Five Star Bank Is Bowing Out of BaaS. Here’s the Lowdown.

Big Changes Are Afoot

So, here’s the scoop: Financial Institutions has decided to ditch their Banking-as-a-Service (BaaS) game. That’s right, the bank holding company, which owns Five Star Bank and Courier Capital, announced this move on Monday, Sept. 16.

Why The Shift?

CEO Martin Birmingham spilled the beans about the change, explaining that an internal review played a huge part in their decision. Factors like the modest financial contribution from BaaS and regulatory changes, including a proposed rule to reclassify BaaS deposits as brokered, influenced the choice. You see, at the end of the first half of 2024, BaaS made up less than 2% of Financial Institutions’ deposits and barely 1% of its loans.

What’s The Impact?

Don’t sweat it too much—the financial impact? Pretty negligible. The company is keeping it cool, saying they’ll drop more details during their third-quarter earnings call in October. And hey, they’re not leaving their employees high and dry—they’re planning to keep all staff who supported the BaaS services. This whole wind-down should wrap up sometime next year.

Growing Opportunities Elsewhere

Birmingham emphasized that this move lets them double down on retail banking, commercial banking, and wealth management within their existing markets. He’s pretty pumped about the growth potential there and sees this decision as a win for their shareholders, customers, associates, and communities.

The Bigger Picture

It’s interesting to note that Five Star Bank is making this move at a rather pivotal time. According to a recent PYMNTS report, traditional banks and financial institutions are finding themselves at a critical juncture. The rapid integration of APIs is revolutionizing financial services. Banks are responding to digital demands and competitive pressures with 41% adopting embedded finance solutions and 48% enhancing BaaS capabilities. But don’t get it twisted—there are still hurdles like outdated systems, regulatory challenges, and security risks.

Changing Landscape

PYMNTS wrote earlier this year that the BaaS landscape is shifting amid increased regulatory scrutiny. Indeed, regulators are awake, said Jim McCarthy, CEO of Thredd. Banks sponsoring these programs will feel the heat and will likely take things seriously moving forward. So yeah, the focus is gradually returning to core banking functions.

For all of you keeping tabs, this pivot aligns with a broader trend—banks hedging their bets on more traditional business lines while navigating an ever-transforming financial landscape. And if you’re curious about the nitty-gritty, watch their next earnings call in October. It’s bound to be enlightening.

Stay tuned, stay savvy, and if you want more juicy updates right to your inbox, don’t forget to subscribe to PYMNTS. Cheers!