Customers Bank is gearing up to launch a new business-to-business payment platform that will offer broader services and enhanced compliance capabilities, following an enforcement action from the Federal Reserve that required it to improve risk management in its digital asset strategy.
Customers is testing the as-yet-unnamed new platform with some clients, and expects to launch it in the next quarter or so, President and CEO Sam Sidhu said in an interview. The new platform consolidates Customers' technology solutions in treasury management and instant payments, and uses APIs for companies to plug in other software or payments products they use in day-to-day operations.
"Our B2B platform will now have a lot more flexibility because now we can port in some of these tools and other software that we have developed internally or externally to create enhanced analytics and monitoring," Sidhu said.
The new platform offers more extensive products and services compared to Customers' existing payment network, Customers Bank Instant Token (CBIT), which is mainly an intrabank network processing payments between two companies that both bank with Customers, Sidhu said.
The planned launch coincides with an Aug. 8 written agreement that the bank and its parent company, Customers Bancorp Inc., entered with the Federal Reserve Bank of Philadelphia, identifying deficiencies in Customers' compliance with anti-money laundering (AML) rules including the Bank Secrecy Act (BSA).
With the written agreement, Customers will have to notify its regulator before it launches new payment networks other than CBIT. Customers has been working in partnership with its regulators as to the new platform, Sidhu said. The work around the new platform was first discussed in an earnings release in mid-2022, he noted.
The written agreement has hit the company's stock price hard. While BSA/AML compliance was a major issue raised in the written agreement, Customers has already begun to address those deficiencies following its most recent examination last year, the written agreement noted. In August, Customers announced the appointment of Allen Love as chief compliance and AML officer.
Vision on fee income and non-crypto clients
The new platform reflects Customers' vision to grow fee income from the payment business, in contrast with the existing payment network CBIT, which has primarily been a deposit play aimed at generating interest income.
As of June 30, Customers held roughly $2.7 billion of deposits from customers participating in CBIT, including about $1.5 billion in traditional demand deposits and roughly $1.2 billion in the transaction network.
On the CBIT network, Customers mainly originates deposits via business checking accounts linked to the network, then parks the deposits in cash at the Fed and earns interest, in a bid to ensure liquidity. As a result, potential interest rate cuts will hurt CBIT's profitability, Raymond James analyst Steve Moss wrote in an Aug. 8 research note. Moreover, the written agreement, which implies more investments in compliance, will further increase the profitability hurdle for Customers to continue CBIT, Moss wrote.
CBIT's link to Customers' digital asset strategy could also cloud its future. Although CBIT can be used by any commercial firm, it is particularly appealing to cryptocurrency companies because it is built on blockchain technology and settles payments instantly around the clock, catering to the trading hours of digital assets.
Under the written agreement, Customers will now have to notify regulators in advance of any new developments and relationships related to digital assets.
"It's going to restrain new product development and expansion. They're also going to have to jump through more hoops to get a new product or service approved," Chip MacDonald, managing director of MacDonald Partners LLC, said in an interview.
The new payment platform, meanwhile, is "all-inclusive" with regard to payment mechanisms, and will be made available to all of Customers' commercial clients, Sidhu said.
Making deposits stickier
Customers' move to invest in payments is part of an effort to expand its offerings to depositors, especially at a time when the written agreement increases the risks of its crypto-related deposits.
In and beyond crypto, having a robust payment infrastructure will help Customers to deepen its relationships with commercial clients, Sidhu said.
Strengthening relationship banking has been a recent theme at Customers. The management said in July that the bank had grown deposits by $900 million since the first quarter of 2023 thanks to new hires. In April, Customers announced that it hired 10 teams of bankers, who brought along deposit relationships from former Signature Bank or New York Community Bancorp Inc. In June 2023, it acquired a $631 million loan portfolio in venture banking from the receivership of the Federal Deposit Insurance Corp. and hired the bankers who originated those loans at Signature Bank.
The emphasis on relationship banking is a shift in strategy because historically, Customers engaged in more transactional businesses such as mortgage, warehouse, multifamily and wholesale lending, said Sam Haskell, managing member of Colarion Partners, which holds long positions of Customers Bancorp's shares.
Sidhu "has done a good job of building relationship businesses and growing the deposit base in less transactional ways," Haskell said in an interview.
Analysts are mixed on Customers' future relationship with the digital asset space, which the company has said will continue.
Uncertainty about potential digital deposit attrition is one of the concerns that led Hovde Group analyst David Bishop to downgrade Customers Bancorp shares on Aug. 9, lowering the price target to $49 per share from $74. Raymond James' Moss, however, believes that Customers' decision to stick to crypto banking helps it gain credibility in the longer term.
"There's definitely people who prefer that they exit," Moss said in an interview. "But at the end of the day, I think they want to have diverse business lines. It's not a concentration for them."
Customers has kept crypto-related deposits under 15% of its total deposits since at least February 2023, Sidhu said.
Other growth initiatives
As Customers continues to improve its digital asset strategy, it is still able to grow in other segments, and the cited deficiencies and the consequential growth restrictions are limited to digital assets alone.
"I thought it was very clear that all the problems really were isolated within the digital asset platform, not the remainder of bank where a lot of their growth is coming from," said Michael Perito, head of bank strategy at the executive search firm Travillian, who covered Customers in a former role as an equity analyst until 2024.
Sidhu said crypto banking is a small and steady portion of Customers' total business with hundreds of clients, in comparison with tens of thousands in the bank's commercial business.
Customers will continue to pursue the growth of core deposits, Sidhu said. It also has the capacity to make commercial real estate loans to existing depositors while other banks may be reluctant to lend in that space, he added.
"Because we have no problems in our portfolio, and because we have less than 1% office loans in our portfolio, we have the ability to be there for these customers," Sidhu said.