Summary
- With a low 1.8x multiple on revenue and a 9x multiple on EBITDA, I expect the stock could easily double in 2021, reaching the FinTech sector norms.
- Banking-as-a-Service (BaaS) cooperative strategies work: Through their successful collaborative efforts with T-Mobile and BenefitHUB, BM Technologies has entered a joint effort with Google to expand its financial offerings.
- BM Technologies has a rock-bottom average customer acquisition cost of $9.63. Industry norms range from $100 to $1,500.
- With dominance in the higher education market, many students’ first banking experience will be with BM Technologies, offering long-term growth and brand awareness.
- Aggressive R&D and sharing technology position BM Technologies to rapidly expand its customer and partner base.
Scared (Expletive)
Jamie Dimon, JPMorgan’s CEO, stated that banks should be “scared (expletive)” concerning fintech firms’ rise. Names such as Bill.com (BILL), Ant Financial, Alipay, Oneconnect Financial Technology (OCFT), MMTEC (MTC), Social Capital Hedosophia Holdings Corp. V (IPOE), Affirm (AFRM), Robinhood, Coinbase.com, and many more have either gone public or are planning to go public this year. I want to discuss BM Technologies (BMTX), formerly known as BankMobile. Despite a humble ~190 million market cap, their collaborative BaaS strategy stands out amongst new market entries. The BaaS strategy invites non-banks into the financial sector, which is a game-changer.
The fintech industry’s total addressable market is expected to exceed 300 billion by 2022. BM Technologies is the fintech leader in higher education. BM Technologies is also one of the largest digital banking platforms. Their B2B2C strategy targets partner firms such as T-Mobile (TMUS) and Google (GOOGL), who provide BM Technologies access to their massive client lists. Their cooperative strategy helps them rapidly expand their user base by bringing a new breed of non-banks into the financial sector. Through the sharing model, they are well-positioned for significant growth. I believe by focusing on R&D while capturing their partners’ existing client base; BM Technologies has a differentiated business model in a crowded fintech space.
Image Source: Investor Presentation
The Story
Luvleen Sidhu co-founded the firm in 2015. Her accomplishments include FinTech Woman of the Year in 2019, Crain’s New York Business 2020 40 Under 40, “Rising Star in Banking & Finance” in 2020, and became one of the youngest CEOs in the sector. CNBC, Bloomberg Radio, Yahoo Finance, Fox News Radio, The Wall Street Journal, Forbes.com, American Banker, Crain’s New York, and FoxNews.com all have featured her. After a few minutes on her website, it is clear to me that she gets it. She is innovative, relevant, and inspiring.
Image Source: Luvleen Sidhu’s Website
In 2016, BM Technology acquired Higher One’s Student Checking and Refund Disbursement business. They have expanded the business, capturing nearly 1/3 of the Higher Ed Student Disbursement Market Share in the US.
Image Source: Investor Presentation
After completing their fintech infrastructure in 2018, they launched a B2B2C value proposition to potential partners. The highly customizable white-label offerings include checking, savings, student refinance, personal loans, credit card, and point-of-sale financing. BM Technologies targets a new partner annually, currently in multiple RFP processes. Their aggressive R&D and cooperative strategy successfully landed and executed a partnership with T-Mobile in 2019. T-Mobile Money extends BM Technologies’ product to their customers, which also includes Sprint’s customers.
Image from T-Mobile Money Website
In 2020, BM Technologies partnered with BenefitHub to create a workplace banking platform, expanding their product to an additional 6 million potential customers. In August of 2020, they entered into an agreement with Google. In 2021, BM Technologies plans to complete its digital banking platform with Google Pay and set up its next partnership. The potential customer base appears to be endless through their ambitious non-bank partnerships.
Image Source: Investor Presentation
Arming the Titans
I propose a simple argument. Cooperative strategies work. Other fintech firms target the individual consumer, competing with banking giants such as Wells Fargo (WFC), Bank of America (BAC), and JPMorgan (JPM). Brand awareness and disruptive marketing are expensive. Even with a great product, innovative fintech offerings are going head to head with industry giants who command substantial R&D budgets. BM Technologies is different. Instead of battling giants, they are partnering with technology titans, synthesizing their expertise with massive customer bases. The symbiotic relationship benefits everyone. BM Technologies’ partner increases their client offerings and revenue streams while BM Technologies expands their customer base. The customers benefit from economies of scale and lower costs on financial services. I propose that small pieces of many proverbial pies (aka Google and T-Mobile) offer greater long-term returns than banking on one (albeit delicious) pie.
Banking giants may be able to match offerings with FinTech stars such as PayPal and SoFI. But how are they going to respond to technology titans waltzing into the sector with their new financial services? I would be more afraid of BaaS arming the titans with their massive customer base than any individual FinTech firm.
Banking is Evolving, and Everybody Knows It
The consumer is looking for something different. They are looking for services with fewer fees and expanded offerings to simplify their digital life. Netflix (NFLX) completely derailed Blockbuster by simply removing late fees. The banking sector is experiencing similar growing pains with FinTech firms lowering or even completely removing some fees. According to Accenture, 50% of consumers switch banks for lower fees and discounts on services. According to PWC, 33% of consumers switch banks for higher interest rates on deposits. PWC also notes that 63% of consumers are more engaged in mobile banking, while 50% of consumers intend to open their next account with a different bank. The consumer appears to be dissatisfied with the current system and is looking to integrate banking tasks into their digital life. We can see non-banks, such as higher ed, retailers, and large employers entering the finance market with credit cards en masse. It is only natural to expand those services to include other financial services. However, the regulations are complex and daunting. BM Technologies’ B2B2C model provides a turnkey solution to meeting the rise in demand for financial services.
Image Source: Investor Presentation
Banking-as-a-Service
The multi-partner distribution model is referred to Banking-as-a-Service, or BaaS. BaaS firms seek partnerships with large non-bank firms, leveraging their technology and reducing customer acquisition costs, or CAC. The partnership provides cost-effectiveness and increases rollout speed. The result is a high-volume, low-cost acquisition model. I argue that the lower costs and rapid deployment of BaaS create strategic advantages to non-banks entering the market. Lower costs also attract new customers who want to lower the penalties of mistakes such as overdraft fees and minimum balance fees. Who doesn’t want to pay less for more?
Image Source: Investor Presentation
BM Technologies is a leader in the BaaS and B2B2C model. They already work with higher education institutions, lowering their monetary distribution costs by an average of ~$125,000 annually for more than 700 institutions. They expect a 99.7% retention of disbursement services this year.
Their white-label banking has captured underserved segments with branded rewards and unique offerings to increase customer satisfaction and revenue streams for their partners. Workplace banking allows firms to execute financial wellness strategies, both offering interest-bearing accounts and lower fees, garnering greater employee loyalty. Through partnerships, BM Technologies has one of the lowest CAC in the market. CAC can cost up to $1,500 for some financial firms. The average CAC for BM Technologies is $9.63. Both small and large banks alike will struggle to compete at that price point.
BM Technologies’ competitive advantage lies in its ability to facilitate the needs of its partners. Customizability is the cornerstone of their offering. With the completion of their Google agreement this year, their market penetration will continue to increase organically. The white-label model is arguably the most comprehensive package for non-bank partnerships. The tailoring of BM Technologies’ product allows partners to differentiate their product without the expenses of developing an independent SEC-compliant platform. Even with massive technological core competencies, Google sees value in the platform. I suspect that BM Technologies’ value greatly exceeds the small market cap it currently carries.
Image Source: Investor Presentation
Financial Projections
BM Technology has over 2 million accounts, primarily driven by their higher education services. Locking in college students after graduation will require continued innovation and expansion of their offerings. BM Technologies continues to expand its R&D and evolve its services to meet consumer needs. Personally, I would like to see a cryptoeconomic engagement in their future offerings.
I signed up for my second bank account in college which I still use today. The bank was first named Wachovia, then First Union, then Wells Fargo. I am now a Wells Fargo customer because Wachovia signed me up my first quarter as a freshman. I expect student accounts will continue to feed their market penetration in the long term. Secondarily, as students become familiar with the interface, they will be drawn to value propositions by partnership platforms. The movement between platforms will increase BM Technologies’ appeal to potential partners continuing their growth.
Image Source: Investor Presentation
Now it is time for some details. On average, ~300,000 accounts are opened annually for their mobile banking platform. They reported ~$944 million deposits in the third quarter of 2020. In the first three quarters, they reported $49 million in pro forma core revenue with projected revenue for 2020 at $66.9 million. They reported $2 million core EBITDA in the third quarter, expecting to finish 2020 with $3.8 million. They have refined their corporate structure, automated projects, and negotiated with vendors for a total savings of 1.7 million dollars in the fourth quarter of 2020. These savings will provide ~7 million of additional revenue in 2021. They anticipate profitability this year.
At today’s price, BM Technologies has a ~1.8x multiple on 2021E revenue of $104.0 million (~12,200,000 shares outstanding x 15.03 share price/~104,000,000) and a ~8.5x multiple on 2021E EBITDA of $21.5 million (~12,200,000 shares outstanding x 15.03 share price/~21,500,000). With the Google partnership completing this year, the increase from $66 to $104 million seems reasonable, arguably, conservative. According to Houlihan Lokey, Core Banking and Lending Tech Firms range between 5x-9x on revenue multiples (EV/S) and 18x-28x on EBITDA multiples (EV/EBITDA). Payment network FinTechs (Credit Cards) offer even higher multiples. BM Technologies is undervalued and should approach industry norms after the partnership with Google is complete.
Risky Business
What could go wrong? I have identified four major risks: relevance, the Google deal, trend anticipation, and maturity.
First, the most dangerous risk is relevance. SoFi, Robinhood, and PayPal offer trading and/or crypto. It seems that the distance between banks and investment is narrowing. The Robinhooders are now moving the market. Traders with less than 20-grand have dominated the airtime as analysts attempt to explain a fundamentally different market. If BM Technologies doesn’t lay a clear plan of R&D, expansion, and execution into crypto and/or investing, then they leave opportunities for others to replace them.
Second, if the Google deal does not complete, BM Technologies could end up with a lot of mud on their face. It wouldn’t end the firm but it would slow momentum and prove to be a tough recovery. The details of the transaction are not public, we have a black box situation. Optimistically the partnership leads to massive expansion and development. Pessimistically, Google gleans the best ideas and walks away. However, the completion of the Google deal demonstrates confidence in the scalability of the platform, which is necessary for attracting other large firms.
Third, do we really need more places to store value? The fintech revolution seems to move with the crypto revolution. At the moment, the market seems enthusiastic about exploring novel locales to store value. At what point is the market saturated? How many accounts does each individual need? The market could move back to high levels of specialization with new interfaces. Some analysts are predicting the consolidation of the financial sector at least in the medium term. If partners (T-Mobile, Google, etc.) do not see their expected returns, they may pull back and leave banking to banks. However, the market may continue to combine and integrate financial services, opening space for Google, Facebook, Twitter, and Microsoft to increase efficiencies. The market may embrace HR expansion into financial-wellness services, providing large firms such as Walmart and McDonalds with more meaningful customized incentives for their teams. I feel the latter is more likely than the former.
Finally, BM Technologies is a young company. They are a small company. The financial sector is unforgiving and they have yet to prove their fortitude. They have a good product and good ideas but can they continue to innovate? I think 2021 will be the hurdle that defines them.
Summary
BM Technologies will disrupt the market through cooperation. Their white-label model offers a convincing value proposition. If we think of their product as an operating system, they could dominate the market through their underlying technology. If successful, their software could be the dominant infrastructure of non-bank financial offerings, potentially reaching innumerable consumers.
Their core clientele is higher education. Facebook (FB) started in higher education, and their product follows users into adulthood. The costs of switching banks place BM Technologies as the standard to beat. Services with equal offerings will fail due to the economic costs of change to customers. Our natural inclinations to choose the path of least resistance advantages incumbents. The longer BM Technologies maintains its dominance in higher education, the greater their opportunity to follow college graduates through adulthood.
Finally, the stock is cheap on every metric. If we take the low range of multiples from Core Banking and Lending FinTech, we get revenue multiples of 5x (EV/S) and EBITDA multiples 18x on (EV/EBITDA). With a 1.8x multiple on revenue and a 9x multiple on EBITDA on BM Technologies’ price, I expect the stock could easily double in 2021 and still be priced at a discount in the sector.
I forgot to mention that the firm won Most Innovative Bank of the Year at LendIt Fintech Annual Awards in 2019. They are changing the way the market approaches financial services and getting noticed. Luvleen Sidhu embodies innovation and inspiration with the resume, the awards, and the media face time to prove it. Buy the stock before it inevitably rises. I think this might be a Buffett hold-forever situation. I agree with Dimon; banks should be scared (expletive).
Go long on BM Technologies and hold until the Google deal closes. Listen for the next partnership. If the partnership is well-executed and the next partner well-chosen, hold forever.
Disclosure: I am/we are long WFC, BMTXW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
