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For BankSimple, Finding a Bank Partner Anything But Simple

US Banker  |  September, 2010

BankSimple.com has yet to go live, but more than 20,000 consumers have preregistered to use the site when it does.

Founder Joshua Reich captured their imaginations with the idea of a low-frills, low-fee version of online banking fused with a personal financial management service that requires little effort on the user's part. And he has lined up venture capital to finance the site.

Now all Reich needs is a bank partner with the technological savvy to support his vision. That part hasn't been so simple.

Though several banks are interested in serving as a behind-the-scenes partner, cementing a deal has been harder than anticipated, largely because of technology hurdles.

"It's a huge surprise about how technology is a limitation to what we want to do," Reich said in a recent interview.

Bank operations are notoriously siloed, which makes it difficult to get the 360-degree view of customers that BankSimple's business plan calls for. Consolidation has compounded the problem, because bolting on new companies and their disparate software systems makes it even harder to get vital information flowing from unit to unit, especially at bigger banks.

"This technology has existed for a long time," but banks have not had an incentive to adopt it, Reich said. "None of this is rocket science."

Reich is a native of Australia with a background in technology and mathematics. He and his partner and chief financial officer, Shamir Karkal, who is from India, started BankSimple about a year ago. Their frustration with the American banking experience motivated them.

"Why is it the case that banking in America is so difficult?" Reich said. "America certainly lags the rest of the world on just the presence of a unified customer record. … And if you don't have that, you can't serve your customer."

Though it is still in development, BankSimple has gotten plenty of buzz, thanks in part to high-profile hires like Alex Payne, an early employee of Twitter, and a novel mission statement: "Don't suck." This month the company secured nearly $3 million in seed money from a team of investors led by First Round Capital, IA Ventures and Village Ventures.

When he started Simple Finance Technology Corp. in Brooklyn, N.Y., Reich opted not to pursue a bank charter. Instead he focused on building the technology and customer service and partnering with a financial company that would handle back-end banking and compliance issues.

Reich said he expects to announce a bank partner by yearend. Most of the banks he has been talking with are small or midsize companies without a large retail operation.

To start, BankSimple plans to provide a combined checking and savings account, tied to a debit card, as well as low-balance credit products. A crucial goal is to help consumers manage their money by giving them a comprehensive view of their finances. There will be no annual or monthly maintenance fees, no overdraft fees, no fees for using automated teller machines. (International wire transfers are one of the few transactions for which the company does plan to charge a fee.)

BankSimple and the partner bank would share the revenue made from net interest income and interchange fees. Reich plans to add more sophisticated offerings and other revenue streams down the line.

The site will help consumers manage their spending by giving them a single balance that incorporates all their accounts.

For example, a customer can tell BankSimple he wants to save $5,000 in 12 months. The site then calculates how much of every paycheck needs to be socked away in savings in order to reach that amount, considering such things as spending habits and potential interest that can be earned.

When that customer logs on to the BankSimple site, he only sees how much money he has available to spend; the balance reflects the amount of money left over after accounting for recurring bills and the portion put into savings.

"We know how often they get paid, how often they spend their money. Customers don't have to worry about manually moving money around," Reich said. "We'll manage it for our customer."

The company also encourages users to develop their own features, in essence personalizing the service, and third-party developers will be free to add their own applications to the site.

BankSimple is focusing on a specific demographic: well-educated professionals in their late 20s and early 30s who are comfortable using technology and are fiscally conscientious. On average they have more than $10,000 in their banking and checking accounts, Reich said.

"These are customers that have plenty of alternatives but don't like any of them," he said. "They know what they should be doing with their money … and they feel terribly guilty whenever they make a mistake."

Reich and Karkal, who work out of the company's home base in New York, are both in their early 30s. They met six years ago while getting their MBAs at Carnegie Mellon University in Pittsburgh. BankSimple's nine other employees work out of offices in Portland, Ore., and San Francisco.

From all the attention the company has received, it's clear BankSimple has struck a chord.

"Customers are frustrated," Reich said. "I think banks have really lost touch with what customers really want. With so much antipathy right now toward the large banking brand there really needs to be a focus right now on customer service."

Bryan Derman, a partner at Glenbrook Partners LLC, a consulting firm in Menlo Park, Calif., said he buys that argument.

"Most of the differentiation in bank products is not about the product features themselves but about how they're delivered," he said. "That's been the case in banking for a while. The products have not changed in a very material way for the most part, but the way they are delivered has evolved."

"It's probably a great time to be trying something different, because customers don't seem to be highly satisfied with what's out there," Derman said. "And the business models … out there are being highly disrupted by the regulation."

Roger Ehrenberg, managing partner at IA Ventures, said: "The market opportunity is just so stunning. It represents an exciting opportunity to take some share in a massive, massive market."

"It's not that banks are inherently bad," Ehrenberg went on. "Banks are good. The issue is that the way that they present themselves to customers oftentimes isn't good, in terms of the actual way that you interact online with the bank, the user experience, the level of transparency, the ease of use."

Of course, others are also trying to disrupt the marketplace for financial services, offering online-only savings products and personal financial management tools. These outfits include Mint.com, which was bought last year by Intuit Inc., and SmartyPig, which has partnered with BBVA Compass Bank, the U.S. unit of Banco Bilbao Vizcaya Argentaria SA.

Analysts say it's difficult to tell how much of a dent companies like them or BankSimple will make in the industry.

"Does this thing really catch fire? Does it gain momentum?" said Ali Raza, executive vice president of Speer & Associates Inc., a consulting firm. "I think that is the $64,000 question. Many of these companies have been fairly nichey."

Reich said it would be all right with him if BankSimple stayed that way. "We are not doing this to become millionaires," he said. "I think we'll be a blip on top of a blip. We have limited growth plans. We have a very patient view."