Get 'Em While They're Young: Why BankMobile Sought Student Servicer

While digital-only "neobanks" have gained lots of attention for their technology and innovation, they often struggled to turn that hype into actual customers.

That's a major reason the $7.6 billion-asset Customers Bancorp of Wyomissing, Pa., signed a deal to acquire the student checking account and refund management disbursement businesses from Higher One Holdings of New Haven, Conn. The bank plans to link the acquired businesses to its neobank subsidiary BankMobile, with hopes of accelerating the growth and profitability of that platform.

There is a lot of inertia when it comes to customers actually switching banks; even if people want to leave their current bank they often don't want to deal with the hassle of changing direct deposits or automatic bill payments that are already set up, said Luvleen Sidhu, chief strategy and marketing officer with BankMobile. By acquiring the Higher One businesses, the bank is seeking to build relationships with college students who may not have deeply rooted banking relationships yet.

"For us, this is a customer acquisition strategy," said Sidhu. "It puts us in a great position. We have a four-year period to get [students] familiar with the BankMobile brand and turn them into lifetime customers. "

BankMobile recently announced it had reached the 100,000 customer mark since launching in January. It projects to have 2 million customers by July 2016, largely driven by the Higher One deal, which is set to close that month.

BankMobile's bottom line should benefit from managing money for students on more than 800 campuses, but turning those relationships with college students into lasting ones will be challenging, observers said.

It is "incredibly difficult from a strategy and execution perspective" for any bank to take college-age customers and "grow and change with them over the next 40 to 50 years," said Ron Shevlin, director of research for Cornerstone Advisors.

Sidhu acknowledged that the task of retaining customers long-term is going to be hard work, she said the move still represents a "great opportunity" for BankMobile to reach a whole new segment of consumers.

Customers will pay $42 million in cash for Higher One's disbursement business, which includes a service that streamlines the financial aid refund disbursement process for students. The deal also includes Higher One's OneAccount, a checking account that is insured by the Federal Deposit Insurance Corp. Customers already had a relationship with Higher One; it held about half of Higher One's deposit accounts. The deal does not include Higher One's eRefund and payments businesses.

"It seems to make sense strategically for them," said Sameer Gokhale, an analyst at Janney Montgomery Scott. "The world has changed rather significantly; millennials want digital banking. It's consistent with the market they want to reach and helps build a brand presence with this demographic."

Gokhale added that the acquisitions will help Customers increase its fee-based revenue. Most banks are "trying to figure out how to grow fee-based revenues, so it is only a positive in that regard," he said.

Higher One has also come under regulatory scrutiny in recent years; it was cited by the Fed and FDIC for allegedly used deceptive practices in misleading students with one of its products by omitting important information about fees, features and limitations of the product. On Wednesday, the FDIC announced a settlement with Higher One and WEX Bank for deceptive practices related to the marketing of debit accounts for college students. Higher One agreed to pay $2.23 million in civil money penalties and the companies were ordered to pay $31 million in restitution to 900,000 students.

Sidhu said Customers "proactively engaged" with regulators about the deal given Higher One's regulatory issues.

"We worked together with [the regulators] before moving forward," she said. "We know they had some issues, and they have been rectified or will be by the time we acquire" the businesses.

She added that BankMobile may look to rebrand the Higher One products in the future.

Frank Schiraldi, an analyst at Sandler O'Neill, said Higher One's regulatory issues are likely not a major concern for the deal's future, but he is worried that Higher One is getting smaller.

"The bigger concern is that the [Higher One] business has been shrinking," added Schiraldi. In October, the company reported its third-quarter revenue was down nearly 6% from a year earlier.

BankMobile is planning to alter the fee structure associated with the disbursement accounts in order to make them more enticing, Sidhu said. Besides hoping it will attract more customers, the change to the fee structure is also to tie the business to the neobank's mantra of cutting fees in banking. For instance, as part of its marketing, the company encourages its customers to use the hashtag #LiveFreeBankFree on social media.

"We'll be reducing [the fees] and aligning it more with our mission to make banking more affordable," Sidhu said.