BankMobile co-founder Luvleen Sidhu discusses how her firm's “Bank-as-a-Service” model enables it to acquire customers at higher volumes and lower costs than traditional banks.

Fintechs are growing rapidly. Their range of offerings and number of customers are expanding as they target the pain points that clients experience with traditional banks. A case in point: BankMobile, a five-year-old mobile-first bank that operates as the digital banking division of Customers Bank of Phoenixville, Arizona. Its “Bank-as-a-Service” model enables it to acquire customers at higher volumes and lower costs than traditional banks. This helps pay higher interest on customer deposits than traditional banks do.

Luvleen Sidhu, co-founder, president and chief strategy officer of BankMobile spoke recently with Knowledge at Wharton about its business model. (Listen to the podcast at the top of this page.) The bank is active in the student loan market and in a “white label” partnership with T-Mobile, where it leverages the latter’s brand; it plans several more white-label partnerships. BankMobile is also helping shift the gender bias in banking and financial services by bringing parity in pay and status for its women executives.

An edited transcript of the conversation follows.

Knowledge at Wharton: As you look at the banking and fintech landscape as we approach the end of 2019 and look forward to 2020, what are some of the most interesting trends you see going on in fintech?

Luvleen Sidhu: It’s amazing to me how much fintech has grown, even since we last spoke at the beginning of 2018. I looked at a stat recently where four years ago, fintechs [accounted for] probably 5% of the market for personal loans. Today, more than 45% of personal loans are originating through fintechs. It’s clear that a shift has taken place, and fintechs are gaining more momentum.

We’re seeing many of them diversify from one niche — Robinhood with brokerage, or SoFi with student refinance, or Square Cash (a payments service from Square). Many of these players want to evolve to have multiple touch points with consumers and not just the original niche that they started out with. You’re seeing many of them applying for bank charters, recognizing that a multi-product offering is probably the most compelling.

The regulatory environment in Europe has been ripe and open to disruption and digital banking, and a lot of the players that have been successful there are now entering the U.S. So, we’re seeing new competitors shaking things up, [such as] Monzo, Revolut, N26. [U.S. fintechs such as] Varo and Chime have also grown. There’s a lot of movement, a lot of potential, a lot of opportunity, and a lot of competition entering the market.

Knowledge at Wharton: What is driving this trend towards fintechs disrupting traditional banking?

Sidhu: Firstly, about 0.1% of the top banks have 50% of the assets. In the first half of this year, the big banks have been able to garner 50% of the growth and deposits. So they’re doing something right. They have the dollars to invest in technology, and they’re improving. People are seeing that, and they’re continuing to gain market share.

“It’s about fintechs being able to recognize that consumer pain points are still not being addressed. That’s why fintechs have seen the momentum they’re seeing.”

But the reality is that people are still dissatisfied. Traditional banks are still not meeting the table stakes of banking. Forget innovation; going back to the basics that I talked about five years ago when we started BankMobile, people aren’t being paid for their money. On average, a checking account provides 8 basis points of interest. Today with our T-Mobile account that we’ve launched, we give 4% interest. People are paying on average $10 a month on checking accounts. It’s close to $120, $130 a year in just checking account fees. That’s the national average. ATM fees are still going up, and people [have insufficient] access to ATMs. We have 55,000 ATMs. Bank of America, the largest bank, has about 18,000.

So it’s really about fintechs being able to recognize that consumer pain points are still not being addressed, and consumers responding, “Someone is listening to us. Someone is addressing our frustration. Someone is making this easier for me, more value-additive to me.” That’s why fintechs have seen the momentum they’re seeing.

Knowledge at Wharton: Fintech is a big field, with many different aspects to it. If you look forward to 2020, which areas are most ripe for rapid growth, and why?

Sidhu: Digital banking, for sure — because it’s amazing to me how many fintechs are applying for charters and how many neo-digital banks are entering the U.S. and trying to get partner banks or are entering or trying to get a charter. Many marketplace lenders are struggling. They’re having trouble accessing low-cost funding, and in being able to have a longer-term relationship with their customer [that is] more than just that one touch point. So, many of them are shifting to lending as a service and trying to help banks and being more of the back-end, or they’re going to try to partner with some of these neo-banks and consolidating some of their technologies.

We are going to see interesting things happening, in terms of consolidation between fintechs, and [them] being able to support more products together and having better customer acquisition together. The buzzwords of AI and machine learning continue to be there. Fraud management and cyber security continue to be huge [concerns].

No one has cracked the code for financial management, and being able to use data and machine learning to be able to proactively help people make better decisions in the moment. Many neo-banks have tried elements of it, but no one has fully succeeded. [New] players will try to solve the problem of helping people make better financial decisions.

Knowledge at Wharton: As more fintechs enter the space that traditional banks have been active in and the amount of lending goes up, do you think it adds any more elements of risk to the system? And if so, how do you think those could be managed?

Sidhu: Many of these fintechs and marketplace lenders haven’t gone through a downturn, so it’s going to be interesting to see how they perform because they profess that their models are so unique that they’ve diversified and that they are able to sustain themselves within a recessionary period. There are indications that that time may come. We’ve been in the longest economic growth span in a long time. We’re going to see in this downturn, as well, if artificial intelligence and machine learning that many alternative lenders are using are really paying off, or is FICO going to remain the central point of how we assess riskiness of customers? We’re going to learn a lot in the next two years.

Knowledge at Wharton: Your comments about what’s happening in the fintech industry today bring me back to the launch of BankMobile in January, 2015. You said at the time that the bank had 1.8 million customers, and your plan was to have 5 million in about five to seven years. Since the bank’s fifth birthday is coming up next January, how much progress you have made towards the goal?

Sidhu: Our model and our goals have not changed. We’re all about: How do we acquire customers at high volumes and at low cost? When we spoke to you, our only vertical was in the higher education space. We continue to do well in that space and acquire about 300,000 new customers a year in the student segment.

We launched in April our next white label partner, which is T-Mobile, and we launched a product called T-Mobile Money. In our opinion, it’s the most successful digital bank launch, or de novo digital bank launch, in history. We have a strong pipeline for other white labels beyond T-Mobile and beyond higher education in various industry verticals. Our goal of 5 million customers over the next five years continues to be the same.

Knowledge at Wharton: You said this is the most successful launch. What were some of the factors that went into making it successful? What could other banks learn from what you have been able to accomplish?

Sidhu: What makes it successful is the growth that we’re seeing, the conversion that we’re seeing to primary banking relationships, the balances we’re seeing, and the increasing trend we’re seeing in point-of-sale transactions. All of these add up to our revenue drivers.

So, what can others learn? Our model is [about] how you get those in non-financial services business to be able to offer financial services. We’ve built the technology platform and the infrastructure to do that. Now, our goal is to find brands that have captive audiences, millions of customers, brand equity and emotional connection with their customers. And, find a way to add financial services as part of that.

“No one has cracked the code for financial management, and being able to use data and machine learning to be able to proactively help people make better decisions in the moment.”

When a brand that you already love or you respect or that you transact with daily adds in a financial services element, you’ve already built in that emotional connection. I think that’s what helps drive some of the success that we’re seeing at T-Mobile and overall in our white label model.

Knowledge at Wharton: You have talked earlier of using a customer-centric strategy to build your business. Could you explain how that has played a role in building BankMobile’s operations and growth?

Sidhu: You’re not going to gain customers unless you have a product that appeals to or addresses their pain points. That’s why we came into business. Our T-Mobile money account is offering 4% interest on balances up to $3,000 – that’s 50 times more than what the average checking account is offering.

Americans are being charged $130 a year in just checking account fees. So, offering a no-fee account is already a huge plus. Americans are being charged $34 billion a year in overdraft fees, so being able to give them access to free overdraft up to $50 every calendar month is already addressing a pain point. That’s what I mean by customer-centric.

If you’re opening a wireless account in a T-Mobile store, we do an eligibility check for a bank account, and we know if you’re going to pass the on-boarding process. If you’re interested in opening an account, the rep can give you a link to open that bank account. You go through the sign-up process, and it pre-fills a lot of the information for you. So, in three clicks, you’ve opened up an account. That’s the seamlessness with which you need to create the experience.

In our student business, this might be their first account. You want to be able to reward them, not just for good financial behavior, but [also for] good academic behavior. Our Passport program rewards them for both of those with discounts, et cetera.

Knowledge at Wharton: Is that what you mean when you refer to what you do as “banking-as-a-service?” Or does that apply specifically to a certain aspect of your activities?

Sidhu: “Banking-as-a-Service” is [about] using our technology platform to allow others to get into banking. For us, it allows for high-volume acquisition of customers at very low cost. A traditional bank might acquire them at $300 to $500 [each]. We’re acquiring them at less than $10. In higher education, we solve a pain point for colleges and universities, which is sending payments between themselves and the students. We interject the bank account in there, and the students have a choice.

Knowledge at Wharton: You’re also in the student loan refinance area now. What is the opportunity you saw there and how did you address it?

Sidhu: We have a “customer-for-life” strategy. In both our products, we start with a checking account. But then we want to be able to grow with the customer. We offer a savings account, student refinance, personal loans and credit cards, and we continue to expand our offering because that’s how you create a customer-for-life strategy.

Specifically, student refinance is an obvious place to play. A lot of students have debt, and being able to provide a product where they can refinance their debt at a lower rate and make payments that are easier over a fixed period of time.

Knowledge at Wharton: Clearly, BankMobile has come a long way. If you think back on the past five years, what has been the biggest leadership challenge you have faced? How did you deal with it? What did you learn from it?

Sidhu: The toughest challenge was when we launched as a direct-to-consumer strategy in 2015. I had a goal [to address] consumer pain points, and create a consumer brand around banking. I found the market wasn’t ready yet for direct-to-consumer [offerings].

We still grew relatively fast in our first year. We had about 100,000 accounts, but they were small balance accounts, and there was a decent amount of fraud in the accounts. When we started off we wanted to have a better product than what exists today – more affordable, easier to use, and also a net income and growth model that’s equal to, if not better than, traditional banks. We realized in our first year that with small balance accounts, with the risk of fraud, we weren’t going to get net income and growth equal to, if not better than, traditional banks. So, we had to pivot.

“By giving visibility and opportunities for women in a small way, and just being outspoken as a representative of BankMobile, I hope I can inspire other women to enter this field.”

The leadership challenge was: “The business model we started out with is actually not working. Now what do we do?” Either you go out of business eventually, or you figure out how to pivot. That was a turning point for us. It was about how we could take this challenge and find an opportunity. We had a relationship with a company that was in the higher education space, and that’s how the idea came about of using those relationships as a customer-acquisition strategy for bank accounts. That’s how we got started in our B-to-B-to-C [business-to-business-to-consumer] strategy.

Knowledge at Wharton: Do women in banking and fintech face unique challenges compared to men? What is BankMobile doing to help combat these kinds of challenges?

Sidhu: Clearly, women are a minority in this field, but it’s amazing to me how many women are actually hold powerful positions in banking. We were a disruptor in this business. We wanted to be a mover and shaker in banking. One thing about me is that being a young woman, and being a minority, aligns well with the disruptor model. I almost felt there was congruence between the business model and what I represented.

Knowledge at Wharton: How so?

Sidhu: There aren’t that many women in financial services. So when you have a disruptive company come out and you have someone that doesn’t look, feel, and smell like what typically is, there’s congruence there, right? You’re disrupting what is typically the leadership in fintech and financial services.

I just felt like I represented it well, and I thought there was a lot of congruence in that. Challenges continue to exist. The reality is the [number] of women in the S&P 500 C-suite is minimal. I think 2% of women-run companies are funded by VCs. We’re going to go out and raise capital this year, and to know those stats is disappointing.

I start my day with meditation and chanting. That is how you become strong. You become confident. You become more knowledgeable of the space. You read a lot. And you earn your way, and you earn your respect, and you pave your own way.

What am I doing for others? The income gap is very visible – 80 cents to the dollar for the lack of parity between men and women. I make sure that our women are paid equally, and I encourage them to speak up. I promote them. Most recently, we promoted the product head of one of our student products to CMO. (Regine Fiddler is the new chief marketing officer.) By giving visibility and opportunities for women in a small way, and just being outspoken as a representative of BankMobile, I hope I can inspire other women to enter this field.

Knowledge at Wharton: What could men do to be more collaborative in helping deal with these issues?

Sidhu: I think that [men could do] the same things that I’m doing as a woman. How do we ensure the income gap is not there? We give fairness to women and help them speak for themselves, because sometimes I think that in my own negotiations on salary, men are much more aggressive. Women should be asking for more. So, mentoring and giving women that voice and encouraging them to speak up is just [what men] should be doing.

Knowledge at Wharton: Since we are close to BankMobile’s fifth birthday, where would you like the bank to be on its 10th birthday?

Sidhu: Well, we’d better be at that 5 million mark the next time I speak to you. There are many non-financial services companies that want to enter financial services, whether that’s Apple and Marcus (the consumer banking product of Goldman Sachs), Amazon and someone else, or T-Mobile and us. There are many retailers, airlines and gig economy-focused companies [across] different verticals where the financial services aspect makes sense in their business model. And I hope that we have many more white labels to talk about next time.