Metropolitan Commercial Bank exits BaaS

Metropolitan Commercial Bank will exit its banking-as-a-service relationships this year.

The decision, announced in the bank’s 10-K filing last week, follows an earlier decision to exit all consumer-facing BaaS relationships.

“The decision to terminate these financial service partnerships will reduce the Company’s exposure to the heightened, and evolving, regulatory standards related to these activities,” the bank said. “This decision … reflected recent developments in the payments and non-bank financial service industry, regulations applicable to this business line of the Company, and a strategic assessment of the business case for the Company’s further involvement at this time.”

The Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. issued guidance last June to identify how banks should handle third-party relationships, including BaaS partnerships.

In November, former FDIC Chair Jelena McWilliams said she fears the third-party guidance would have a chilling effect on bank-fintech partnerships.

“They can’t specifically prohibit [third-party partnerships]. And I think they’re trying to make it more difficult for banks to engage in those partnerships,” McWilliams said at the time.

MCB noted in its filing that regulators “have increasingly focused on the risks related to bank and non-bank financial service company partnerships, raising concerns regarding risk management, oversight, internal controls, information security, change management, and information technology operational resilience.”

It noted that there have been regulatory enforcement actions of late against banks “that have allegedly not adequately addressed these concerns while growing their non-bank financial service offerings.”

MCB may have been referring to Blue Ridge Bank, another once-BaaS-heavy bank that was hit in January with a consent order by the OCC related to compliance issues in its BaaS partnerships.

The FDIC, days later, issued a consent order against Franklin, Tennessee-based Lineage Bank in connection with its fintech partnerships.

MCB noted last week that it’s facing ongoing investigations by federal and state agencies concerning a prepaid debit card product it offered through an independent third party.

“We could be subject to additional regulatory scrutiny with respect to that portion of our business that could have a material adverse effect on the business, financial condition, results of operations and growth prospects of the Company,” MCB said.

The Federal Reserve Board fined MCB roughly $14.5 million in October for violating customer identification rules and inadequate risk management practices related to the prepaid cards it issued. The lender separately agreed to pay $15 million to the New York State Department of Financial Services for the same issue.

All told, MCB’s BaaS-related deposits total $781 million, accounting for 13.6% of deposits.

If it can’t replace the deposits, it may need to “seek alternative and potentially higher rate funding sources as compared to the existing relationships, which could adversely affect our results of operations,” the bank said.

BaaS would be just the latest segment from which MCB has exited of late after partner relations drew scrutiny. The bank said early last year it would leave the crypto sector.

MCB served as a banking partner for the crypto exchange Voyager Digital, and faced a spotlight in July 2022, when it clarified to Voyager customers that their accounts were eligible for FDIC insurance only if the bank, not Voyager, were to fail.

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