BBVA takes write-down on Simple bank purchase (spoiler: it is not a problem)

Read full story in the new issue of Money Of The Future 2016\2017 report

BBVA Compass said Wednesday that it remains committed to its digital banking efforts despite another impairment charge on a 2014 acquisition that contributed to a 2 percent drop in fourth-quarter earnings.
As with most investments, return is delivered in the medium to long term,” the company said in an email.

BBVA Compass’ net income was $89.4 million for the fourth quarter, down 2 percent from $91.6 million during the same period in 2015. That drop is partly due to an impairment charge related to its purchase of Simple, an iconic digital bank without branches. This accounting move suggests the bank overpaid based on what Simple is currently earning. But it is not right conclusion for many reasons.

Excluding impairment charges, net income for the three-month period ending Dec. 31 was $149 million, up 37 percent from $109 million during the fourth quarter a year earlier. Net income for all of 2016 was $371.5 million, down 27 percent from 2015. Like many banks, BBVA Compass Bancshares was affected by the collapse in oil prices. But the fourth quarter showed improvements as nonperforming loans dropped from 1.91 percent of total loans during the third quarter to 1.63 percent at the end of the fourth quarter. The bank continued setting aside less money for problem loans. Provision for loans losses fell 42 percent to $37.6 million in the fourth quarter, down from $65.1 million in the third quarter. BBVA Compass has roughly 1,300 employees and more than 75 branches in the Houston region. “We are encouraged by the momentum of our results during the second half of the year, particularly with respect to revenue growth in the fourth quarter,” Onur Genç, president and CEO of BBVA Compass, said in a news release. Total revenue increased 5 percent year-over-year for the fourth quarter.

BBVA Compass Bancshares has taken impairment charges on Simple each year since the acquisition. The $60 million charge reported Wednesday brings the total to $89.5 million. Acquiring technology companies can have challenges. Often those companies are expected to produce value in the future, but there’s little current cash flow and earnings.

John Heasley, executive vice president for the Texas Bankers Association, said banks are trying to keep abreast of new technologies as more non-bank lenders enter the traditional banking industry. “You’re seeing a lot of banks making exploratory purchases of some of these smaller startups,” he said. “I think some have been more successful than others.”

It’s too soon to tell if the purchase price of Simple will be justified or not, said Dan Bass, managing director of investment banking for bank advisory firm Performance Trust Capital Partners. “Long term, they may look back and say the price is great,” Bass said.

What banking giant BBVA had to say about Simple in its earnings call
BBVA Compass, the U.S. arm of the Spanish bank that owns Portland-based Simple, continued to write down the price it paid for the Portland startup, according to the bank’s most recent financial results. But, at the same time it called out growth for its Portland asset.

According to regulatory filings BBVA took similar charges totaling $17 million in 2015 and $12.5 million in 2014. That’s a total write-down of $89.5 million since the acquisition.

“BBVA continues to be a net investor in Simple,” said Simple co-founder and CEO Josh Reich in an email to the Business Journal. “This is a show of confidence in our continued success and ongoing growth. In 2017, we’ve scaled our team to about 350, added customers at the rate of a bank that has over 1,000 branches, and — most importantly — we’ve proven that our focus on customer experience is sustainable. It scales as we do.”

Back in 2014, BBVA paid $117 million to acquire Simple, an online bank that appeals to young people and operates without any physical branches. Since making that purchase, the bank has taken a goodwill impairment charge on its earnings. Goodwill is an accounting term that incorporates the value of intangible assets of an acquisition.

On a conference call with analysts, BBVA CEO Carlos Torres Vila said Simple “is growing very well” and adding more than 30,000 customers a month at what he described as a low cost of acquisition. He also highlighted the launch of Simple’s shared accounts as one of the company’s new product milestones for the fourth quarter.

In Portland, Simple continues to grow at its new Central Eastside headquarters. It has already leased another 50,000 square feet of space in a building under construction. It has more than a dozen job listings on its website ranging from engineering to marketing and product.

For Simple Digital Banking, The Mobile Relationship Is Key
Simple, which began its business as a debit card linked to a sophisticated phone app to help users track their spending and save into specific envelopes such as vacation, house or tattoo, plans to extend its reach now that is it part of BBVA Compass. The company uses machine learning to tell individuals how much is safe to spend before their next payment arrives.

“We are looking at a future with more products,” said Amy Dunn, communications specialist at Simple. “Our vision to start off with someone early in their financial life, and grow with them as they go to a more complicated financial life. We plan to grow with them through a digital medium.”

When it started, Simple’s accounts were held at FDIC-insured The Bancorp Bank. In 2014 Simple was acquired by the technologically aggressive Spanish bank, BBVA, whose U.S. subsidiary is BBVA Compass. Now Simple is moving accounts, and opening all new accounts, through the Compass Bank. The tie to BBVA Compass will also provide access to a wider range of banking services such as mortgages and other loans.

It plans to remain entirely digital, so pretty much the bank’s only point of contact with its customers is the phone interface, the app’s design gets a lot of attention. (Simple does have customer service available by phone but it tries to anticipate customer needs and offer proactive solutions digitally. For example, users were occasionally leaving their debit cards at bars and calling to cancel, and then perhaps the next day reactivate them, Simple added a feature that lets them turn off the card with their phone and reinstate it if they recover the card the next day.)

“We think a lot about building customer relationships, and the way we do it is first by listening to customers and then responding to them,” said Emmy Yardley, vice president of product at Simple. “We are building products for the way people think rather than the way banks work.”

The best example of this is Safe-to-Spend. Instead of just showing a balance and leaving the customer to calculate rent, utilities and other expenses coming up before the next payment period, Safe to Spend uses machine learning to understand a person’s salary, expenses and the amount she is setting aside in online envelopes for various goals.

“Safe-to-Spend has historically been a powerful tool for learning about money habits — our customers know what they can spend today without hurting themselves tomorrow,” said Dunn. “However, we hadn’t designed a feature that informs customers when they’re overspent their StS, which got very confusing. Customers would call in concerned that they had overdrafted or that their account was in the negative.”

Their total account was positive, but accounting for the money they were directing to their Goals, they were spending too much. The user could fix that by putting more money into the account or transfering some from Goals into their current account.

“Our Product team built in an ‘Overspent’ banner that will pop up to notify customers when this happens. They see the banner after logging in on the web, or on the Goals tab of the mobile app.” “After we launched it we actually received tweets and support messages from customers telling us how much they loved it,” Dunn said.

The bank’s apps, which are undergoing constant development and refinement, are grounded in data and research, said Yardley. “We don’t stop once we release a feature — we keep going, constantly making improvements and listening and responding the to the way people react.”

It offers Instant Help that recognizes common questions as they are being typed and offers up an answer as they are reaching out to customer service. Simple doesn’t engage a lot with customers on their mobiles — it aims to keep life, well, simple.

We think if we do a great job at building a relationship they are not looking at us so often,” Yardley said. “We have set them up to feel confident with their money. They get a notification when they swipe their card, and they don’t need to check in with us. Capitalizing on their eye balls is not Simple. The get real-time notifications of spending on their cards. For us, it is about keeping the relationship as streamlined as possible.”

Simple also takes advantage of a fully modern platform with cheap, cloud-based storage to offer fun features that customers can use as they wish. “We were one of their first to add notes and photo on each transaction. A customer might shoot the receipt to record a business expense, but we also have people capturing scenes and friends they went out with so they can remember the meal. Then it’s not just a transaction, but a memory.”

The concept of goals has proved popular with independent contractors and freelancers, people in the gig economy where income is very unpredictable. “We see a lot of people leveraging Goals as a way to protect their budget from themselves,”said Yardley. “If they don’t know when they are going to get paid, they can tuck some money into envelopes, the money is reserved or when it is needed. Some freelance sites have put it up as a life saver.”

Simple Competes On Customer Experience, Not Interest Rates

“BBVA gives us access to a much broader range of products that our customers wanted,” said Reich. “Our customers are saving money and the number one thing they are saving for is a down payment. Our end game is to offer mortgages, be a full service bank, but we definitely won’t do it this [2016] year.”

Reich and Enrique Gonzalez, who is the relationship manager for Simple from BBVA, said both sides are working to maintain Simple’s independence and culture. “We want to remain an independent company,” Reich explained. “We appreciate the resources they provide but we don’t want to die from their loving embraces. We want to cherry pick what is useful to us; we are doing more of the taking in this relationship.”

Gonzalez said his job is to make sure the bank doesn’t interfere with Simple. “BBVA is a large organization. We sometimes try to embrace and sometimes suffocate by holding them too tight. We worry about killing the good things we bring on board. We wanted to make sure we keep their independence and enhance the reasons we acquired the company. Simple represents many of the things that excite BBVA about the future of banking — design thinking customer centricity and product innovation.”

BBVA has built significant technology internally and has developed APIs that will enable companies to do cool things, Reich said. “We are the first real user of that open platform.”

The process is a little incestuous. Shamir Karkal, co-founder of Simple, has been hired by BBVA to head up the bank’s open API. In a blog post on the bank’s Web site Karkal admitted his moves puzzled people — why would be leave a fast-growing fintech company to work at a bank. “Of course the acquisition made me familiar with the parent company, but the real reason I joined BBVA was the opportunity to build an Open API platform. To explain what that means, I frequently use the shorthand ‘AWS of banking’…BBVA has a huge opportunity to do the same — open up our core platform and services, in turn enabling others to build companies on top of these…”

Reich won’t go into specifics on Simple’s growth, but he did say that if it were a traditional bank it would have needed 850 branches and 6,000 branch employees to support the number of customers it has now. “We are investing in head count for growth, but we have 200 to 250 people. Our hypothesis is that there is a different way to grow the banking business. The traditional way is through the price mechanism. They all ended up doing the same thing — free toasters, sign-up bonuses, introductory interest rates, branch proximity, marketing spend — it has always been linear. What we do to grow is invest in the user experience, primarily delivered by the Web. If it works great for 1,000 people it doesn’t cost us 10X to deliver the experience to 10,000. We’ve made a big investment in the first order costs of developing technology and in our model.”

Gonzalez said that Simple’s success grows out of its culture. “The talent and technology would be difficult to replicate. A high percentage of the people are engineers” or have strong technology backgrounds, he added, and they all work together. “When I joined here one and a half years ago, one thing that struck me then and still calls my attention is that when you first walk in it is hard to tell what area someone is in — product or engineering. It has a strong culture without silos. Here it is very cooperative [between business and technology] to make something that works beautifully. The confluence between culture and the drive for innovation makes a helluva difference.”

BBVA people are curious about Simple, sometimes too curious he added. “I turn down 75 percent of the requests to visit the Simple office.

Simple has great visuals on its Web site and offers ways for users to divide up their savings and see the results on the phone as the specific accounts they have chosen, such as vacation or home. A pretty Web site is nice, said Reich. “I don’t care how pretty you make your Web site, if you hit customers with a $35 overdraft fee they are not going to feel good about your brand.”

“Our customers love our business model,” said Reich. “We don’t want to have an adversarial relationship. It’s a strategic issue and not a lot of people get this. Our hypothesis is that the user experience is a competitive advantage for customer acquisition.”

Although Simple avoids defining itself as a millennial platform — its oldest customer is 94 — its Web site is millennial folksy with advice on roasting your own coffee (It is based on Portland, after all, at the southern end of the Great Northwest caffeine trail). The site also features, a 20-something musician saving to produce her second album. The savings goals suggestion on the Simple site include a tattoo, student loans, transportation (illustrated by a bike), restaurants and giving. But it is not aiming at a niche market. Reich said Simple plans to become one of the largest banks in America.

Reich said: “We are going to compete on experience, and the interest rate is some of that. Price mechanism is not our core competence or strategy. Through our Safe To Spend and goals, our customers are able to save money they didn’t think they could. If I can save $100 and get a medium interest rate, that is better than having no money at a high interest rate. Customers end up with a higher savings rate on Simple.” Banks that compete on interest rates build an internal a culture of accounting, finance, risk. They view customers as homo economicus and then they go out and market on on rates and numbers because that is what they know, he said. “Simple believes it is possible to build a financial company that is good for the consumer and does well for the business. That is considered normal in other industries.”

SoFi buys Zenbanx to offer banking and money transfer services to its users
Online lending firm SoFi announced today that it has acquired Zenbanx, a startup that offers banking, debit, payments and money transfer services to users online and through a mobile app.

The combination of the two will allow SoFi to move deeper into the financial lives of its customers. While today it focuses on student-loan refinancing, mortgages and personal loans, integrating Zenbanx will allow it to provide an alternative to the traditional checking and deposit services most of SoFi’s customers today get from banks like Bank of America, Citi or Chase.

Zenbanx offers a variety of banking services, including savings and debit, money transfer and bill payment, and the ability to deposit or hold money in up to nine currencies. The company was founded by Arkadi Kuhlmann, who previously served as CEO of online bank ING Direct, which was acquired by Capital One in 2011.

The deal shows how SoFi is thinking about new ways to get customers hooked on its services. The company has explored the possibility of applying for its own banking charter and the company explored the acquisition of a credit-card startup last year.

Terms of the deal were not disclosed, but The Wall Street Journal has pegged the price of the acquisition as nearly $100 million in an all-stock deal. That’s consistent with the price BBVA paid for online banking startup Simple back in 2014, and marks a significant investment for SoFi, which is still private but has raised more than $1 billion in private funding.

It also shows how strategically important SoFi believes banking will be to the future of its business. The problem faced by SoFi — and for any company looking to get into the consumer banking space — is that new bank charters are tough to come by due to heavy regulation in the banking industry. While more than 100 new bank charters were formed each year on average from 1990 to 2008, just seven were formed from 2008 to 2013 in the wake of the financial crisis.

As a result, most startups in the banking space end up partnering with regional and community banks that are digitally savvy and looking for new ways to boost deposits and assets under management. That process can take a long time to complete, however.

With this acquisition, SoFi won’t have to go through the headache of finding a banking partner and integrating with their services, as Zenbanx already has a partnership with WSFS Financial Corp. In addition to being a partner, WSFS was also a small strategic investor in Zenbanx — which means it will now also hold a (very small) stake in SoFi.

The hope is that SoFi will be able to leverage its existing user base and marketing muscle to get people signed up for banking services, something most new banking startups struggle with. And by offering banking on top of its loan and financing offerings, it will have a deeper — and stickier — relationship with users.

SoFi’s investors include SoftBank, Third Point Ventures, Wellington Management, Institutional Venture Partners (IVP), Renren, Baseline Ventures and DCM Ventures.

Atom Bank has raised £100 million and will announce within weeks

British app-only bank Atom is set to announce an equity investment of close to £100 million ($125 million) in the next few weeks with support from its existing investors.
Chairman Anthony Thomson announced last August that the bank planned to raise £100 million in the first quarter of 2017. Thomson confirmed to Business Insider that Atom Bank will be announcing a funding round “of that order … in the next few weeks.” “To date, we’ve raised £135 million. We will just be announcing the closing of our next capital raise in the next few weeks,” Thompson told Business Insider.

Atom’s existing investors include hedge fund Toscafund, star City stock-picker Neil Woodford, and Spanish bank BBVA, Atom’s biggest shareholder. BBVA invested £45 million in Atom prior to launch, valuing it at £150 million.

“We’ve been well supported by our existing shareholders,” Thomson said, declining to name specific investors in the round. Thompson said last June’s vote for Britain to exit the European Union has not affected funding efforts.

Atom is one of a number of app-only, digital banks that have started up in the UK over the last 18 months. Others include Monzo, Starling, Tandem, and Tide.

“At launch, we raised more money than any other bank in the UK had raised to launch,” he said. “That includes my previous bank. As of today, I think I’m right in saying we have raised more money than all of the other digital banks put together. We have the capital to build a substantial bank.”

Thomson added that Atom plans to raise another £100 million towards the end of next year before pursuing a public listing.

“We always said in our plans that we would have another capital raise towards the end of 2018 and that would be the last before an IPO. We talked about raising roughly £100 million towards the end of next year.”

Prior to helping set up Atom, Thomson helped to run Metro Bank, a startup bank in the UK pursuing growth through a branch network. Metro’s founder Vernon Hill told Business Insider he thinks app-only banks are “all hype” and can’t succeed.

Addressing his former business partner’s criticism, Thomson told BI: “We have consumer deposits, we’re growing our business loans, we’ve issued more mortgages than I recall we did in Metro Bank in its first year. We’re off to a good start.

“If one looks at the data, bank branch transactions declined 40% in the last 5 years and the rate of pace of decline is increasing. Telephony as a means of banking is in decline and last year for the first time ever, fixed desktop internet banking declined, admitted only by 2%. The explosive growth was in app-based transactions.”

He added: “Opening a bank today with branches would be like BT putting telephone kiosks back on the high street. The world’s just moved on.”

Atom launched to the UK public last year with a highly attractive fixed savings product that offers upwards of 2% interest, which has helped the bank attracted over £100 million in deposits. Thomson said Atom can afford to offer this high-interest product to customers “indefinitely.”

“One of the underpinnings of a bank that’s based on mobile devices, particularly one that’s based as we are in the North East, is we are a very, very low cost model,” he said. “We don’t have legacy branch networks, we don’t have legacy IT platforms, we don’t have legacy balance sheet or regulatory issues.

“A typical high street bank will have a cost to income ratio of around 60%. We, as a mature business, will have a cost/income ratio of under 30%. That means we can provide better value to our customers.”

Atom currently only offers savings and mortgage products to consumers but Thomson says the bank will launch current accounts in the second half of 2017.

Atom Bank made a loss of £22.5 million last year on income of £46,000. Thomson said it will take the bank three years to break even.

Read full story in the new issue of Money Of The Future 2016\2017 report

Life.SREDA VC invested in several neobanks already: Simple (exit), Moven (exit, secondary), Fidor (exit), Rocketbank (exit), YOLOpay, — and in Anthemis Group (exit, secondary), early investor in Simple, Moven, Fidor, Atom bank.