Five Star Bank Parent Plans to Exit Banking-as-a-Service Business

Financial Institutions says it’s getting out of the banking-as-a-service (BaaS) business.

The bank holding company, owner of Five Star Bank and Courier Capital, announced Monday (Sept. 16) it would begin “an orderly wind down” of its BaaS offerings. 

CEO Martin Birmingham said the change follows an internal review that considered factors such as BaaS’ contribution to the company’s results and regulatory changes, and a proposed rule related to the reclassification of BaaS deposits as brokered.

“We see significant opportunity and growth potential for our retail banking, commercial banking and wealth management business lines within our existing geographic markets,” he said in a news release. 

“This decision allows us to continue to nurture those lines of business and drive value into the company for the benefit of our shareholders, customers, associates and communities.”

As of the end of the first half of 2024, BaaS offerings accounted for less than 2% of Financial Institutions’ deposits and less than 1% of its loans. 

“Given the modest size of the business, the financial impact is expected to be immaterial, and the company looks forward to providing additional detail on its third quarter earnings call in October,” the release said.

Financial Institutions plans to complete the wind down sometime next year, and expects that it will retain all staff supporting the BaaS services.

Five Star Bank’s exit from BaaS comes at a time when — as PYMNTS wrote earlier this year — “traditional banks and financial institutions (FIs) find themselves at a pivotal juncture.”

A recent PYMNTS Intelligence/NCR Voyix report, “Embedded Finance and BaaS: From Marketing Buzz to Banking Bedrock,” shows the integration of application programming interfaces (APIs) is revolutionizing financial services by embedding them into daily digital interactions.

“With 41% of financial institutions adopting embedded finance solutions and 48% enhancing their BaaS capabilities, banks are responding to digital demands and competitive pressures,” PYMNTS wrote. “Despite this progress, challenges such as outdated systems, regulatory hurdles, and security risks remain barriers.”

That report also noted comments from payments executives pointing out that the BaaS landscape is shifting amid increased regulatory scrutiny, putting more focus on core banking functions.

“The regulators are now awake,” Thredd CEO Jim McCarthy told PYMNTS. “At the end of the day, it’s the banks that sponsor these banking-as-a-service programs that will be the ones that are impacted … so they will take this all quite seriously.”