February 14, 2022 – On today’s podcast we welcome special guest, BM Technologies Chair, CEO and Founder Luvleen Sidhu. BM Technologies is a leader in mobile banking technology that provides digital banking platforms with checking and savings accounts, and more.
On the show, Luvleen discusses:
- The opportunity for entrepreneurs in fintech
- How management consulting experience and an MBA from Wharton assisted her in becoming an entrepreneur
- Founding a fintech company at 28 and taking it public
- Key opportunities in the crypto space
- And more
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Welcome investors to The Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies, your hosts, Julian Klymochko, and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate Financial Technologies. Accelerate because performance matters. Find out more at accelerateshares.com.
Julian Klymochko: Luvleen welcome to The Absolute Return Podcast. Happy to have you on the show. How are you today?
Luvleen Sidhu: I’m good. Thank you so much for having me, happy to be here.
Julian Klymochko: Great. So, getting into it. You were a young founder, just 28 years old when you founded BankMobile, what were you up to before that? And what learnings and insight gave you the confidence to start a company?
Luvleen Sidhu: Yeah, so I was 28 when we started this, a little bit older now, seven years in but you know, going back to what really led me here, I think that, you know, our life is really an accumulation of different experiences that lead you to new opportunities. I think you had Sam, my brother, who’s the CEO of Customers Bank on here.
Julian Klymochko: Yes, we did.
Luvleen Sidhu: I just listened to the first five minutes of that podcast, and he talked about us being, you know, a family of bankers. And he had talked about not paving this path for himself and where he is today and how he got there. And I could say the same thing similarly, I was pre-med at Harvard, realized pretty fast that I hated it. But I did really push through it for half my time there, but I remember sort of begging my Indian parents who love engineers, and you know, finance was not one of the options, engineers, or doctors. Like, can I please do a finance internship? Let me just apply. And so, I actually got into the sophomore rotational program at Lehman Brothers and that’s really my love for finance or financial services really began. And so, I spent time there, I graduated in 2008 from Harvard. My first on the job after six weeks of training was the Lehman bankruptcy.
Julian Klymochko: Oh, no.
Luvleen Sidhu: So, a very interesting start to my career. And I think definitely stays with me and informs some of the things that we’ve built in and our mission and our vision for BankMobile, which became BM Technologies. But yeah, so I think that seeing the financial landscape really collapse and the risk and how, you know, so many Americans lost their wealth and really building that financial empowerment idea of how can we financially empower millions of Americans combining that with my experience at Wharton, where it took lot of classes on entrepreneurship and got that bug coupled with the fact that I was at Booz & Company and worked in their financial services vertical and helped a large financial services company launch their own digital bank. And then, finally combining all of those experiences and recognize that we were in a very unique time where, you know, there was a new digital era and people weren’t going into bank branches the way that they used to. And really being able to join forces with Customers Bank with this idea of developing what came to be known as BankMobile at the time and joining forces. And we’ve taken a journey together. We divested from them earlier this year, and now we’re an independent FinTech company trading on the New York Stock Exchange called BM Technologies Inc, that’s a little bit of how we got here.
Julian Klymochko: Exciting stuff. So, as part of your background, you had a gig management consulting in addition to an MBA from Wharton. I was wondering if you felt those assisted you in becoming an entrepreneur. We often see people say in their late twenties interested in being a founder, but also considering in MBA. Do you think that’s useful? What sort of advice would you give to your younger self?
Luvleen Sidhu: Yeah, I think that, as I said in my opening remarks, I think our experiences and culmination really lead us to the next opportunity. And so, if someone feels called to really strengthen their skillset in certain area, or they feel value in a certain degree, like go for it. But if it’s out of sort of desperation and not really, you know, a feeling that this is going to help me, but I feel like I need this. I would say, don’t go for it because there’s plenty of people that build exceptional businesses and are able to identify really interesting consumer pain points that aren’t being met. And there’s no guarantee that just getting an MBA is going to help you be in a successful entrepreneur and vice versa. There’s plenty of those that went to school and are able to leverage their network or something that helps them. So, there’s no one size fit all. I’d really sort of listen to, you know, people need to listen more to their intuition and what they want to do, because when we lead with that sort of passion behind what we’re doing and alignment, it leads to much better outcomes
Julian Klymochko: That makes a lot of sense. Got to listen to your heart and your brain, I suppose. So, you made a big intentional bet on FinTech, I suppose. What ultimately drew you to the financial technology opportunity to focus on?
Luvleen Sidhu: I actually interned at Customers Bank prior to going to Wharton and banks simple, it was called simple at the time until similar to chime, they got in trouble for using the word bank. They had just come to market, and it was very intrigued by what they were creating, the technology behind what they were creating. And then also the thesis behind the fact that, you know, what I laid out before there, people aren’t walking into bank branches, the way that they used too, people are redefining convenience where it used to be the bank branch to something much greater. And then, you know, with COVID, we’ve seen just an acceleration of technology that we’ve never seen before, but even before that happening, people were ready and able to use digital technology. And they were looking for convenience at a different level and they were looking at affordability.
You know, we’re done with this. There was anger after 2008 towards big banks. And so, there was this desire that we’re done paying these big banks fees, we’re done, and we want transparency. We want affordability, and that coincided with a digital transformation that was taking place anyway, where we had the technology to change the delivery system or the distribution of financial services. And so really melding my background, my experience with this natural sort of technology transformation that was taking place, matching that with just the macro discontent, with what was happening with financial services and the consumer experience, really, it was obvious that there was an opportunity in FinTech.
Julian Klymochko: So, I wanted to dig into the company that you founded and continue to lead BM Technologies. What was the thesis behind it? And give us a description of the service that you provide.
Luvleen Sidhu: So, BM Technologies you know, really came out of BankMobile and BankMobile was a division of Customers Bank. We’re the same company. We took all the same people with us, and our vision and mission really hasn’t changed since we began, which is our mission is to create a more affordable, more transparent, more consumer-friendly banking experiences. But we don’t do it in the way that Chime and Varo are doing it with just a direct consumer approach. I think with sort of VC backed any sort of fueling a lot of these sort of Neobank, there’s this unlimited sort of supply of money. And we didn’t want to be in a position where our customer acquisition costs were so high, that it was unsustainable and our CLV took years and years and years to really make up for that CAC.
And so, our thesis was really that, is there a way to have high volume customer acquisition at very low cost and to still deliver on our mission of creating affordable, transparent consumer friendly banking. And that is what we are executing on and we’re executing it on our business, which is in the higher education space, which I’m happy to talk more about if you’re interested and that’s really a way for us to solve a pain point for colleges and universities and in return, we touch one in every three college bound students in this country, and that’s a market that replenishes every single year and we get to offer them banking services and it’s an honor to do so. And so that’s a very unique way for us to be able to get high-volume, low-cost acquisition. And then our second business, which is banking as a service, which is now that we’ve invested in technology, that’s API driven, that is cloud based, that is scalable. How can we enable non-banks to be able to leverage this as well? And that’s what we’re doing in our banking as a service line, which I’m also happy to talk more about.
Julian Klymochko: Yeah. So, prior to getting into the partnerships which you have a tremendous amount, I was wondering if you can explain the banking as a service business model?
Luvleen Sidhu: Yeah, I think that, you know, we were one of the first to really introduce this idea. I think that, you know, going back in history, everyone was very familiar with these affinity sort of credit card. So, everyone had a credit card, whether you were a Banana Republic or your American Airlines, but it wasn’t being sort of brought to you at the right moment at the right time. And it wasn’t really going beyond credit cards. And so, banking as a service now with new technology that enables this to come to fruition as well as debit card. And really that checking account is that primary banking relationship from which everything starts is becoming more acceptable, more mainstream. And so, the opportunity to help non-banks build stronger relationships with their customers, providing value additive services at the right time to have access to more data, they have access to more revenue stream.
The customers happier that they’re meeting an unmet need at the right time. It’s really become a unique environment for this embedded finance. And this banking is a service phenomenon to really flourish, which we’re taking advantage of. And so how are we playing in it? You know, we have built our technology, which is, as I said, is API based. And we are able and equipped to work with brands to be able to launch their own digital banks, if that’s what they’re looking for or their own lending products, if that’s what they’re looking for. And as I said, you know, we can offer it as a white label app experience if they don’t want to build it from scratch, or if they want to embed it in their own ecosystem, they want to control that experience a hundred percent. They can consume that in an API based fashion. And so, it really provides flexibility for our banking as a service client that work with us
Michael Kesslering: And with some of those banking as a service partnership that you have, can you give some examples of who you’re working with for partners? And then after that, I’d like to also chat about the universities that you’re partnering with, because I think that’s really an interesting service line.
Luvleen Sidhu: Yep, so banking as a service, you know, it’s interesting because I remember when we first started this years ago, we’d have to educate the brand or that partner about what is banking as a service versus now, you know, with a buzzword coming in 2021, everyone’s hearing about it, everyone’s talking about it, and everyone wants to be a part of it. And so, the tables have really turned in terms of the opportunity and the education of what we’re doing here. Our main partner in the banking as a service space is T-Mobile, we launched a product called T-Mobile Money for them, which is a very attractive checking account product. You know, that, you know, 4% on balances up to 3000, it has fee free, overdraft production. It has a vast array of ATM network availability. You get $5 off of your T-Mobile monthly bill when you use this account. So not only is it a strong standalone account, but we’re creating synergies with the core wireless business to provide additive benefits to the account. And this is just a great use case of how you amplify and can augment an existing business model with financial services. And that’s what we’re doing today.
Michael Kesslering: That’s great. And so, then with regards to the university category, how does that work from the student’s perspective? And can you give a little bit more granular detail on how that segment works?
Luvleen Sidhu: Yeah, so I’ll take one step back and then go to the student if that’s okay. So, in our student business or higher education business, our first client is actually the university and the college. And the pain point that we’re solving for them is that they disperse billions of dollars a year in what are called financial aid refunds. This is that the student has gotten financial aid, it’s applied to tuition, and there’s usually an amount left over, and that is due to the student. And we help our schools disperse about 11 to 12 billion a year. So, this is high volume. This is a huge headache for them. They have to be compliant with the department of ed on top of that. They’re cutting checks on their own, which is a pain in the butt and costly. So, we take over all of this for them.
And in return, we get to touch their students. Which, you know, I talked about the volume of the 745 or 750 colleges that we do business with now, you know, one in every three college bound students goes to one of those schools and we get to ask these students, you know, do you want to receive this money, ACH and existing bank account, or do you want to open a very competitively positioned bank, mobile account? And so, from the student’s perspective, they really get to think about, number one, is how fast do I get my money? So today ACH could be up to two to three days versus, you know, in our account, it’s the fastest way to receive the money. And number two, is, am I satisfied with my current banking relationship, or do I have a current banking relationship, and can this new banking relationship serve me? And so that’s what we’re taking advantage of. And we get a funded account on day one. So, you’re not starting the relationship from, you know, a useless sort of standpoint from both parties, right? It’s like, hey, let’s get this relationship going and moving and show that we can add value to you. So, that’s, that’s how that business works.
Julian Klymochko: One recent piece of news. You guys did acquire for Sound Bank. I was wondering if you could talk about the strategic rationale behind that merger and also your approach to M&A?
Luvleen Sidhu: Yeah, so I’ll take the first Sound Bank question first, so you know, as I had mentioned in the beginning, we were a bank for close to seven years prior to divesting from Customers Bank, you know, early in 21. And so, we always had high conviction in the combination of a FinTech with a charter. We definitely feel like it’s the strongest operating model to really have in the business that we are in. And so, our reason for divesting from Customers Bank was really because Customers Bank core strategy was not consumer banking. And they took pride in sort of investing and incubating us and growing us to where we were. But then we had divergent core strategies. And so, it made sense to let us continue to grow on our own and for us to separate in that way.
But it didn’t change the fact, we believe that that model of combination between a FinTech and a charter is the best operating model and our business, you know, banking as a service or the B2B, B2C strategy we have in the higher ed business. We had two paths forward. We could either have our own charter, or we would have to be reliant on a partner bank. There’s no other way to operate within the banking system. And it became very clear to us, and especially in a low-rate environment, especially when every single bank is flushed with deposits in this moment in time. That doesn’t mean it stays like that forever, that the partner bank model just wasn’t as attractive, right. And you have to share economics with a partner bank, there’s dependent. We wanted to own our financial future and have stability and autonomy and opportunities to expand it.
And so, we chose the charter route and not only from an economic standpoint and sort of opening the door for us but it also, you know, presents the opportunity to offer a more full suite of products and services, which then we can cross sell to our existing base, which adds value from a customer standpoint and also increases, you know, the CLV of our customer base. And third, you know, it makes us a better bass provider because, you know, right now, there’s three of us that try to be part of these deals, a sponsor bank, the technology who’s us, and then the client like a T-Mobile. But when you reduce the number of parties involved, there’s less friction, there’s more efficiency and there’s better economics. So, it became very clear to us that having the charter was the best operating model for us. We’re not the first to identify this. We’ve seen SoFi do this, you know, congratulations to them, to finally getting that approval and to lending club before us. And Square has gone down the path of getting a charter, Varo has as well. And so, we similarly believe in a similar model as these very progressive Fintech in combining the two.
Michael Kesslering: Seems, it’s impossible to have a conversation in the FinTech space nowadays without talking about crypto. And I did notice in some of your investor materials that that’s mentioned as one of your five key pillars moving forward, what opportunities do you see in the crypto space for your company?
Luvleen Sidhu: Yeah, no happy to answer that. So, I think that, you know, for us, we think about how do we flesh out a digital banking ecosystem, right? When FinTech first started really getting momentum six, seven, eight years ago, there was a massive sort of unbundling you could say, where, you know, SoFi was going to be very focused on student loans. Robinhood is going to be very focused on investing. And now what you’re seeing is more of a rebundling and this recognition that consumers are looking for more convenience under one umbrella, and two, if we’re going to get the customer anyway, let’s try to get as much share of wallet as much as possible. And going back to Julian’s question about M&A as well, which I didn’t fully answer, but there’s also this openness and willingness, I think within FinTech and financial services in general around partnership, we don’t have to do it all alone anymore.
And many of the technology leading FinTech’s have APIs. And so, the ability to sort of plug in another partner to be able to increase the breadth of services that you’re offering, you know, at BMTX, we talk about having banking, having lending, having advice, having investing, insurance and crypto that Michael talked about. And we really think of it as a build, a buy and a partner decision, you know, what is the best way? And I can say with confidence that there’ll be more partnerships to help build that out than there will be of build and buy. And as it relates specifically to crypto, there’s no denying it, you know, one in five Americans today owns Bitcoin. I think that Americans and I say Americans, because right now we’re very focused on the US, you know, Americans are looking at how do they incorporate crypto in their overall financial planning, and we just can’t ignore the trends that are taking place. And so, we are very serious about being able to add a capability that involves crypto onto our platform, because consumers demand it, but also being respectful of the regulatory environment and the catching up that’s taking place and you know, making sure that we’re respectful and in tandem with the regulatory sort of environment.
Julian Klymochko: So, one thing that you mentioned earlier on in the show is your brother Sam of Customers Bank. So, we had him on the podcast a few episodes ago, which went great. And I’m just trying to put the pieces together because I believe BMTX went public through Megalith Financial, and I believe Sam was behind that as well. So how was it, you know, working with your brother and how has it been as a public company over the past, you know, 12, 14 months?
Luvleen Sidhu: Yeah. So, I’ve never really had the pleasure of working with my brother. So, Megalith Financial was a SPAC that had launched, and it was very focused on, you know, as, you know, this SPAC market, it’s raising capital to be able to you know, identify an acquisition that makes sense. And then purchasing that and taking it in public through that vehicle. And so, Megalith had its own mandate that was very broad, but very focused on the FinTech space. And they looked at, I don’t know, 140, 150 deals. And really, you know, they were coming upon a point where we were also looking at strategic options for BMTX and what is the right next move for us. And we came in, you know, head-to-head and really at the right time, that made sense for us. Given that sort of perceived conflict of interest, Sam stepped away at the time that you know, any sort of conversation began with BMTX, and this is all publicly disclosed, because obviously we have to this.
And so, we were very excited about the opportunity of really the meeting of the minds and the timing of this because there was no intention behind us getting together. But it was just sort of the perfect timing and it worked out. But through that process of working with Megalith, you know, both Sam and Jay recused themselves from that process, there was an independent board of directors on both the Megalith side, as well as the Customers Bank side in negotiating that deal. There was independent legal counsel, independent investment bankers. And so, process was very, very meticulously done to make sure that it was done very well, and in the right way.
Julian Klymochko: And on the other side of the table at Megalith the SPAC, you mentioned Jay, now, was that another brother?
Luvleen Sidhu: No, Jay is my father.
Julian Klymochko: Jay. Oh, Jay is your father. Okay. Okay
Luvleen Sidhu: Then, so when we talk about a banking family, like that’s what we mean.
Julian Klymochko: Yeah. I was going to say your parents must be proud, but now I see where you get it from.
Luvleen Sidhu: Yeah, my father Jay has a long sort of legacy and is a veteran banker and he built Sovereign Bank.
Julian Klymochko: Right.
Luvleen Sidhu: Which was, you know, later purchased by Santander. And so, he built that from nothing into the 17th largest bank in the country. And he’s the chairman of Customers Bank,
Julian Klymochko: Right, that makes sense. So, you come from a banking family, so it’s not surprising where you ended up, but nonetheless accomplished a lot for being at such a young age. One last question on BMTX, the stock. Say an investor is, you know, keen on FinTech, wanting to invest in the space. What differentiates BM X from, you know, you mentioned SoFi, LendingClub, Varo, obviously some of these are public and investors can acquire their shares. I did notice in your investor presentation BMTX does seem to be trading at a discounted valuation.
Luvleen Sidhu: Yeah, so this is a two-part question. So, one is a competitive landscape and where I think our differentiation is, number one. I talked about our customer acquisition costs. That’s a huge one. It’s a huge one. So, when we talk to investors, they’re just so impressed by sort of the customer acquisition moat we were able to create in the higher education space and now with banking as a service, our cut acquisition cost is less than $10. And we’re seeing these Neobank spend, you know, 500 million to a billion a year on marketing.
Julian Klymochko: Wow.
Luvleen Sidhu: And investors are sort of scratching their head that how much time will it take, or if ever, will the CLV on those accounts sort of payback that CAC. And so, we’ve been really focused on how do you get low CAC in a profitable business model.
And so, I think number one, our ability to have created a way to do that is phenomenal and a differentiation. And I think number two is within the banking as a service space. And as if FinTech in general, it is the charter to become a FinTech bank and to vertically integrate with, with that charter. And I talked a little bit about all the expansive opportunities from earnings to new products and services, to even new lines of businesses that we’re not even doing today, all become open to us with that charter. And we are uniquely positioned for that charter because, you know, as I said, you know, we’re a team of bankers, right? We were born from a bank. So, this isn’t a bunch of technology, people that are trying to learn banking and going through this process, we are bankers that are becoming bankers again through charter. And so, I think that that positions us well, and differentiate us in this race, you could say to vertically integrate and for other FinTech’s to want to get a charter as well.
Julian Klymochko: That’s a really good point. I have seen many companies get into some trouble when they’re run by, you know, so-called tech bros without much of any financial or banking experience. And they have the move fast and break things, attitude. And the regulators in the financial sector generally are not a fan of that type of activity and end up unfortunately shutting them down. So, it does seem like the correct approach that taking at BM Technologies. And you seem well on your way. So lovely. I’d like to thank you for being on the show today. Super interesting. And it’s great to have siblings on the podcast and getting their opposing points of view. So, thank you very much.
Luvleen Sidhu: Thank you so much.
Julian Klymochko: All right. Wishing you the best of luck. Bye everybody.
Luvleen Sidhu: Thank you. Thanks Julian. Thanks Michael.
Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.
