Evolve Bank & Trust, a Memphis-based institution, is reaffirming its commitment to banking-as-a-service (BaaS) despite recent financial setbacks. The bank reported an $8.76 million loss in the first half of this year, following litigation, federal enforcement actions, and a data breach. New CEO Bob Hartheimer is spearheading efforts to rebuild trust and fortify the bank's operational framework.
Key Takeaways
- Evolve Bank & Trust experienced an $8.76 million loss in the first six months of the year.
- New CEO Bob Hartheimer aims to stabilize the bank and enhance its banking-as-a-service (BaaS) operations.
- The bank is implementing stricter compliance measures following issues with former fintech partner Synapse Financial Technologies Inc.
- Employee numbers have decreased from 500 to 381, and 16 loan offices have closed.
- Hartheimer anticipates profitability to return in 2026 as litigation costs decrease and system upgrades are completed.
The Rise and Challenges of a Fintech Leader
Evolve Bank & Trust has carved a significant niche in the financial technology sector, earning the moniker "the bank behind the fintech revolution" from The Wall Street Journal. Its banking-as-a-service model allows fintech companies to offer financial services to consumers by partnering with a traditional bank for regulatory compliance and fund holding.
The bank's success was evident in its financial growth. Net income soared from $1.77 million in 2015 to $25.5 million in 2022. Assets also saw substantial growth, increasing from $367 million in 2015 to $1.81 billion last year.
Evolve's Financial Journey
- 2015 Net Income: $1.77 million
- 2022 Net Income Peak: $25.5 million
- 2015 Assets: $367 million
- 2023 Assets Peak: $1.81 billion
- Current Assets: $1.46 billion (down 20% from 2023)
However, this rapid expansion faced significant hurdles. The collapse of Synapse Financial Technologies Inc., a former fintech customer, plunged Evolve into complex litigation. This was compounded by enforcement actions from the Federal Reserve and a data breach that exposed customer information.
Leadership Transition and the Path Forward
In the wake of these challenges, Bob Hartheimer took over as CEO this summer, replacing Scott Stafford. Hartheimer, a former regulator with the Federal Deposit Insurance Corp. (FDIC) and a co-founder of the credit card originator Jasper, brings a wealth of experience in both banking regulation and fintech.
"My view is that happened here with banking-as-a-service. The industry embraced it and examiners had to learn what banks were doing," Hartheimer stated, reflecting on the rapid advancement of fintech ahead of regulatory frameworks.
Hartheimer's vision, dubbed "Evolve 2.0," focuses on building a "most technology-forward banking-as-a-service business" while also strengthening other bank operations. He acknowledges that losses are expected to continue into next year, attributing them to ongoing legal fees from the Synapse litigation and essential system upgrades to meet regulatory requirements.
Addressing Regulatory and Operational Gaps
The Synapse collapse highlighted critical issues within the BaaS ecosystem, particularly concerning the tracking of customer funds. Synapse, acting as a "middleware" aggregator, was responsible for maintaining records of consumer accounts. When it failed, the clarity of fund ownership became severely muddled.
Hartheimer explained that banks had relied on aggregators to track funds, a perception now changing across the industry. Regulators now clearly state that the bank bears ultimate responsibility for customer records.
Evolve is now reconciling customer accounts on a very frequent basis, a practice becoming standard for BaaS banks nationwide. This shift emphasizes direct oversight by banks, moving away from sole reliance on fintech partners for critical record-keeping.
What is Banking-as-a-Service (BaaS)?
Banking-as-a-Service (BaaS) allows non-bank companies, like fintechs, to integrate banking functionalities into their own products without needing a full banking license. Traditional banks provide the underlying infrastructure, regulatory compliance, and access to payment systems. This enables fintech apps to offer services such as savings accounts, money transfers, and cash advances directly to consumers.
Internal Restructuring and Future Outlook
Evolve has undertaken significant internal changes to adapt to the new regulatory landscape and streamline operations. The bank has reduced its workforce from 500 to 381 employees, the lowest number since 2020. Additionally, 16 loan or mortgage offices across the country have been closed.
The bank's assets currently stand at $1.46 billion, a 20% decrease from $1.81 billion last year. While Hartheimer prioritizes earnings as a measure of performance, he anticipates more losses in the short term due to necessary investments.
He projects that the bank will "turn the corner" and return to profitability in 2026, as the expensive Synapse litigation winds down and the new compliance systems are fully implemented. These investments, he notes, are crucial for long-term stability and regulatory adherence.
Industry-Wide Shifts
The Synapse incident has prompted broader changes in how banks engage with fintechs. Stan Orszula, a partner at Chicago law firm Barack Ferrazzano, notes a trend towards banks working directly with fintechs, bypassing middleware companies. This direct approach offers greater transparency and control over end-user accounts.
Despite the challenges, the fintech sector continues to grow, and banks are still actively seeking partnerships. Orszula advises banks to be fully committed, stating, "don’t enter the space unless it makes business sense and you are willing to extend blood, sweat and treasure and that you are committed to it."
Hartheimer remains optimistic about Evolve's ability to succeed in the BaaS space. He emphasized his confidence in the bank's future, stating he would not have accepted the CEO position if he did not believe in its potential to overcome regulatory hurdles and move forward strategically.
