BMTX’s legacy business, formerly known as HigherOne (“ONE”), services the higher education industry. When colleges receive loan funds/scholarship funds, they allocate a % towards students’ personal needs, living expenses, and textbooks. Historically, colleges cut paper checks and dealt with all the minutiae that disbursements entail. While not a bank per say- BMTX plays the part of college bursar in exchange for a small subscription fee from the college. Students are offered an ACH to their accounts held at third party banks, in which case BMTX disburses the funds and step out of the picture, or the option to deposit $ into BMTX’s platform (at Customer’s Bank for now, but will change to BMTX once they close on the acquisition of a bank charter) and receive a debt/credit card etc.
ONE ran into compliance problems in 2013-2015 for the fees they were charging consumers and the respective disclosures. In 2016, Customers Bank (“CUBI”) purchased the platform, rolling it under their digital banking strategy aptly named “Bank Mobile”. CUBI rectified the compliance issues grew the business, ran into Durbin challenges (assets >10bn) and subsequently spun-off Bank Mobile into a related party SPAC in late 2020, as discussed below. Account Fees are now only $2.99/mo and can be waived if there is minimal activity in the account. There are no more pin fees or excessive ATM charges. Instead, revenue is primarily generated from interchange and deposit fees (effectively a revenue share from the bank partner holding the deposits). They currently serve 745 colleges and claim to touch 1 in 3 students nationwide. BMTX disbursed $10.6bn YTD as of 3Q21, captured ~20%. There are over 2mm accounts on the platform, with 350K opened YTD. We recommend looking at the company’s website for more info on theaccount offerings.
Competition is limited and mainly from colleges keeping the headache in house. Most companies are focused on being the payment processor for tuition payments vs student disbursements (See TouchNet). BMTX’s legacy business is a great business- arguably recurring, very low CAC (management uses a $10/account number), low attrition and high incremental margins.
Over the past 2-3 years, BMTX expanded into what they call B2B2C/Banking as a service and workplace banking. This effectively allows non-financial companies to embed banking functionalities in their customer/employee lifecycle. (“Proprietary API driven banking as a service platform and white label interface to help fintechs and brands launch fully branded financial services products to their customers and to their employees”). Their most impressive partnership is withT-Mobile Money, who poured significant capital towards development of their platform. Another announcement would be a great catalyst, though it seems a few potential partners management was targeting have either been pushed off or never got past the finish line.
There was also a plan to roll out accounts, amongst a few other banks such as Citi, in partnership with Google, butGoogle sunset the entire project, likely driven by their recognition that financial services isn’t Google’s core competency.
Deposits (both organic and college related deposits) have substantially grown. Obviously, COVID stimulus has accelerated deposit trends, but the numbers are still exceptional, especially on the ‘new business’ side where deposits have continued to skyrocket even as COVID stimulus wears off. Although spend hasn’t grown as strongly as deposits have, deposits are arguably a more recurring revenue business which benefits from increased interest rates vs interchange revenues which face industry tailwinds.
Averaged service deposits were 1.7bn in 3Q +129% y/y, and ending deposits were $2bn, indicating solid momentum. Per account metrics have also increased- as exhibited below. Assuming an additional 200K active accounts in 2022 (which is conservative considering 2mm current accounts and +350K YTD), that’s an addt’l ~10mm in revenue (200K * ~$50 rev/account) much of which should drop to the bottom line.
As exhibited earlier, ~25% of revenue comes from interchange and card revenue, and 50% comes from servicing fees from partner banks/deposit revenue share. Coming out of CUBI, BMTX signed an agreement thru YE22 to yield 2.75% - 3% service fees on deposits. Obviously, at the pace interest rates are trending, getting a new partner bank to share such a high % of service fees was unrealistic. Instead, management decided to acquire First Sound Bank (OTCMKTS: FSWA), a single branch Seattle community bank focused on commercial lending with ~100-150mm of assets, and a low-to-mid single digit Net Interest Margin. BMTX is paying 23mm cash for the charter with an expected close date in 2H22, and intends to bring deposits onto its own BS. In our discussions with management, it's clear they are still flushing out their business plan, but intend to increase the bank’s loans (student loans, residential loans etc) and generate interest income. In place of the 2.75%-3% yield they get on their current deposit base, we estimate this can be increased to 4+% which gives BMTX much better revenue economics. For the foreseeable future, the company will be a mix of fee revenue (CFO is hesitant to take credit card loans onto the BS, and will have a partner for that, and collect interchange on debit and credit) and interest income.
BMTX is a high margin business, with 30+% EBITDA margins. 2019-2020 were development years, as the company built out the BaaS platform, and 2021 has shown the power of the business and its exceptional incremental margins. Expenses have been flat, with the addt’l 20mm of revenue dropping to the bottom line. 2021 guidance is ~93mm of rev and ~26mm of EBITDA, with EBITDA YTD at 21mm. With no debt, minimal CapEx, and ~25% effective tax rate, FCF for 2021 will be ~20-22mm. CapEx and development will only show up if a new platform or another large customer like T-Mobile requires customized products. Even then, many of the costs are shared with the partner. So it's safe to say this company is trading at 4.5x trailing FCF with significant growth and no debt. You can look at the company’s deck and the FinTech world to see valuations that will shock the VIC community, but even if you put the typical 8-10x earnings that banks trade at, this is a double-bagger on valuation/multiple expansion alone + the business is growing exceptionally well.