legal and Finance needs to be in the loop before a single line of code ships.
Legal teams have long served as the backstop for other teams in the business, drafting terms, assessing risk, and reviewing flows. But NBFI compliance demands more. Regulations increasingly demand real-time monitoring, automated safeguards, and provable consumer protections. The key question: How do we implement control frameworks that regulators trust, and systems can enforce?
In the EU, that means reserve reporting, capital adequacy, and consumer recourse rules under MiCA. In the U.S., new stablecoin frameworks signal similar expectations. But even outside those domains, payment partners and auditors want proof that your internal policies are more than PDFs on a drive.
Legal and finance teams must work closely with product and engineering to embed compliance directly into system behavior. Is the refund logic compliant? Can we produce a transaction history for every user? If a regulator asks for proof of funds, how fast can we provide it? The answers to these questions are just too complex to rely on manual oversight. They have to be built into your infrastructure from the start—and doing so gives you an advantage over competitors who are only bolting it on after the fact.
If your business has become an NBFI, intentionally or not, you’re now playing a different game, with new opportunities, but also new constraints and very real consequences for getting it wrong. You’re providing financial services now, and you need transparent, auditable, and resilient infrastructure in place that you can rely on to give you an edge over competitors rolling their own, and failing to get buy-in from every team.
Internal alignment is critical because no single team can meet these expectations alone. Finance can’t ensure reserve traceability without engineering support. Product can’t design compliant flows without legal input. Legal can’t embed policy without systems that enforce it.
When these teams align early, they can build systems that not only satisfy regulators but also scale cleanly with your business and deliver the seamless experience your users expect. That cross-functional coordination is the foundation of a defensible NBFI strategy.
The good news is that you don’t have to build everything from scratch. With Formance, you don’t have to choose between scalability, auditability, and velocity. Our modular financial infrastructure helps finance, product, and legal teams get and stay aligned in the face of existing and coming regulations. Interested in learning more? Schedule a demo today to see how Formance can give you the competitive edge.
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