New Haven, Conn.-based BankMobile will be looking to further develop its banking-as-a-service model as a stand-alone company following its Aug. 6 sale agreement with Megalith Financial Acquisition Corp.
Customers Bancorp Inc. had been trying to sell or spin off its BankMobile unit since 2015, with one other attempted sale falling through when the buyer was unable to raise enough capital. The bank's sales efforts accelerated when Customers went over the $10 billion threshold Dec. 31, 2019, said CEO Jay Sidhu. Banks below the $10 billion asset threshold are not subject to restrictions from the Durbin Amendment, which limits interchange fees on debit card transactions. Since BankMobile does not charge other account fees, the fees it receives from debit card transactions are crucial for profitability, said David Patti, director of communications and marketing at Customers Bancorp.
BankMobile was not profitable in 2019, booking a $9.4 million loss. Management projects a $7.0 million net loss in 2020 before then turning a profit of $4.7 million in 2021, according to an investor presentation. That presentation makes the case that BankMobile, which will be rebranded as BM Technologies as part of the deal, presents a unique banking-as-a-service solution. The presentation also lists the Durbin fee challenge as a top reason for the transaction. While Customers Bancorp will retain deposits in the near-term, the longer-term goal will be for BM Technologies to have deposits held at banks not subject to the Durbin Amendment, Jay Sidhu said.
"We are obviously going to be very interested in BM Technologies expanding their relationships with other banks and looking at the Durbin-exempt banks," he said, according to a transcript of a deal call.
BankMobile buyer Megalith is a special purpose acquisition company also chaired by Jay Sidhu, who said in an interview that both the bank and the SPAC were deliberate in avoiding conflicts of interest. The bank consulted with Raymond James Financial Inc. to shop the deal, Jay Sidhu said, and received 50 proposals, three of which were recommended to the board. Then there was a due diligence process and vote, from which members associated with both sides recused themselves.
"The independent directors and the non-conflicted colleagues on the board made the final decision," Jay Sidhu said.
Jay Sidhu had been contracted for a bonus on the sale of BankMobile, but because of the nature of the deal recused himself in this case and will not be getting a bonus, he said. Customers will continue to be BankMobile's largest investor after the sale, but the bank plans to divest that ownership over time.
"Customers Bancorp over a period of time wishes to gradually, without disrupting the marketplace, reduce its ownership ... we leave it entirely up to the market conditions and BankMobile how to run this company," said Jay Sidhu. Customers Bancorp will not have any board seats or control over BM Technologies, he said. "This is a totally arms-length transaction."
BankMobile's main customer demographic is college students. BankMobile provides digital bank accounts for students receiving payments from universities and has relationships with 722 campuses, representing access to one in three college-bound students, said Luvleen Sidhu, CEO of BankMobile. She said the company will look to add more bank and nonbank partnerships following its recently announced partnership with Google LLC.
Analysts were positive on the deal. Steve Moss, an analyst with B. Riley FBR Inc., wrote that the deal allows Customers to divest itself while enabling BankMobile to pursue more opportunities with banks under $10 billion. Those banks have "more favorable economics," Moss wrote in a note on the deal. Moss kept Customers' "neutral" rating on the news of the deal.
Keefe Bruyette & Woods analyst Michael Perito wrote that the sale of BankMobile would be a "positive catalyst" for Customers Bancorp. "It will allow the bank to raise some cash proceeds and better focus its resources on its core commercial bank strategy," Perito wrote in a note on the deal, adding that the deal has "higher potential of being approved by the regulators" than Customers' prior attempts to sell BankMobile.
BankMobile plans to use its new position to partner with more banks and nonbanks to deliver banking services.
"It's really exciting to partner with Megalith Financial," said Luvleen Sidhu. "There's no doubt having access to public currency creates a lot of strategic options that we can take advantage of."