Metropolitan Commercial Bank discontinues its services in Banking-as-a-Service sector.
In a move to reduce its exposure to evolving regulatory standards, Metropolitan Commercial Bank (MCB) has announced its decision to exit its banking-as-a-service (BaaS) relationships this year. This decision follows an earlier decision to exit all consumer-facing BaaS relationships.
The bank's BaaS-related deposits amount to $781 million, accounting for 13.6% of its total deposits. MCB has also exited the crypto sector, having served as a banking partner for the crypto exchange Voyager Digital.
Regulators have been focusing on the risks associated with bank and non-bank financial service company partnerships. Concerns have been raised regarding risk management, oversight, internal controls, information security, change management, and information technology operational resilience.
Last June, the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. issued guidance regarding third-party relationships, including BaaS partnerships. However, the specific guidance on partnerships with third-party effects like Banking-as-a-Service was not explicitly detailed in the publicly available documents from that time.
The decision by MCB comes amidst regulatory enforcement actions against banks that have allegedly not adequately addressed these concerns while growing their non-bank financial service offerings. In October, MCB was fined approximately $14.5 million by the Federal Reserve Board for violating customer identification rules and inadequate risk management practices related to prepaid cards. MCB is also facing ongoing investigations by federal and state agencies concerning a prepaid debit card product it offered through an independent third party.
In a related development, Franklin, Tennessee-based Lineage Bank received a consent order from the FDIC in connection with its fintech partnerships, days after the order against Blue Ridge Bank. Another bank, Blue Ridge Bank, was hit with a consent order by the OCC related to compliance issues in its BaaS partnerships in January.
Former FDIC Chair Jelena McWilliams expressed concerns that the third-party guidance could have a chilling effect on bank-fintech partnerships. If MCB is unable to replace the deposits it stands to lose, it may need to seek alternative and potentially higher rate funding sources.
In July 2022, MCB clarified to Voyager customers that their accounts were eligible for FDIC insurance only if the bank, not Voyager, were to fail. The German Ministry of Finance (Bundesministerium der Finanzen) also issued guidelines relevant to partnerships including Banking-as-a-Service, as part of broader tax and regulatory reforms, in June last year. However, the specific guidance on partnerships with third-party effects like Banking-as-a-Service was not explicitly detailed in the publicly available documents from that time.
This development underscores the increasing scrutiny that banks are facing as they expand their non-bank financial service offerings. Banks will need to ensure they are in compliance with regulatory requirements to avoid similar enforcement actions and maintain the trust of their customers.
