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Why the BBVA Simple Bank Deal is Extraordinary


I was on vacation when the Simple deal went down last week. So, today I read the 25 or so unique articles published Thursday and Friday on BBVA’s $117 million acquisition of Simple. Of the bunch, only Ron Shevlin dove under the covers as to why a global financial powerhouse plunked down nine figures for a relatively small prepaid debit card portfolio. His take: the brand.

I’ve been a huge Simple junkie, publishing 22 posts on the startup in the past four years. And I was delighted it chose to make its first industry appearance at Finovate in Fall 2011 (video here). But I’m even more excited about this deal, which was remarkable for several reasons:
  • Other than ING’s regulator-mandated divestiture of its U.S. unit to Capital One, this is the first major retail digital bank acquisition in the United States EVER. Yes, EVER.  Since the dawn of what we called “Internet-only” banks in Oct 1995 (note 1), not a single one has been acquired at other than a fire sale (e.g., ING Direct purchase of Netbank after it was closed by the FDIC), (see note 2). 
  • The revenue multiple was off the charts. Simple says it processed $1.7 billion last year. Assuming this was all debit card volume and they split the revenues relatively equally with their processor, The Bancorp Bank (which is Durbin-exempt, note 3), the startup generated somewhat less than $10 million in revenues last year. That’s not at all bad for a bank in its first full year of business. Founder Josh Reich says they were on a path to profitability, not a small feat for a tech company with nearly 100 employees.
  • Banks are usually acquired for some premium of their assets and deposits. Simple had zero financial assets since it only collected deposits. We don’t know their deposit totals, but with an average of 65,000 customers (note 4) making $1.7 billion in purchases, that means each spent about $2,000 per month. Let’s say that each of its 100,000 accounts held double that on average ($4,000), the bank had around $400 mil in deposits at year-end 2013. I’m not sure what banks are paying for demand deposits these days, but it’s not 25%.
  • Simple raised $18 mil since inception, but we don’t know at what valuation. But with the $117 million cash deal, it appears that investors were rewarded adequately. It was no 10x exit, but it could have been 2x to 3x, or more.
  • BBVA paid almost $1,200 per customer. Given that Simple’s entire funding amount of $18 mil had already generated 100,000 customers ($180 per customer), clearly acquiring this customer base was not the main driver of the valuation.
What it means:
  • Moven, Holvi, Tink, Numbrs, and other digital-only banks will see a bump in their valuations. 
  • Y-Combinator and other accelerators will see a surge in retail banking startups (which leads to more great Finovate presenters)
  • Simple under BBVA will be a fantastic case study with plenty of material for fintech bloggers and analysts (and especially blogging analysts)
  • There will be more legacy financial institutions following this strategy (clearly, there were other bidders to push the valuation above $100 million); however, don’t expect a stampede. Two or three acquisitions in 18 years is hardly a trend.
  • BBVA could very well make Simple its ING Direct-like brand (“BBVA Simple”?) across multiple new international markets (hat-tip to Venture Beat for being the only tech blog to focus on the international opportunity).
  • At least for a few years, before the founding team scatters to new ventures, it will be useful to have a semi-autonomous unit in Portland building out the services.
Finally, I’ll need a new VC-backed retail banking startup to obsess over. Time to get my Moven card activated.
1. The first pure digital bank was Security First Network Bank (SFNB) which was dumped for $13 mil in 1998 after attracting $50 mil in deposits and $14 million in credit card receivables).

2. One could argue that E*Trade’s ill-fated purchase of Telebanc for $1.8 bil in 1998 qualifies, but Telebanc was primarily a direct bank built through the phone channel.
3. Interestingly, as part of BBVA, which is not exempt from Durbin price controls (as far as I can figure), Simple’s interchange rate will likely fall dramatically, making the revenue multiple much higher going forward.

4. The bank started the year with 30,000 accounts and now has 100,000. So, assuming growth was even over the year, the average annual number of accounts = 65,000.
5. For more on pure-play digital banks, see our full Online Banking Report here (published in late 2011, subscription).