Are partnerships with big banks worth the effort?

Hello!

Bill, a financial automation software provider for small and mid-sized businesses, has built a fantastic roster of financial institution partners. Thus, JPMorgan, Bank of America, Wells Fargo, and American Express rely on Bill’s white-label platform to support their client in automating invoice processing.

However, despite spending over a decade on building these relationships, Bill has very little to show for it. Financial institutions helped Bill acquire tens of thousands of SMEs as its customers, but these customers contributed less than 3% of the company’s revenue in 2023.

While one can see an amazing growth opportunity in increasing monetization of this customer segment, I now start to think that this effort might be a dead end. Bill monetizes its customers primarily through payment processing fees, and payment fees is not something that big banks would be willing to share.

Let me walk you through my thinking.

Jevgenijs

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Bill (NYSE: BILL), a financial automation software provider for small and mid-sized businesses, has a fantastic roster of financial institution partners: JPMorgan Chase, Bank of America, American Express, Wells Fargo, and PNC. Bill provides its financial institution partners with a white-label version of its platform, which seamlessly integrates with partners’ existing business banking services, and helps their clients automate invoicing and payment processes.

Bill spent more than ten years forming connections with big financial institutions, and now these partners bring in many clients. Thus, in Fiscal Q2 2024 alone (calendar Q4 2023), financial institutions helped Bill add 6,200 clients, bringing the total number of “shared clients” to over 72,000 customers. Excluding Divvy and Invoice2Go businesses, which Bill acquired in 2021, financial institutions helped acquire a third of all Bill’s clients (see the chart below).

The problem is… these clients generate very little revenue for Bill. Thus, in 2023, financial institution customers generated revenue of $32.6 million, or roughly 3% of the company’s subscription and transaction fees. In the same period, customers acquired directly or through accounting firms, generated revenue of $1 billion (excluding the float revenue). Naturally, the question is if a decade of investments into building partnerships with financial institutions was worth it.

Before I try to answer this question, let’s take a step back and look into how Bill makes money. It has three sources of revenue: 1) transaction fees, or fees that its customers pay for payment processing, 2) subscription fees, which are monthly fees for using Bill’s platform, and 3) float revenue, or the interest that the company earns on customer funds.

Bill charges $45-79 per user per month for its platform. In 2023, subscription fees for Bill’s platform contributed $223 million to the company’s top line. In addition, in 2021, Bill acquired Invoice2Go, an invoicing and expense-tracking solution, which brought in an additional $36 million in revenue.

However, the majority of revenue comes from transaction fees, or fees for processing payments. Thus, in 2023, Bill’s platform generated $365 million in transaction fees. In addition, the company’s Divvy (now called Spend & Expense) and Invoice2Go businesses generated $414 million in transaction fees. On the company level, transaction fees contributed 65% of the company’s 2023 total revenue.

I would also argue, that the company’s float revenue, or the interest that Bill earns by investing customer balances into short-term financial instruments, should be credited to its payment processing capabilities. After all, customers would not hold funds with Bill (or rather its banking partners) if they couldn’t make (or receive) payments using Bill’s platform. In 2023, Bill earned $153 million in float revenue, which represented 13% of the company’s total revenue. So Bill is one of those software companies, that makes most of its revenue from financial services.

Getting back to Bill’s financial institution partners…The lack of revenue generated by financial institution clients comes down to them not using Bill’s payment capabilities. As you can see in the chart below, in 2023, financial institution customers contributed just $22 billion, or 8.6%, to Bill’s payment volume. As a reminder, financial institution customers represented 1/3 of Bill’s customers.

Per Bill's management comments, most of the company’s financial institution partners offered only ACH and check payments to the customers using Bill’s white-labeled platform. Thus, in addition to financial institution customers making relatively few payments (compared to Bill’s direct customers), they also use the products with the lowest take rate (Bill’s average take rate is 0.14%, take rate on card payments is 2.9%).

As an optimist, I always thought of Bill’s partnerships with financial institutions as a growth opportunity. My thinking was that over time, financial institution customers will adopt Bill’s payment capabilities, and will start generating similar average revenue to the directly acquired customers. However, on the latest earnings call, Bill announced that its largest partner, Bank of America, started “evolving their firm-wide payment strategy, and that evolution will impact the solutions they offer to their existing customers.”

Bill has been co-operating with Bank of America to serve the bank’s new small business customers. However, the endgame has always been to expand the solution to the millions of Bank America’s existing SME clients. Now this plan seems to be at risk, which made me revisit the question of whether Bill’s partnerships with big banks are an opportunity or a dead end.

If you think about it, charging fees for payment processing, and monetizing customer balances is the bread and butter of banks. Yes, they might be less capable of building streamlined processes and beautiful user interfaces than Bill. But there is no way they would be ready to give up on payment fees and free deposits. Especially, when we are talking about SMEs, which big banks rarely lend to.

So where does it leave Bill?… I think Bill will be fine, even if nothing ever materializes from partnerships with financial institutions. The company has two fantastic businesses, Bill's AR/AP management platform, and Divvy’s expense management solution. Despite the slowdown in SME spending, analysts still expect Bill to grow revenue by 17%, and EBITDA by 33% this fiscal year (which ends in June 2024), and deliver similar growth in the next fiscal year.

The company has finally completed the integration of Bill and Divvy platforms, so it can start cross-selling Divvy to Bill’s direct customers. At the time of the acquisition, the ambition was to, eventually, cross-sell Divvy to 50% of Bill’s direct clients. Cross-selling products is a difficult endeavor, but Jon Rettig, the company’s CFO, reiterated this cross-sell target while speaking at an investor conference in March 2024.

Bill is also leveraging the lending know-how from Divvy and the data on transactions, suppliers, and invoices, from Bill’s side, to expand its credit offering. Thus, according to the management’s comments, Bill is piloting a working capital solution. The company has originated “tens of thousands of loans, north of $100 million” during the initial beta, and sees strong demand for the new product both from buyers and suppliers that the company works with.

So, maybe…Bill doesn’t need those financial institutions. They can already help SMEs with invoice management and payments. They offer credit cards through Divvy and piloting a working capital solution. Looks like exactly what those financial institutions offer to SMEs, correct? Of course, financial institutions like Bank of America also provide current accounts, but Bill can easily solve this gap by partnering with smaller, Fintech-friendly banks. Let’s see how this evolves, but Bill a certainly a company worth following!

Cover image source: Bill

Disclaimer: Information contained in this newsletter is intended for educational and informational purposes only and should not be considered financial advice. You should do your own research or seek professional advice before making any investment decisions.