Dive Brief:

• BM Technologies plans to acquire First Sound Bank, a Seattle-based community business bank, in an all-cash deal worth $23 million, the banking-as-a-service (BaaS) provider announced Monday.
• The combined entity will be named BMTX Bank and "will be a fintech-based bank focused on serving customers digitally nationwide," BM Technologies said in a press release. First Sound Bank, which has one branch in downtown Seattle, is expected to continue serving the greater Seattle market following the acquisition, the company said.
• "This is a thrilling milestone for BM Technologies, and is a major step forward in executing our vision to create a disruptive fintech bank," Luvleen Sidhu, BM Technologies' chair, CEO and founder,  told analysts Monday. Sidhu will lead BMTX Bank as chair and CEO, and will be directly responsible for digital banking initiatives, the company said. Marty Steele, First Sound Bank’s president and CEO, will lead the combined company’s community banking division and also serve as chief operating officer of BMTX Bank. The deal, which is subject to regulatory approvals, is expected to close in the second half of 2022.

Dive Insight:

Sidhu likened the proposed deal to strategies taken by fintechs such as Square, LendingClub, Varo Bank and SoFi, which have successfully obtained bank charters over the past several years. 

"Similar to these other fintechs, we believe this is a critical step in order to create a sustainable, profitable company with numerous growth opportunities in the future," she said.

During the analyst call, Sidhu listed several strategic and financial benefits to the deal, including the ability to combine its financial technology and proprietary BaaS expertise with a bank charter.

The deal will allow BM Technologies to accelerate its earnings power by supplementing fee-based income with net interest income, she said, adding the deal will also allow the company to offer new products and services over time, "which will also help us better attract, engage and retain customers and help us fulfill our customer-for-life strategy."

"This move enables us to become a fintech bank that can support other fintechs to come to market, similar to what Cross River, WebBank, MetaBank and a few other players are doing today," she said.

BM Technologies, formerly known as BankMobile, was incubated by Wyomissing, Pennsylvania-based Customers Bancorp for five years before it was acquired for $140 million by special-purpose acquisition company Megalith Financial Acquisition Corp. in August 2020. 

While under Customers’ umbrella, the fintech originally had a direct-to-consumer model before shifting to a business-to-business one in 2016, in light of growing competition from challenger banks.

Sidhu said the company’s previous connection to a bank will give it a competitive advantage over other fintechs seeking their own bank charters. 

"We were born within a bank and operated as a bank for six years prior to divesting as an independent fintech company, which provides us with a huge competitive advantage relative to other fintechs hoping to become a bank," she said. "We strongly believe a bank is the most profitable way for us to operate our model, versus a bank partner model where we need to share in revenues and have less control over our financial future."

Customers Bank has continued to hold BM Technologies’ customer deposits following the spinout, but those deposits will be moving over to the new entity’s balance sheet over time, Sidhu said.

BM Technologies is open to exploring additional strategic M&A opportunities, Sidhu said, and plans to expand its product offering to include advice, crypto, investing and insurance over the next six to 18 months. The company plans to take a "build, buy, partner" approach to adding the new products and services to its digital banking platform, Sidhu said. 

"As a local bank, we remain committed to our community and are excited about the opportunity to leverage BMTX’s innovative digital banking technology, Banking-as-a-Service business model, low-cost deposit funding, and better access to the capital markets in order to scale our [Small Business Administration], commercial and private banking, mortgage, and other business lines," Steele said in a statement Monday. "Together we are looking forward to this partnership to create a nationwide deposit gathering and lending platform with the power to deliver an integrated customer experience at the highest level."