Who Says You Need A Charter To Be A ‘Bank’?

BankMobile left its banking nest and has become an independent fintech that's publicly traded. Co-Founder Luvleen Sidhu expects to continue building an atypical banking business on the foundation the company established when it was part of Customers Bancorp. In a full-circle move, it may help tech-challenged community banks catch up to the mobile banking wave.

While the eventual fate of the national limited-purpose fintech charter continues to be debated, multiple neobanks have instead pursued full U.S. banking charters. Being able to operate with official banking powers and federal deposit insurance has been the gold standard for some. Indeed, Varo Bank, which gained its charter in summer 2020, spent three years and an estimated $100 million to become a real bank.

That’s one strategy, but not the only choice. BankMobile, a leading mobile-only banking service, went 180 degrees and debanked itself.

On Jan. 4, 2021, after a process that began in 2020, BankMobile extricated itself from its founding owner, Customers Bancorp, and in the process became a nonbank fintech company. BankMobile, which became BM Technologies for corporate purposes, gave up not only access to a banking charter, but also the deposits it had held as part of Customers Bank. It still services those deposits, but the new structure retains all of the development BankMobile has spent its young life creating while also opening many new potential opportunities with additional depository institutions.

In the investor’s deck that helped accomplish the actual spinoff, there is a bolded explanation of what the company is and does that might as well be in neon. It says in part:

“BankMobile is Not a Bank. BM Technologies is Not a Bank and it does not provide banking services. BankMobile is a technology provider that facilitates deposits and banking services between a customer and an FDIC insured partner bank. “

A trifle legalistic, but it hammers the point home. BankMobile is no longer a bank — but it plans to broaden its clientele and the financial institutions that it will now represent as a third party facilitator. During 2021, as one of the handful of companies partnering with Google, it announced plans to introduce co-branded BankMobile Google Plex accounts as an expansion of its extensive college student banking program.

Not Your Typical Bank Income Statement

In the process of making this move, BankMobile provides one answer to the question posed by some banking experts regarding what the traditional industry will do for an encore, as the continuing low-rate environment continues to erode the classic bank profitability model based on net interest margins.

“It was always Customer’s plan to spin out BankMobile, but the urgency grew because Customers’ crossed the $10 billion threshold that had exempted it from the Durbin amendment.”

The activities of BankMobile as of the third quarter of 2020 illustrate how it turns a profit with no spread income. The revenue pie was split as follows:

  • Card Revenue (interchange fees and other sources) 41%
  • Deposit Servicing Fees (charged to partner banks) 31%
  • Account Fees (monthly fees and certain service charges) 17%
  • University Fees (dealing with a highly specialized banking function) 8%
  • Other Fees 3%

No spread income at all on that P&L. It was always Customer’s plan to spin out BankMobile, but the urgency to do so grew because Customers’ crossed the $10 billion asset threshold that had exempted it from the Durbin amendment’s limit on interchange fees.

Becoming an independent, nonchartered fintech “provides us with the freedom to have other bank partners and to continue to grow our business and not be capped by a bank that has crossed the $10 billion line,” explains Luvleen Sidhu, who co-founded the operation and is CEO, in an interview with The Financial Brand.

Beyond that regulatory wrinkle, Sidhu explains that an independent operation made more sense economically.

“Our value was hidden underneath the umbrella of Customers Bancorp,” she explains. “We were getting little to no value for our company, for the proprietary technology that we’ve built and for the existing partnerships that we can leverage.” BankMobile has over two million accounts and has been opening new ones at a rate of 300,000 a year, according to the company’s investor deck. (In the process of the spinoff, accomplished using a “SPAC” — special purpose acquisition company — the company became a New York Stock Exchange traded firm.)

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Fintech Independence Creates a Banking Hub

The independent BankMobile now functions in multiple business lines. Here is a rundown of the main ones.

  • Its partnership with 725 colleges and universities, in which the schools pay BankMobile fees to offer students accounts that serve to disburse student aid funds. Beyond immediate fees, the long-term goal is to hold onto those account relationships, marketed as BankMobile VIBE accounts.
  • Its role as white-label banking provider behind the T-Mobile Money accounts that are now also open to former customers of Sprint, in the wake of that carrier’s acquisition by T-Mobile. Among the attractions are no fees as well as 4% interest on up to $3,000. (The contract has been extended to 2023.)
  • Its workplace banking strategy, offered to companies for their employees through a human resources portal company.

Before the spinoff, the deposit and card side of BankMobile’s client relationships all went through Customers Bank. While presently Customers continues to be the depository partner, the intent is to expand the deposit partnerships to multiple banking institutions.

A key element of what BankMobile brings to bank partners is the opportunity to raise low-cost deposits on an ongoing basis and at volume.

“We source them, service them and provide them to our partner banks,” says Sidhu.

While becoming an independent fintech takes BankMobile out of direct regulation, Sidhu says a key part of their service to clients is strict attention to compliance and regulatory issues. She says that everything that had been done to meet Customers Bancorp regulatory obligations continues. “We have our own compliance team and our own Bank Secrecy Act team, as well as a risk management infrastructure,” says Sidhu. “Any new bank partner that we choose will have more of an oversight function, with us doing the day-to-day work to make sure that we’re compliant.”

What sets the new BankMobile apart from many other entrants in the Banking as a Service field, says Sidhu, is that it covers the entire set of client needs, from the technology necessary to deliver the mobile product to the artificial intelligence and data analytics functions to customer support. Essentially BankMobile is the bank, albeit unseen.

“That’s awesome,” says Sidhu, “because that means there’s a lot of white space for us.” Even as more firms take the road BankMobile did, she says, “it’s going to be difficult to replicate the scale we have built.”

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Joining BankMobile and Google Plex on Campus

One of the beauties of mobile banking is that, especially as the eclipse of cash is hastened by coronavirus worries, once you have someone in the fold, there is little reason for them to ever switch banks. The BankMobile campus program is designed in part to “get students in at a younger age when their financial life is less complex,” says Sidhu, “building that emotional connection with them, building that trust with them and over time adding layers of financial services as their needs mature.”

“The partnership with Google can potentially be an accelerant to help more and more students choose to engage with us.”— Luvleen Sidhu, BankMobile

Sidhu says that the retention rate among the consumers who start as college disbursement accounts has been growing, and is something the company works hard to improve. She says that the BankMobile partnership with Google on its Plex accounts will initially be tied to the campus program. She expects the accounts to debut towards the end of 2021.

“We feel the partnership with Google can potentially be an accelerant to help more and more students choose to engage with us and to remain with us after graduation,” says Sidhu. “We think the Google brand is strong and that the combined BankMobile/Google Plex user experience will be very customer-centric and will be well received.”

Because the accounts will exist within the Google Pay ecosystem, Sidhu believes that will add value, enabling rewards like cashback and bonuses when users order food and other payments actions common for students.

Sidhu sees the BankMobile/Google combination resulting in a “super app,” along the lines of an Alipay.

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How Far Can Fintech Go? And Will the Game Change?

Given her status as co-founder of BankMobile, now past the five-year mark, Sidhu has been at the forefront of the fintech boom. There has been speculation that more fintechs are going to have to shift from growth mode to producing profits, to meet investor demands. Some have even speculated that fintechs have ticked off all the boxes of potential activity, and that there’s not much room left for new entrants.

Sidhu disagrees strongly with the second claim and partially with the first. She thinks the next three to five years promise major developments.

“I don’t believe in finite options,” says Sidhu. “I think a lot of potential remains untapped and I’m excited for the future of the fintech industry. The beauty of banking is that everyone is a potential customer. And in the U.S., you don’t have a capped population to go after, as you do, say, in the U.K.”

Regarding profitability, Sidhu says BankMobile is already there on a EBDITA basis. (Earnings Before Depreciation, Interest expenses, Taxes and Amortization.) She believes that as more fintechs find it attractive to become public companies more will find that they have to show black ink.

However, Sidhu doesn’t think the classical fintech growth emphasis is dead by any means. “Companies are still being rewarded and provided a premium, even, for burning cash to create tremendous growth without worrying about profitability,” she says.

Another opportunity for fintechs that Sidhu sees is the opportunity to make a business out of reinvigorating community banks. She says she can see a fintech like BankMobile partnering with community banks to create modern channels using the firm’s tech where smaller institutions “have struggled with digitization.”

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