BILL Holdings just posted another quarter of strong profitable growth, exceeding analysts' expectations and painting a picture of resilience in the face of a challenging macro environment. But beneath the surface of "spend neutrality" and impressive financial figures, there's a subtle shift in language that could signal a potential storm brewing for BILL's long-term growth prospects - the evolving relationship with Bank of America.

While the narrative around consistent TPV signals and muted growth in the short-term is understandable given the economic climate, the change in tone regarding Bank of America's involvement raises a red flag. BILL's initial success in serving BofA's new small business customers paved the way for an ambitious expansion plan to reach the bank's massive installed base of SMBs. However, a sudden strategic shift at the bank has thrown a wrench into these plans.

The vagueness surrounding this "firm-wide payment strategy" from Bank of America and BILL's cautious "early days" assessment is telling. While Rene Lacerte reassures that they're working with BofA to determine the impact on the expansion opportunity, a sense of uncertainty hangs heavy in the air. The potential loss of access to BofA's established customer base could significantly curtail BILL's long-term growth trajectory, particularly in the lucrative FI channel that represents a strategic cornerstone for future expansion.

Why This Matters for BILL Holdings

FI Channel Significance: BILL has repeatedly emphasized the importance of their three-pronged go-to-market strategy, with the FI channel playing a critical role in their long-term vision. Successfully penetrating this channel is essential for reaching a vast pool of SMBs and unlocking exponential growth potential.Magnitude of Potential Loss: Bank of America boasts millions of existing SMB customers. Losing access to this massive market segment could represent a substantial setback for BILL's penetration goals in the FI channel.Impact on Growth Projections: BILL's growth projections heavily rely on expanding its reach within the SMB market. A significant disruption in their FI channel strategy could force a reassessment of these projections and impact investor confidence.

A Hypothetical Scenario: The Impact of BofA Internalization

BILL's FY25 growth projections hinge on successful FI channel expansion. If Bank of America internalizes its payment solutions, BILL's net new customer adds in the FI channel could decline by 50% in FY25, resulting in a 10% reduction in overall revenue growth for the year.

This hypothesis underscores the potential impact of losing access to Bank of America's customer base. A 50% reduction in FI channel customer adds, while speculative, isn't implausible given the size of BofA's customer base and the lack of clarity regarding their evolving payment strategy. This scenario could lead to a significant downward revision of BILL's ambitious growth projections and force the company to re-evaluate its long-term strategy.

Visualizing the Impact

The chart below illustrates a hypothetical scenario where BILL's FI channel customer adds are significantly impacted by Bank of America's internalization strategy.

The Bigger Picture: Embedded Finance and BILL's Future

Furthermore, this situation raises a broader question about the competitive landscape within the embedded finance space. If other major banks follow Bank of America's lead, BILL's reliance on the FI channel could become a vulnerability, potentially forcing them to double down on their direct and accounting channels or explore alternative embedded finance partnerships with non-banking software providers.

BILL Holdings stands at a pivotal crossroads. The company's ability to navigate this evolving landscape and secure its position within the embedded finance ecosystem will be critical for achieving its long-term vision. Investors should closely monitor developments with Bank of America and other FI partners, as these relationships could have a significant impact on BILL's future growth trajectory.

"Fun Fact: BILL processes nearly 1% of US GDP – a testament to their scale and the crucial role they play in facilitating SMB commerce."