Banks founded in Minnesota use banking-as-a-service to expand nationwide

As community banks look to blend their small-town, in-person roots with long-term digital sustainability, two financial institutions founded more than a century ago in Minnesota say doing so is possible..One is Bellevue, Wash.-based Portage Bank, founded in 1901 in Ceylon, Minn., a town of 250 people near the Minnesota-Iowa border. The other is B2 Bank, formerly First National Bank of Buhl, Minn., founded in 1902.First National Bank of Buhl was acquired in July 2021 by Brian Barnes, founder of automated money management company M1 Finance. The bank then rebranded and focused on building a nationwide Banking as a Service, or BaaS model. Deposits have more than doubled since Barnes acquired the bank, with a $26 million increase in just the second quarter of 2023 due to its partnership with M1 Finance. As of earlier this year, B2 Bank had $60.4 million in deposits and $35.1 million in loans.In March, B2 Bank hired three senior executives from St. Petersburg, Fla.-based Climate First Bank to guide expansion, including Ryan Jaskiewicz as CEO; Chris Cucci as president; and Chris Van Buskirk as chief credit and risk officer. The trio is tasked with helping B2 Bank build a digital private bank for customers seeking long-term wealth. Many M1 customers are entrepreneurs and business owners looking for commercial lending and mortgages..Jaskiewicz is tasked with expanding the bank’s commercial lending program. An entrepreneur, he launched nonbank finance company 12five Capital LLC in 2006 as a 23 year old. After serving as CEO for 17 years, he joined alternative lender Breakout Finance as chief strategy officer in 2023. He was named president of structured finance at Climate First Bank in 2024.Jaskiewicz was introduced to Barnes last fall. At the time, B2 Bank had a retiring CEO, Randy Peterson. “I wanted to get back into the CEO role and get back into a role where all the weight is on my shoulders, for better or for worse ... I like when the buck stops with me,” Jaskiewicz added..The foundation for B2 Bank’s growth followed a 2023 order from the Office of the Comptroller of the Currency finding the bank needed to bolster internal controls to the level of a $5 billion bank to undertake BaaS, despite having only $70 million in assets. Bank leaders wrote policies, added related committees and adopted third-party risk management provisions.“We are in a great place with the OCC,” Jaskiewicz said.“It is one thing to have procedures, it is another thing how you execute on those policies,” he added. “What is the process for doing that? We are getting our feet wet with that, and then starting to add assets from a commercial banking level.”Jaskiewicz sees this as the right time for expansion due to the openness federal bank regulators have for digital banking. “We have the regulatory foundation, the infrastructure and now the leadership team to build something significant—a bank that operates at the intersection of community banks’ trust and relationships with the speed and scale that modern financial technology enables,” he added.Portage BankPortage Bank partners with fintechs and has a dedicated business technology and payment processing division, Portage IQ. The division offers fintech API-powered payments and direct access to the Federal Reserve. The bank also utilizes tools such as Braid FI, allowing the bank to bring its fintech payment processing in-house.The foundation for what is now Portage Bank was established in 2019 when The State Bank of Ceylon was acquired by several Washington state-based investors, including Matthew Moran, Gellert Dornay, Robert Cumming and Kevin Johnston.Moran, Portage Bank president and CEO; and Richard Eastley, senior vice president of payment systems operations, described the bank’s evolution in late April during the Bank Holding Company Association spring seminar in Edina, Minn.The acquisition process started months before the deal closed. Seeking a charter to gain access to payment rails, Moran began calling a list of the 18 smallest banks in Minnesota to gauge their interest in selling. The State Bank of Ceylon was receptive.Acquiring the then-$11 million bank cost only $55,000, with the buyers then spending $160,000 on technology upgrades. State Bank of Ceylon had $2.3 million in small loans and three employees. The bank also had less than $40,000 in annual income and did not charge loan fees due to not having the software to disclose the charges.“We bought out their capital, paid a small premium for their 118-year-old charter,” Moran said. The buyers built the foundation of the commercial bank to create interest and fee income to later invest in payments. “We created overdraft loans for everybody,” Moran said. “We underwrote them all. They were fully documented, fully disclosed, fully compliant.” Within 60 days Portage Bank had $18,000 in reserves. “What it really gave the staff was time,” Moran added. “That was the most important part.”State Bank of Portage planned to sell its low-yield bond portfolio, with proceeds then reinvested into construction loans in the Pacific Northwest. Moran had already supervised or granted more than $2.5 billion of multifamily and residential lending credits, with many customer relationships starting before the Great Recession.Moran’s team convinced then-Bank of Ceylon Owner Marlen Bents their plan would work. “We convinced him of two things,” Moran said. “We are going to put our money right up next to yours. And we only worked with builders that have a long improvement history with this.”The strategy paid off, with 35 loans sold in 2019—many with two participants. Wholesale payments followed, and Portage Bank saw the chance to partner with fintechs seeking direct access to ACH and Fedwire Funds Service. “We became their bank, their connection to the primary electronic payment rails in the United States,” Moran said. “Today, that business is one of our key engines.”Today, Portage Bank has 44 employees and manages $112 million on the balance sheet and $156 million off the balance sheet. Portage Bank also holds $80 million in credit. Today, one of Portage Bank’s largest partners is a top 10 crypto exchange in the country, with other partners in the cross-border payments space. The bank expects to make $12 million in revenue this year.“There is nothing special about what we did,” Moran said during the Spring Seminar. “Nothing that any community bank in this room cannot do.“Every one of you has the ability to partner, to participate, to expand your reach, to diversify your credit, to turn your small town bank to something that honors your community, the community’s past, but also builds a future,” he added.Portage Bank is seeking responsible growth, Moran said. The bank has a money market account he sees competing with Marcus, the online savings account from Goldman Sachs. “That conservative philosophy that runs the bank is overlaid upon the payment program,” Moran said. “You can do online gambling if you want, but there are a lot of ways to make money in payments. You really have to decide what is a good fit.”Compliance has been crucial to the growth of Portage’s payments business, Eastley said. This includes due diligence for partners during the up to two-month onboarding process; along with BSA/AML transaction monitoring.Training, due diligence a mustRegulatory accountability for third-party fintech relationships rests with banks, said Elaine F. Duffus, a senior specialized consultant for Wolters Kluwer. She cited the 2024 failure of Synapse and the subsequent fallout with host bank Evolve Bank & Trust. The Tennessee-based bank has faced class-action lawsuits alleging mismanagement and negligence after it froze $100 million in customer withdrawals from its fintech partners following the bankruptcy of Synapse, citing accounting discrepancies that made it uncertain which funds belonged to what users.The California Department of Financial Protection and Innovation recently fined fintech app Yotta Technologies $1 million in connection with the Synapse failure for allegedly deceiving customers about the safety of their deposits.Regulators under the Trump administration have been directed to streamline licensing and approvals for fintechs and digital assets looking for bank charters. The Treasury Secretary and financial institutions have also been directed to strengthen customer due diligence.Duffus said the developments open the door for banks to offer compliance-as-a-service. The business model allows organizations to outsource regulatory compliance management to third-party providers.Banks looking to enter BaaS need to see it as an operational transformation, instead of a way to receive more fees and boost their bottom lines, Duffus said. Banks that have faced enforcement actions have often moved ahead without sufficient compliance and risk planning, she added.Though BaaS can be a boon for community banks, it is not an all-encompassing solution and often requires a year-long onboarding process, said Cornerstone Advisors Director Elizabeth Gujral. Community banks that successfully onboard BaaS set it as a line of business and hire dedicated risk/compliance leaders along with project managers, Gujral said.Successful BaaS banks often network with each other at industry events. She advised banks concerned that offering BaaS will risk their current operations to avoid entering the space. She said fintech providers need to be accountable to the board of directors, with the board educated on what they are doing.Portage said it has an advantage over its peers on the compliance side, having undertaken due diligence and transaction monitoring on fintech partners. “Our team is the expert,” Eastley added. “It is really an obligation on our side to help educate and share information with our examiners proactively so we can have those discussions. It really becomes a collaborative engagement. And the examiners like that collaborative relationship. They do not like adversarial relationships.”Banks that have not achieved success in BaaS often do not prioritize the offering enough, Gujral said. “If you have a lack of focus it puts the whole program at risk,” she said.“I do not think everyone should do it, because it really should be if it makes sense for what a bank is trying to achieve,” Gujral added. “If they are looking for a route to just grow their deposits or do some lending, then sure, but I do not think they should just enter into banking-as-a-service when there are other opportunities still available in their market. It is a huge investment.”Today, B2 Bank has 27 employees, 15 in Mountain Iron and Buhl, with the rest nationwide. Despite its national aspirations, Jaskiewicz said B2 Bank remains invested in the two small towns in Northern Minnesota. Last week, the bank announced the relocation of its corporate headquarters to Holladay, Utah, from Buhl. B2 Bank is building a connection between its in-person employees in Mountain Iron and Buhl and nationwide remote staff. Doing so allows more bank employees in Northern Minnesota to be aware of its national presence and vice versa.“They can step in for one another,” Jaskiewicz said. “By doing that, we breed culture with each other. It is that idea of, have you walked in my shoes? If a nationwide employee knows what the community person is doing, they have walked in their shoes.”Eastley suggested interested banks network with other banks and undertake a proof of concept to determine the feasibility. “There are plenty out there that will share information, and there is enough business out there that the competition is not really a concern,” Eastley said.Moran said bankers entering BaaS should discuss the option with their directors and have a formal education program to explain NACHA and ACH terminology.Portage Bank added contract provisions requiring advanced notice from fintech partners to move a significant amount of money. Moran said Portage Bank steps away from potential fintech partnerships when the third party requests exceptions or cuts corners to speed up the process.“You have to do due diligence and have a person who knows what they are doing, can evaluate and provide the documentation on a new partner,” he said. “You have to have a platform that can process high-volume payments.”Eastley said banks can engage in “moderate to high-risk activities,” if they are aware of those challenges and list how to mitigate and document shortfalls. “We have to be a little different than what we did in the last few decades,” he added. “Think about the digital asset age we are getting into, and how we can bridge that gap into digital assets and be part of that, not look on from the sidelines. The sooner you get started, the sooner you can move in the process.”