Dive Brief:

• Warsaw, New York-based Five Star Bank will wind down its banking-as-a-service offerings and aim to exit that space next year, the bank said this week in a release.
• Five Star’s BaaS efforts account for 2% of the bank’s total deposits ($108 million) and less than 1% of the bank’s total loans ($31 million), as of June 30, the bank said. “Given the modest size of the business, the financial impact is expected to be immaterial,” the bank wrote Monday.
• Four of the bank’s 12 BaaS partnerships are live, two are in onboarding, four have not yet begun testing, and two had begun offboarding, the bank said, adding that it would supply more details during its third-quarter earnings call next month.

Dive Insight:

The $6.1 billion-asset Five Star is hardly the first lender to back away from BaaS.

Wyoming-based Mode Eleven Bancorp said in April that it would voluntarily retreat from the space after the Federal Reserve Bank of Kansas City hit the holding company with a cease-and-desist order over the fintech-related activities of its subsidiary, Summit National Bank.

Metropolitan Commercial Bank, too, said in February that it would exit its BaaS relationships this year.

Five Star, for its part, said Monday its BaaS program “moved forward at a measured and conservative pace to balance growth with effective risk management.”

However, after considering “the contribution of BaaS to our core financial results, evolving regulatory expectations and a proposed rule regarding the re-classification of BaaS deposits as brokered, in addition to the future investments in talent and technology necessary to achieve scale, we are prioritizing our core community banking franchise,” Five Star CEO Martin Birmingham said in a statement.

Regulators across the board appear to have ramped up their scrutiny of banks’ fintech partnerships this year. The Federal Deposit Insurance Corp. has issued BaaS-related enforcement actions against Thread Bank, Lineage Bank, Piermont Bank and Sutton Bank. The Federal Reserve has gone after Evolve Bank & Trust. And the Office of the Comptroller of the Currency filed a new consent order against Blue Ridge Bank – even after the lender shed roughly a dozen BaaS partners.

“We see significant opportunity and growth potential for our retail banking, commercial banking and wealth management business lines within our existing geographic markets,” Birmingham said Monday. Leaving BaaS, he said, “allows us to continue to nurture those lines of business and drive value into the Company.”

Five Star said it expects to retain all of its employees that support its BaaS operations and to refocus those roles toward growing its core banking operations.

Jason Henrichs, CEO of Alloy Labs Alliance, told American Banker the banks that are pivoting away from BaaS now “are the ones that weren't fully committed to it."

"It looks easy on the surface to say we do compliance, we open accounts, we do these things already, but it's a completely different business,” he said. “The banks that do [BaaS] well are going to absolutely crush it … but you have to be committed."

Birmingham, in an email to the outlet, called BaaS “a relatively low-cost, break-even business to date."

"Ours is not the first bank to announce plans to begin winding down its BaaS offering,” he said, adding, “the regulatory and risk-management goalposts keep moving for U.S. financial institutions in this business.”