Blue Ridge Bank, a longstanding financial institution based in Virginia, has recently undertaken a significant strategic refocus by reducing its Banking-as-a-Service (BaaS) fintech partnerships. This decision, influenced by regulatory scrutiny, marks a pivotal shift in the bank’s operations, emphasizing more profitable and less risky ventures.
Blue Ridge Bank: A Brief History
Founded in 1893, Blue Ridge Bank has been a fixture in the mid-Atlantic states, offering a wide array of banking, lending, and savings products. With a strong emphasis on community banking, it has served individual consumers and businesses alike.
The BaaS Model and Regulatory Scrutiny
The BaaS model, lucrative for many banks, involves offering banking services to other businesses, particularly fintech firms. However, this model requires strict adherence to regulatory obligations. In August 2022, the US Office of the Comptroller of the Currency (OCC) flagged Blue Ridge Bank for practices deemed “unsafe or unsound,” focusing on anti-money laundering (AML) risk management and third-party risk management issues. This led to a Third-Party Risk Management Programme, mandating rigorous assessments and audits of BaaS partnerships and necessitating OCC approval for new partners.
Downsizing Fintech Partnerships
From nearly 50 fintech partners, Blue Ridge Bank has begun offboarding at least a dozen, with more expected to follow. The bank’s CEO, Billy Beale, acknowledged the deep involvement in BaaS and the challenges in achieving profitability due to related compliance costs. The bank aims to recalibrate its BaaS strategy, focusing on fintech partners that either have high account volume or small deposit balances per account, thus reducing the compliance burden while maintaining profitable relationships.
Financial Challenges and Strategic Response
The bank has reported significant losses, including a $41.4 million loss in the third quarter, largely due to a goodwill impairment charge and legal settlements. The stock price has also seen a substantial decline. In response, Blue Ridge Bank is exploring options to raise capital to meet these challenges, aligning with its broader strategy to meet regulatory capital requirements.
Industry Trends and Future Outlook
Blue Ridge Bank’s strategic shift reflects an industry-wide change in risk tolerance. This trend is likely to make it increasingly difficult for smaller fintech programs, especially those serving niche and lower-income retail users, to find bank partners willing to work with them. This move is expected to help the bank focus on its core strengths, improve regulatory compliance, and enhance profitability in the long term.
Blue Ridge Bank’s decision to trim its BaaS fintech partnerships is a significant step in its journey towards a more sustainable and less risky banking operation. This strategic shift showcases the bank’s commitment to adapt and evolve in response to the changing financial landscape, focusing on stability, regulatory compliance, and long-term profitability.