What will BankMobile’s future look like once it is spun off from Customers Bancorp?

Customers launched the digital-only bank, designed to target millennials and technophiles, in January 2015. Since then, BankMobile has adapted an app for Apple Watch, formed an innovation unit and created a financial literacy and self-help podcast series.

One thing BankMobile hasn’t accomplished is turn a profit for its Wyomissing, Pa., parent. The business is expected to report a $6.9 million loss when Customers shares its third-quarter results later today.

Luvleen Sidhu
Courting students is "a diamond in-the-rough" in terms of customer acquisition, says BankMobile President Luvleen Sidhu.

BankMobile also threatened to put a drag on its parent’s profitability by restricting interchange fee revenue now that Customers has reached $10 billion in assets. That is the reason why Customers is planning to spin the business off.

Customers recently decided to pursue a tax-free exchange of shares with the $114 million-asset Flagship Community Bank in Clearwater, Fla., rejecting other offers to buy the business outright. The original plan to sell the business to Flagship fell through because Flagship was unable to raise the $175 million needed to close the deal.

Luvleen Sidhu, BankMobile’s president, recently discussed the thinking behind the spinoff and the path forward for her business as its ownership structure changes. Here is an edited transcript.

Why did Customers decide to pursue a complicated spinoff instead of selling BankMobile?
LUVLEEN SIDHU: We’re hoping to give about $100 million to $110 million of value to Customers shareholders. That would be tax free. The shares would be exchange-traded securities as soon as the transaction is complete. Those who just want liquidity right away have that option [to sell their shares]. Those who really believe in our future growth potential have an opportunity for appreciation. If we look back at [Flagship’s original $175 million offer], that was giving after-tax about $100 million of cash to Customers shareholders with no upside.

With the unsolicited offers we got, we weren’t able to capture what we believe to be the full value of BankMobile. Doing this, we have Customers shareholders that get to take advantage of the tax-free option to stay invested … and we get to work with Flagship, which has stayed by ours side through all of this.

What will BankMobile’s leadership team look like?
I’ll be staying with the company and so will all our employees. We have about 220 that will all be going over with the transaction. Flagship Community Bank will be renamed BankMobile. Frank Burke, who is CEO of Flagship, will remain CEO of the newly formed company and I will be president.

Frank has a lot of integrity, which is very important when you want to partner with someone. I’m excited to work with him on a personal level. He’s very visionary. He saw an opportunity to be able to partner with us and to use our structure to really grow this company.

Customers said it plans to report a $6.9 million loss at BankMobile for the third quarter. Does the spinoff move the business closer to breaking even?
We hope that the deal will be executed by June 2018 and we will be publicly traded on that day. What’s in our model projections is definitely [to be] on the path to profitability at that point.

There’s been a lot of talk about a white label relationship Customers is close to announcing. What are the latest details?
We are still under [a confidentiality agreement] and can’t announce everything, but it’s going to be a very big splash in [the first quarter]. It’s a top consumer-oriented company with millions of customers. We will be offering our bank accounts to their employees and their customers through their thousands of retail outlets, as well as penetrating their existing customer base.

We see our business really growing in the white label space, this model of being able to do high-volume customer acquisition at low cost and creating a sustainable customer-acquisition model that leads to profitability. But it really only [works] when we’re able to take advantage of [revenue from interchange fees].

Another effort being discussed involves having companies offer BankMobile products to their employees. How would that work?
With white label, we have this leveraged growth and high-volume customer acquisition [strategy], but we customize that app and co-brand it. For “Perks at Work,” we’re also looking at employers, to be able create a customized growth strategy for our direct-to-consumer app. It depends on how many employees an employer has, but most likely we would not co-brand this app. It will be a BankMobile app that will be available through these companies.

That’s really to help them to eliminate checks and all these different [payroll] processes that they don’t want and to just be able to offer direct deposit. We’d help with this sort of frictionless disbursement.

We’d also offer other products we’re built around it. Once we’re tapped into the human resources benefits and payroll engine, is there a way for us to give more real-time pay so people don’t have to wait the typical two-week period? We call that our payroll advance product.

We can also offer other products, like the credit card we’re launching in the first quarter, auto loans, mortgages, student loans. All that’s rolling out in 2018.

How is the student loan disbursements business Customers bought in June being integrated into BankMobile? Is it feasible to turn college students into customers for life?
Our models are very conservative. We say “customers for life” because that is 100% our goal, but we’re only counting on keeping them for five to seven years. It’s very conservative to get us to profitability. That being said, I have so much optimism about it.

It’s like a diamond in-the-rough in terms of this customer-acquisition strategy; 20% to 25% percent of the students who are banking with us haven’t had a bank account before. There aren’t many opportunities to take advantage of these situations without paying millions of dollars for exclusivity on campus. Here, the schools are paying us.

We’re committed to being able to offer a broad range of services that haven’t all rolled out. In December, we’re rolling out our personal loans and in the first quarter we’re also rolling out our credit card for them. Then we’re [planning] to expand our loan portfolio with student loans, refinancing of student loans and auto loans in the second and third quarters. It’s really about continuing to build out a suite of products that we know our customers need and being able to provide them at attractive pricing.

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