One of the biggest challenges banks face today is in acquiring new customers.
Consumers still tend to open accounts in branches, but branch traffic overall has fallen, and those realities make the cost of adding customers pricey.
Meanwhile, digital acquisitions are tough, too. Banks often have to offer higher rates or take other aggressive marketing steps to draw in enough applicants online. Fintechs have lower costs, but they struggle to build up critical mass.
So, any company that has an edge in acquiring customers is likely worth a premium.
At least that is what Customers Bancorp in Wyomissing, Pa., is hoping as it looks to unload BankMobile, its digital-only neobank aimed at millennials that has benefited from its acquisition of the student-loan-disbursement firm Higher One. The unit is said to have 2 million relationships with college students that it is working hard to turn into lifelong customers through a no-fee policy and a good user experience.
Customers has been discussing its plans to divest BankMobile since last year, but during a conference call tied to fourth-quarter earnings last week, CEO Jay Sidhu said its anticipates announcing the details of the divesture shortly.
“We are in final negotiations with a partner right now and though no assurances can be made, obviously, [that] this will happen, we are hopeful that it's going to happen,” Sidhu said.
The company said it decided to sell the unit because of the Durbin amendment, which caps interchange fees for banks with assets of more than $10 billion. Customers had $9.6 billion in assets at the end of the fourth quarter, and it says the business case for the retail-focused BankMobile unit doesn’t make sense once the parent company goes over $10 billion. BankMobile had $456 million in deposits at the end of 2016, and they could grow to as much as $1 billion this year, according to the company.
Research analysts are expecting the unit to fetch at least $100 million, but valuing it is difficult. Frank Schiraldi, an analyst at Sandler O’Neill, said the unit may sell for about $100 million, which would be about a 14% deposit premium based on an average of the level of deposits the company expects the unit to have this year. That’s a hefty premium, Schiraldi said, considering recent deals have involved premiums of 7% to 9%.
Meanwhile, Michael Perito, an analyst at Keefe, Bruyette & Woods, is pegging the sales price closer to $150 million. He arrived at that number by considering its deposit premium potential as well as market multiples, and he sees it as a bit of a bargain. For one, since Customers has identified why it needs to unload it, the company is not selling from a position of strength. Meanwhile, since deposits are involved, a bank has to be the buyer and the deal will be mostly, if not all, cash. Both of those forces weigh on the price. Additionally, BankMobile is not currently profitable.
“Whoever buys BankMobile is going to believe strongly in the branchless-banking direction,” Perito said. “The buyer is going to believe that five to 10 years from now, even if only 20% of these kids stick around each year, that they’ll have a really solid deposit network. This deal is going to have to be 100% strategic.”
Luvleen Sidhu, the CEO's daughter and BankMobile’s chief strategy officer, said during the earnings call that more than 80% of BankMobile’s newest customers said they are very likely to somewhat likely to stick with BankMobile after graduation.
The other thing influencing the analysts’ predictions is a Dec. 30 filing with the Securities and Exchange Commission that details a bonus payment that Jay Sidhu will receive if the unit sells for more than $100 million. Essentially, if the company is disclosing the scenario, its executives have a pretty good idea it’s going to happen, they said.
Sidhu said in an interview that the unit will likely sell for more than $100 million but that the bonus wasn’t the reason. “It is well worth more than that,” he said.
Sidhu founded BankMobile with Luvleen Sidhu in January 2015 as way to serve millennials and middle-income folks through digital channels. Such strategies are often pinned to paying up for deposits, but BankMobile’s deposits are non-interest-bearing. Instead, the unit sought to build relationships through experience.
Sidhu said the unit could have earnings of $15 million in 2018 and $20 million to $25 million in 2019. He said that would be achieved by taking advantage of the unit’s potential revenue streams, including debit and credit card usage and lending. Sidhu said it is exploring a sale because it is the least disruptive avenue to the business. For instance, an initial public offering would have taken at least two years from start to finish.
“You can find a way for our shareholders to win, for the buyer’s shareholders to win, and at the same time the management team can continue to execute. It is the best option,” the CEO said before backtracking. “Well, the best option would have been to keep it, but because of the regulatory environment that is not the best option.”
Sidhu declined to discuss the potential acquirers.
The likely buyer is a community bank that is well under $10 billion in assets and is looking for a way to fund its commercial loan growth, said Ron Shevlin, the director of research at Cornerstone Advisors.
BankMobile’s steady pipeline of customers through its student-lending-disbursement business is key, said Joe Gladue, an analyst at Merion Capital Group.
“Up until recently, the typical way for banks to get customers was through their branch networks, but those are falling by the wayside and there is no clear path to customer acquisition without them,” Gladue said. “BankMobile is a method of acquiring customers, and the added attraction is in the college students who will soon be early in their careers and are likely to be good customers.”