GBank Financial Holdings (GBFH)
A Game-Changing Fintech Hidden Within a Community Bank
September 19, 2024
This memo is for informational purposes only and should not be considered investment advice. Please consult a licensed financial professional before making any investment decisions.
GBank (GBFH) Investment Summary
The Bank
GBank (GBFH) is a Las Vegas-based community bank founded in 2007 by Ed Nigro, its 82-year-old executive chairman. Ed’s career spans real estate development and casino management, with deep roots in Las Vegas. In 2013, Ed and the Board promoted Ryan Sullivan from GBank (Bank of George at the time) CFO to CEO. Their combined expertise has led GBank to focus on local small businesses and to become a nationally ranked SBA lender, primarily serving economy roadside hotel chains.
In 2014, Ed Nigro and Hanan Sabri co-founded Bank Card Services (BCS), a sister company to GBank. Initially, BCS delivered the sponsor bank for Sightline Payments, a fast-growing gaming payments solution. However, Sightline faced challenges after VISA and Mastercard changed the transaction merchant code, restricting gaming-related credit card transactions. GBank saw an opportunity and launched its own gaming-centric VISA credit card. Though still scaling and currently weighing on the bank’s earnings, the program features high-quality, active cardholders. Management expects profitability by Q1 2025, with the program soon expected to contribute meaningfully to GBank’s profitability and growth.
That’s the bank: a well-managed, high-performing community bank, with an ROE of roughly 20% and growth rates of 20-25%, comfortably supporting its $260 million valuation and 2.5x price-to-book multiple. If GBFH were just a bank story, shareholders would do well. But there’s much more to it.
The Oregon Lottery and BCS’s Pooled Player Account (PPA)
In 2018, the Oregon Lottery sought to expand into sports betting but faced regulatory restrictions on holding residents' funds on its balance sheet. BCS solved this problem by creating the Pooled Player Account (PPA). By opening a PPA at GBank, all of Oregon’s customers received individual For Benefit Of (FBO) custodial accounts. Every transaction —gaming transactions, settlements, reserves—between the state and its customers was processed entirely within GBank, based in Nevada. Ed and Hanan recognized the account architecture’s broader potential and moved to protect it; BCS has since secured three patents.
Bankers might argue FBO accounts are nothing new—and they’d be right. But BCS’s account architecture is novel, with significant benefits. The key distinction: In traditional FBO accounts, customer funds are held in the company’s name, giving the company full control. With BCS’s PPA patented architecture, FBO accounts are structured so that funds are held in the bank’s name, for the benefit of the customer. The bank and the consumer retain full control.
This unique structure solves several major flaws in traditional FBO accounts:
Pooled Fund Risk: Traditional FBO accounts pool funds, creating legal ambiguities. BCS’s PPA eliminates this by giving each customer their own notational account.
Reconciliation Complexity: BCS automates real-time reconciliation, simplifying fund management.
Lack of Real-Time Visibility: Traditional FBO accounts delay access. BCS’s system allows instant funds visibility.
Inconsistent Consumer Protection: BCS’s account architecture gives customers direct ownership of sub-accounts, ensuring clearer legal standing.
Risk of Commingling: BCS’s account architecture keeps business and customer funds separate, reducing regulatory risks.
Slow Transfers: Traditional methods (ACH, wire transfers) are slow. Since PPA accounts are personal consumer accounts, RFP (Request for Payment) and RTP (Real-Time Payments) are possible at near-instant transfers, even after hours and on weekends.
I should point out that once I understood the significance of the patents, I hired the head of IP at Morris Manning & Martin, a leading law firm, to review them. Initially skeptical, my attorney assumed these were "business method" patents, notoriously hard to defend. However, after a deep dive with BCS’s attorneys, it became clear that the patents focus on account architecture, which was ultimately deemed novel, unique, and defensible.
Regulatory Scrutiny and FBO Accounts
While the PPA benefits are compelling on their own, they’re even more so in today’s regulatory environment. Digital wallets and FBO accounts are facing increasing scrutiny after collapses like Synapse, which left $265 million of customer funds inaccessible. The FDIC, Federal Reserve, OCC, and CFPB, are all advocating for stricter oversight of fintech and BaaS (Banking as a Service) models.
The FDIC is introducing real-time reconciliation rules to better track customer funds. The CFPB is expanding its oversight to digital wallets, ensuring they meet the same consumer protections as traditional banks. The Federal Reserve and OCC are tightening regulations on fund segregation and commingling. BCS’s unique account architecture and real-time reconciliation system already comply with these standards, giving it a clear advantage.
A Use-Case: The Casino Management System Opportunity
A new BCS customer is a casino management system (CMS) provider integrated with 140,000 slot machines nationwide. Todd Nigro, Ed’s son, has spearheaded the development of technology that will link the gaming operators CMS directly to the PPA. The customer was highly impressed by the demo of Todd’s app, and fully appreciates the unmatched advantages offered by BCS - instant fund transfers, FDIC insurance, and real-time tracking—unavailable elsewhere in gaming.
To fully appreciate this opportunity, it’s crucial to understand the current state of payments in the slot machine industry. Most gaming operators still rely on physical receipts with barcodes, and existing digital wallet solutions are buggy and unreliable. Todd’s solution, powered by BCS’s PPA architecture and instant consumer RTP/RFP payments, is a game changer. The ability to offer seamless, real-time payments between players and gaming operators solves a key pain point in the industry. It’s difficult to imagine that other CMS providers won’t want to integrate such a best-in-class capability, given the clear advantages over outdated methods.
GBank projects that for every 100 slot machines linked to PPA, approximately $2.5 million in daily deposits will be generated. Onboarding just 10,000 of this customer’s 140,000 machines could add $250 million in non-interest-bearing deposits to GBank. If the customer integrates half of their slot machines, GBank would gain an additional $1.5 billion in deposits, potentially earning $30 million in pre-tax income by placing these excess deposits with other banks. This would more than double GBFH’s current EPS, and that’s just one customer.
Expansion Beyond Gaming: Pooled Consumer Account (PCA)
The PCA (a second patent) is similar to the PPA and is the same account architecture for use-cases outside of gaming. And while GBank and BCS are initially focused on gaming, where regulatory oversight is already established, the PPA/PCA model’s potential extends far beyond the sector. Increasing regulatory scrutiny in digital wallets, and companies holding consumer funds without adequate protections presents significant opportunities for BCS’s PPM/PCA account architecture.
Digital wallets like PayPal and Venmo, which hold vast sums of consumer funds, are ideal candidates for this solution. A recent Wall Street Journal article highlighted that Airbnb holds tens of billions in customer funds on its balance sheet. As oversight increases, BCS’s PPA/PCA offers a scalable, compliant solution to safeguard consumer funds, opening significant growth opportunity for both GBank and BCS.
Valuation Analysis: GBFH as a Fintech
The FBO and Banking-as-a-Service models are driving the digital finance transition, and GBank and BCS are well-positioned to capitalize. I have little visibility into GBank’s sales pipeline outside of the CMS customer datapoint. But based on the benefits of BCS’s proprietary account structure, increased regulatory oversite into digital wallet and FBO accounts, and the favorable economics that come with creating low-cost consumer deposits, it is not difficult to envision earnings from BCS generated deposits reaching $200 million and more, especially if the regulators become more active. I know that BCS is currently flooded with serious inquiries.
I view $200 million of BCS related earnings as a success but certainly not GBank’s best-case scenario. I’ll assume an earnings multiple of 15 (given its profitability and growth), which translates into $3 billion in additional value on top of today’s $260 million market cap. That’s a $250 share price. My valuation work is obviously crude, but the potential upside is clear.
GBank’s Relationship with BCS
BCS was founded by Ed and Hanan but was both funded and incubated by GBank. The two companies share significant overlap in ownership and Board membership. Ed’s clear intent is for GBank to capture the majority of BCS’s economic benefits, which is why GBank has twice attempted to acquire BCS. GBank Financial Holdings, Inc (GBFH) withdrew the first application with the Federal Reserve Bank as GBank was a less mature organization, and the second, more recent application, remains stalled in the FDIC’s lengthy approval process. Given the time demands, Ed and senior management decided to secure the maximum allowable stake of 32.9% in BCS and focus on business growth.
While GBank currently misses out on 67% of BCS’s licensing fees, the real value lies in the interest-free deposits BCS generates. We expect GBank to continue as the primary banking partner for BCS due to their close relationship and Ed’s commitment to maximizing shareholder value for GBank.
Conclusion
I’m not sure if Ed anticipated the regulatory onslaught that now seems imminent, but my time with him has made one thing clear: he’s deeply committed to doing banking the right way - protecting customers, even in digital environments, remains his top priority. If you believe regulatory headwinds are here to stay—or intensify—GBFH, in my view, is an incredibly compelling opportunity. Even without regulatory pressure, many companies, particularly in regulated industries, will be drawn to the security and convenience of BCS’s innovative account architecture.
GBFH offers the upside of a promising early-stage fintech, combined with the downside protection of a well-managed, high-performing community bank. With BCS’s PPA/PCA architecture inherently addressing both regulatory concerns and consumer safety, GBFH is well-positioned to capture significant market share in digital wallets and gaming. In terms of risk-adjusted returns, GBFH ranks among the best investment opportunities I’ve encountered in my three decades of investing.