Spanish bank BBVA has long been known as a tech-savvy leader in digital banking. Its U.S. subsidiary, BBVA Compass, boasts what is widely regarded as some of the best-designed mobile banking apps in the country. So on first blush, the giant Spanish bank's Feb. 20 announcement that it's buying online banking company Simple puzzled a few of us.
BBVA is buying Portland-based Simple for $117 million. The two companies say Simple will continue to operate independently alongside BBVA's other U.S. operations. Simple founder and CEO Joshua Reich will continue in his role, and the company's board of directors will carry on independently.
Why did the $820 billion-asset bank make this sizable investment in an area in which it was far from weak?
The answer is not so Simple.
BBVA appears to see several appealing features in Simple, but undoubtedly the key trend driving it is the industry's seismic shift to mobile banking.
BBVA has "leapfrogged the competition in a quest to respond to the needs of the digital consumer," says Jim Marous, senior vice president, corporate development at consulting firm New Control. That, he says holds true "whether BBVA decides to build a separate mobile-first bank, the way Capital One did in the online space with ING, or integrate the functionality of Simple within their current solution."
Francisco Gonzalez, BBVA's chairman and CEO, showed his hand in a recent Financial Times editorial. "Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking," he wrote. "I disagree. What is more, I think banks that are not prepared for such new competitors face certain death."
In terms of preparing for the digital onslaught, Simple provides BBVA with a nationwide, young and digitally savvy customer base, a respected mobile banking platform and a brand that's well known (at least in some circles) for innovation. Collateral benefits include the PR benefit of being perceived as an aggressive investor in digital banking.
Simple's complex history
Simple's (originally BankSimple) journey began in 2009 when Joshua Reich got mad at his bank. When I first met him in February 2011, Reich was a relatively unknown, jeans-clad Brooklyn hipster with a small startup and a vision: to create a digital bank "that doesn't suck." He shared online banking horror stories: the time his bank overdrew his account by processing a batch of bills twice, then his credit card was charged to cover the loan at an annual interest rate of 19%; the surprise he felt when he called up his home lender's mortgage calculator only to find it contained no information on his mortgage.
"It's one thing to say you have a feature, it's another for it to work," he says. "To make it work well is still another thing."
Reich put together a tech team, created a sleek online and mobile banking user interface and set a goal of signing up around 15 banks to use it. Potential bank-partners had to meet three criteria: they had to believe in BankSimple's vision; they had to cede control to BankSimple (no cross-selling of unrelated products on BankSimple's site); and they had to be able to integrate their systems and products with Reich's.
Everything had to be BankSimple-branded. In exchange for the chance to build awareness of their own brands, banks would get a chance via BankSimple to break into a new digital market, akin to the way the ING direct model did it.
Fast-forward three years. Simple has come a long way. It moved to Portland, Ore. (perhaps the one U.S. city hipper than Brooklyn). Its founders generated buzz by working the speaking circuit and pointing out the failings of traditional banks' digital offerings. It joined the ranks of a small club of digital-native banks, sometimes called "neo-banks," that includes Moven, Green Dot's GoBank and American Express's Bluebird.
Then in late 2011, it signed up The Bancorp Bank as a bank partner. It beta-launched Simple the following summer. Its maiden offering included mobile apps for iOS and Android with mobile check deposit and a Goals feature that lets account holders schedule automatic savings. In 2013, it handled $1.7 billion in transactions. Its staff grew to 92.
The deals the company hoped to sign with other banks never materialized. Simple, along with Moven and the other neo-banks, struggled to turn a profit.
"For these companies, the question has long been 'can they really survive on their own?'" says Zilvinas Bareisis, senior analyst within Celent's Banking group. "What is their business model? Can they make enough money to become sustainable? The service is good. The customer experience is amazing. The features are targeted at young, digital-native customers."
The problem for Simple and similar ventures is that they have but one revenue source: interchange fees.
Now that Simple has sold out, it becomes BBVA's challenge to make it profitable. The Spanish bank, which bought Birmingham, Ala.-based Compass Bancshares in early 2007, just before the financial crisis, has faced its own struggle in the U.S. to build brand recognition.
"Right now they're virtually unknown," says Serge Milman, principal consultant with SFO Consultants. "If you go to 100 people and ask what BBVA is, 99 people will think you're talking about some kind of drink."
Simple is not a household name either, but it is known among a subset of young, tech-savvy Americans. And it's following is national while BBVA Compass is known mostly in the South.
"If you go to the coasts and the tech hubs, everybody knows about Simple," Milman says.
For BBVA, the real value is in Simple's name and demographic. If it was after technology alone, BBVA could have built a platform in a few months for half a million dollars, Milman says. Instead it paid $117 million for a company with 100,000 customers, or $1,200 per customer.
"That's awfully expensive," says Milman; banks typically pay about $200 to $400 per customer acquisition.
If BBVA's acquisition is going to pay off, it will be because it finds a savvy way to leverage Simple's upwardly mobile customer base and streamlined user interface for a much larger audience.
For other banks, the question is whether to try to follow in BBVA's footsteps if they can or risk getting left behind.
"It's a significant event but just because BBVA did this, do other banks have to go out and buy a neobank? No," Celent's Bareisis says. "For one thing, there are not that many options."
Even if not many me-too transactions follow, BBVA's bold move will force its rivals to focus on ways to go digital and convince affluent young consumers that their banks don't suck.