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The parent company for Five Star Bank in Warsaw, New York, is winding down its modest banking-as-a-service business.
On Monday, Financial Institutions Inc., which has $6.1 billion of assets and is the parent of both Five Star and Courier Capital, announced that Five Star would quit this line of business fully in 2025 to focus on its core community banking franchise. This decision took several factors into account including “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,” said bank CEO and president Martin K. Birmingham in a press release.
Five Star’s exit is another sign of turmoil in the BaaS space. Some banks, including Metropolitan Commercial Bank and Summit National Bank, have left the business entirely; others, including Blue Ridge Bank, Lineage Bank and Evolve Bank & Trust, have been forced to shrink or curtail their programs. Many, including Thread Bank and Piermont Bank, have been penalized by regulators but remain in the game.
Many others remain committed to the space, but they contend with several of the issues Birmingham referenced in his statement, including fuzzy regulatory expectations, the cost of specialized technology and the need for specialized talent.
In Five Star’s case, the BaaS business accounted for 2% of total deposits and less than 1% of loans. Of the 12 fintech partnerships Five Star had forged, only four are currently live. The bank is “working to support orderly transitions for its BaaS partner firms,” according to the press release.
“We see significant opportunity and growth potential for our retail banking, commercial banking and wealth management business lines within our existing geographic markets,” said Birmingham in his statement. “This decision allows us to continue to nurture those lines of business and drive value into the Company.”
Employees in the bank’s BaaS business will be redeployed elsewhere in the bank, according to the press release. In 2023, the bank downsized its workforce by 3.4%.
