Neobank HMBradley pivots to B2B, shuts consumer bank

Founded in 2018 to serve the mass affluent, HMBradley is shutting its consumer business to focus on a new strategy that involves selling to banks, CEO Zach Bruhnke told customers Wednesday.

Why it matters: The company's decision to exit its primary business sums up the challenges consumer-focused neobanks face.

What's happening: The company began developing a B2B offering this year, armed with a previously unreported $13 million in funding. It was a down round, says Bruhnke, who confirmed it was less than half its last valuation, which was $180 million.

• Castle Creek Capital Launchpad I, an early-stage joint fund backed by the community bank-focused private equity firm of the same name, led the round, raised over the summer.
• "We thought it was a great opportunity for HMBradley to build on top of headless banking cores for serving banks at community bank level and regional bank level, [considering what] HMBradley has built for its consumer facing business," says Ryan Gilbert, general partner at Launchpad Capital.

Details: As 2023 began, HMBradley was seeking a comeback for its consumer bank. But after the SVB-triggered banking crisis and the battle of deposit yields, the company failed to grow as quickly as expected, Bruhnke said.

• In the first quarter, Bruhnke estimated the business could hit $20 million in revenue by year-end. Now, the company expects to hit $11.5 million.
• "We just weren't seeing the growth numbers that we wanted to continue to see," he said.

Unlike most neobanks, HMBradley makes money from a partner bank by accruing more deposits, rather than through interchange. As a result, it pays less in yields than its partner bank.

• "So our product had to be that much better. For a lot of consumers, it was. And for a lot of consumers, it wasn't. That's the reality of it," Bruhnke said.
• Like many neobanks, HMBradley did not lend off deposits, which also eliminated a core chunk of revenue. Traditional banks, meanwhile, could higher deposit yields to customers, due to their charters.

What they're saying: "As we took this [B2B offering] more seriously, it just became obvious that we were gonna produce more revenue on the B2B side," says Bruhnke. "At some point, you've got to look at the mirror and say, OK, well, one of these is going to do better than the other. Right?"

Of note: The company sought to sell the consumer banking business, along with the brand, but did not land a deal.

How it will work: The new offering will sit atop so-called headless core banking systems like Finxact or Thought Machine.

• Applications could include tamping down on ACH and wire fraud using virtual account numbers. The firm plans to serve banks of all sizes.
• HMBradley currently does not earn revenue from this B2B line of business, nor does it have contracts in place, but it does have two letters of intent.