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Strategic Refocus: Blue Ridge Bank Trims BaaS Fintech Partnerships

Banking-As-A-Service aka BaaS image

A Shift in Strategy

Blue Ridge Bank, a long-established financial institution in Virginia, is set to significantly reduce its Banking-as-a-Service (BaaS) partnerships. This decision comes in the wake of regulatory scrutiny and aims to streamline the bank’s operations and focus on more profitable and less risky ventures.

Blue Ridge Bank: A Brief Overview

Founded in 1893, Blue Ridge Bank has been a staple in the mid-Atlantic states, offering a range of banking, lending, and savings products. With a focus on community banking, it has catered to both individual consumers and businesses.

The BaaS Model and Regulatory Challenges

The BaaS Business Model

The BaaS model, which has been a lucrative venture for many banks, involves offering parts of banking services to other businesses, mainly fintech firms. However, this model requires strict adherence to regulatory obligations.

Regulatory Scrutiny

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 deficiencies in areas like anti-money laundering (AML) risk management and third-party risk management. This led to the implementation of a Third-Party Risk Management Programme, mandating rigorous assessments and audits of BaaS partnerships and necessitating OCC approval for new partners.

Restructuring BaaS Partnerships

Downsizing the Network

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, emphasized the need to recalibrate the BaaS strategy, acknowledging the bank’s deep involvement in this area and the challenges in achieving profitability due to related compliance costs.

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Focusing on Profitability and Compliance

The bank’s new approach is to focus on fintech partners that either have high account volume or small deposit balances per account. This strategy is aimed at reducing the compliance burden while maintaining profitable relationships. The bank will continue to offer lending and deposit services to fintechs, including partners like Unit, Upgrade, and Flex.

Financial Implications

Capital and Profitability Concerns

The downsizing is part of Blue Ridge’s broader strategy to meet regulatory capital requirements and address financial challenges. 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. It is also exploring options to raise capital to meet these challenges.

A New Direction for Blue Ridge

Blue Ridge Bank’s decision to trim its BaaS fintech partnerships reflects a strategic shift towards more sustainable and less risky banking operations. This move is expected to help the bank focus on its core strengths, improve regulatory compliance, and enhance profitability in the long term.

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