BM Technologies, Inc. (NYSE:BMTX) is among the largest digital banking platforms and Banking-as-a-Service (BaaS) providers in the country, offering state-of-the-art high-tech digital banking and disbursement services to consumers and students nationwide. The company has undergone a remarkable journey, evolving from its roots as a wholly-owned subsidiary of Customers Bank to an independent fintech powerhouse serving millions of customers.
Business Overview and History: BM Technologies, formerly known as BankMobile, was incorporated in May 2016 as a subsidiary of Customers Bank. In August 2020, the company entered into an agreement with Megalith Financial Acquisition Corporation, a special purpose acquisition company, to become an independent entity. The divestiture transaction was completed on January 4, 2021, marking a new chapter in the company's history as BM Technologies, Inc.
BMTX's fintech business model leverages its BaaS partnerships and university relationships to achieve high-volume, low-cost customer acquisition in its Higher Education and BaaS segments. The company's primary revenue sources include interchange and card revenue, servicing fees, account fees, and university fees, with the majority of revenues driven by customer activity such as deposits, spending, and transactions.
BMTX does not hold a banking charter, but rather facilitates deposits and banking services between customers and its partner banks, Customers Bank and First Carolina Bank, which are Federal Deposit Insurance Corporation (FDIC) insured institutions. The partner banks hold the FDIC-insured deposits that BMTX sources and services, and are the issuing banks on BMTX's debit cards. The partner banks pay BMTX a servicing fee for the deposits generated and pass through interchange income earned from debit card transactions and account fees.
Financial Performance and Ratios: In the latest reported quarter (Q2 2024), BMTX generated operating revenues of $12.5 million, which was in line with the prior year's quarter, representing a slight year-over-year decrease of 0.8%. The company's core EBITDA for Q2 2024 was a loss of $880,000, a slight improvement compared to a loss of $906,000 in the same period last year. As the second quarter is generally the weakest for the company's Higher Education business, BMTX anticipates delivering positive core EBITDA for the full-year 2024.
Looking at the most recent fiscal year (2023), BMTX reported revenue of $55.25 million and a net loss of $17.33 million. The company generated operating cash flow of $1.53 million and free cash flow of -$4.35 million in 2023.
Liquidity: BMTX's liquidity position remains strong, with $12.5 million in cash and cash equivalents and no debt as of June 30, 2024. The company's current ratio stands at 1.02, indicating a solid ability to meet its short-term obligations. The quick ratio is also 1.02, further confirming the company's liquidity strength. However, the company's net profit margin of -20.6% and return on assets of -25.0% reflect the challenges it has faced in recent years. The debt-to-equity ratio is -0.21, which is negative due to the company's net debt position.
Revenue Streams and Performance: BMTX's revenue is primarily derived from four main sources:
1. Interchange and Card Revenue: This segment saw significant growth, increasing by 57% in Q2 2024 compared to the prior year period. The growth was primarily driven by a change to a partner bank with Durbin-exempt interchange rates for the Higher Education business.
2. Servicing Fees: These fees decreased by 11% in Q2 2024 compared to the prior year period, driven by lower deposit balances in the BaaS business. However, for the six months ended June 30, 2024, servicing fees increased by 11% compared to the prior year period, driven by higher Fed Funds rates and higher deposit yields.
3. Account Fees: These transaction-based charges on customer accounts decreased by 5% in Q2 2024 compared to the prior year period.
4. University Fees: Earned from disbursement activity and subscription services for Higher Education institution clients, these fees increased by 7% in both Q2 2024 and the first half of 2024 compared to the prior year periods.
Additionally, BMTX's other revenue, which includes maintenance and support services, decreased by 46% in Q2 2024 compared to the prior year period.
Transformation and Growth Initiatives: A key focus for BMTX in the second quarter of 2024 was the successful launch of its next-generation technology platform, which unlocks the company's ability to bring innovative products and services to market at an industry-leading pace. This significant investment has enabled BMTX to offer its student customers exciting new features, such as the cash back rewards engine introduced in July 2024. However, the implementation resulted in $1.6 million in one-time costs related to running dual platforms during the transition.
The cash back rewards program has already seen strong adoption, with 30% of active customers signing up for the service. This feature has resulted in over $20,000 in cash back value being put back in the pockets of BMTX's students, while also driving an increase of 1.4 more transactions per month for participating customers.
In addition to the cash back rewards, BMTX has also launched its Identity Verification (IDV) product, an innovative Software-as-a-Service solution that assists universities in mitigating fraud vulnerabilities during the student enrollment process. This offering has already been signed on by 15 universities, with a strong pipeline of additional clients expected through the remainder of the year.
These strategic initiatives, combined with BMTX's focus on enhancing the value proposition for its student customers, are expected to drive increased transaction and deposit volumes, and thereby improve the company's revenue potential.
Risks and Challenges: One of the key risks facing BMTX is the approaching expiration of its BaaS partnership in February 2025. In the current regulatory and interest rate environment, this business has been unprofitable for the company. In the event of a wind-down, BMTX believes it would become significantly more profitable, as the company shifts its focus to its higher-margin Higher Education business. Specifically, BMTX expects their pro forma core EBITDA to increase by at least $1 million per quarter on a run-rate basis if the BaaS business is wound down.
Another challenge for BMTX is the highly competitive nature of the digital banking and fintech space, with larger players and well-funded startups vying for market share. The company's ability to maintain its competitive edge and continue innovating its product offerings will be crucial to its long-term success.
Additionally, BMTX is subject to various regulations, including those from the Department of Education, due to its student disbursements business. Compliance with these regulations and any changes to the regulatory landscape could impact the company's operations and financial performance.
Future Outlook: Despite the challenges, BMTX remains optimistic about its future prospects. The company expects to deliver positive core EBITDA for the full-year 2024, with the upcoming fall peak season for the Higher Education business expected to contribute significantly to this goal. The company has also been receiving inbound interest for its business at values substantially higher than its current stock price, indicating potential for future strategic opportunities.
Conclusion: BM Technologies, Inc. (NYSE:BMTX) has demonstrated its resilience and adaptability in navigating the dynamic digital banking landscape. The company's strategic investments in its next-generation technology platform and innovative product offerings, such as the cash back rewards engine and IDV service, position it well for future growth.
While the impending expiration of the BaaS partnership and the competitive nature of the industry pose challenges, BMTX's focus on its higher-margin Higher Education business and its ability to deliver value-added services to its university and student customers present promising opportunities for the company to enhance its profitability and shareholder value in the years ahead. The potential wind-down of the unprofitable BaaS business could further improve the company's financial position, setting the stage for a more focused and profitable future.