Before Billy Beale became its CEO,
The risks materialized last year, when the $3.2 billion-asset bank entered into an enforcement action with the Office of the Comptroller of the Currency. The public agreement requires Blue Ridge to monitor and control its anti-money-laundering risks.
It's fallen to Beale, a veteran community banker who was hired in May, to pick up the pieces. Following the departure of the holding company's chief executive officer in July, Beale became the president and CEO of Blue Ridge Bancshares and kept his title as CEO of its bank subsidiary.
"There's still a lot of just blocking and tackling that we've got to do to get the bank to work the way it's supposed to," Beale said in a recent interview.
Fintechs often partner with small banks to take advantage of the benefits that come with a bank charter. Blue Ridge was at one time providing its so-called banking-as-a-service offering to more than 70 firms, Beale said. The controls that were supposed to protect the bank were overwhelmed, he added.
"Blue Ridge in a lot of ways jumped in up to their clavicles," Beale said.
Beale is a former CEO of both Community Bankers' Bank in Midlothian, Virginia, and Union Bank & Trust in Richmond, Virginia. Since joining Martinsville, Virginia-based Blue Ridge, he has signaled a renewed focus on traditional community banking, though he has also said that the bank does not plan to leave the fintech business altogether.
When Beale arrived, Blue Ridge was down to around 40 banking-as-a-service clients, he said in an interview last week. The bank is now aiming to reduce that number to between six and 10 clients, assuming those companies want to stick with Blue Ridge, he added.
That downsizing efforts could take another year to complete as Blue Ridge navigates its contractual obligations. "It is a slower process than I thought it would be," Beale said.
The bank is looking to maintain relationships with those fintechs that have high levels of deposits and generate relatively few alerts for potential money laundering. Such companies typically serve businesses, rather than consumers, according to Beale.
"There are less alerts generated on the business side," he said.
Cutting ties with higher-risk clients should help Blue Ridge navigate its regulatory challenges. Beale did not discuss specific companies, but American Banker
At one point, Aeldra was offering U.S. bank accounts, in partnership with Blue Ridge, to non-U.S. citizens in India. Last year, Aeldra said in a notice on its website that it was winding down its operations.
Beale indicated that it's challenging for Blue Ridge to earn a profit from its banking-as-a-service business, given the amount of money it is spending on compliance. In the second quarter, Blue Ridge announced a net loss from continuing operations of $19.5 million, largely as a result of specialty finance loans that it placed on nonaccrual status.
To deal with its current volume of Bank Secrecy Act alerts and suspicious activity reports, Blue Ridge is relying on 73 employees and three outside vendors, Beale said. "Just to give you a sense of the size and cost of doing this," he added.
Blue Ridge is just one of many small banks that embraced fintech partnerships. Its current troubles underscore the perils of expanding that business too quickly without paying sufficient attention to compliance.
Adam Eckels, owner and founder of AJ Consultants, an executive search firm that works with banks and fintechs, said that people who now look at fintech as a bad word are missing the point.
"It just needs to be handled carefully and correctly like anything else," Eckels said in an email, emphasizing that he wasn't commenting on Blue Ridge or any other particular bank.
"Would a bank lend an accounting firm millions for payroll, office space and growth without checks and balances within credit and compliance? Nope," Eckels said. "Same needs to happen in this new wave of banking."
