I wrote a little bit about the "gotcha" fee business model of consumer banking this week and the beginnings of a successful movement to bring a standard, simplified fee disclosure form to the banking industry.
But while better disclosure is great, it's really just an improvement at the margins. A lot of account holders will never read those disclosures, no matter how simple and easy you make them, and the current fee-based model for retail banking seems to inevitably draw banks into designing fees that are meant to catch customers unaware.
Rather than attempt to make these types of gradual improvements to the way checking accounts work, one Internet startup called Simple is trying to blow up the existing model of consumer banking, using advanced analytics and Web technology to make banking much easier and more intuitive for consumers.
I interviewed Simple CEO Josh Reich on how their new product, which is currently in beta, will work, and what new features it brings to the table for consumers.
1. How is using Simple, your product, different from using the average online banking site?
Two really big things. One is that it's a completely modern new experience. There's a lot of data that banks have about how customers transact, but they don't really use to help the customer. So we really unleash all that data to drive a real-time, really data-rich experience. That makes the search really powerful. A lot of banks have a search functionality today, but people don't use it because it doesn't work. The data that it's searching over isn't very good, it's very slow, and when things are slow, it means that people just don't use them.
We've put a lot of attention into using much more modern Web design techniques to make a far more usable experience. And the reason why we're doing this is that people have a lot of anxieties around their money. They have a lot of questions about their finances, and it's hard to get those answers today.
Now you can turn to a tool like a Quicken or a Mint, but it's quite a lot of work to set it up. But the bank, in reality, already knows all the information that you're otherwise spending time setting up. For example, (for) over 90 percent of (your) transactions, we know where you were located when that transaction occurred. We would (use) fairly accurate geolocation data, and most banks do have that data, but they're not using it.
But by us sort of bubbling that information up, you can do things like, "I want to search for lunches in New York," and that's powerful. We know when a transaction is lunch because we know that it's a restaurant. We know people tend to have lunch between 11 and 3, and we know where New York is. That's a really powerful experience. By making it really easy for people to interact with their data in real time, they'll better understand what's going on with their finances, and they'll be able to improve their financial behavior. So that's the first big thing.
The second big thing is the product itself, in terms of the financial product, is really quite different. What you get from Simple is ... one card and one account, and we decouple the underlying financial products from the virtual account and card.
What that means is that you might be a customer of ours. We may have matched you with a checking style account, an interest-bearing savings account and a line of credit. You swipe your card at the store, and we'll decide in real time the best way to fund that transaction.
Everyone fundamentally wants the same thing. Everyone wants to earn as much interest as possible on money that they have and pay as little interest as possible on the money that they borrow, and to achieve that today requires a lot of work because the banks make most of their money from fees, and those fees arise when customers make mistakes.
But the rules of the game are very easy for computers to follow. So if your paycheck comes in to us, we will automatically, in real time, sweep that paycheck into a high-yield savings account for you. That's a radically different way of interacting with financial products.
2. So, just to be clear, it would go into a high-yield savings account. Well, there's a standard definition for how many transfers you can do out of a savings account in a given period of time. How's it going to handle that?
What we do is, when everyone starts off, they get a really basic, very minimally interest-bearing checking account that's like a NOW account (negotiable order of withdrawal account, a checkable deposit account that pays interest). The rates on NOW accounts aren't great -- then again, the rates on savings accounts aren't great today -- but you'll be getting some interest.
Now, what happens is over time, as you set up your direct deposit, as you set up bill pay, as you start sending money in and spending money out of the product, we learn your financial behaviors. And so the regulation on interest-bearing savings accounts is you can't make more than 6 withdrawals in a 30-day period, and so we identify what the appropriate buffer is, and once we get up to that sixth withdrawal in a month, we'll pull it out so you don't forfeit the interest that you've earned completely over that month, but you may forfeit that last two day's worth of interest.
This is really simple for a computer to do. People are surprisingly predictable on their month-to-month activity, but where we need help from customers, in terms of their behavior, we are asking for that help.
3. Let me ask you a little bit about how the transaction will be handled on the back end. You guys are not a bank, right?
Correct. We are not a bank.
So you're going to be making some partnerships with some financial institutions?
We already have. We're live and up and running right now. I've been using Simple as my only bank for a couple of months now. Our biggest partner right now is a bank out of Delaware called the BanCorp Bank. They are sort of a community bank with about $2.1 billion on their balance sheet. They are a good technology partner for us that really lets us get the business up and running.
So they're basically collaborating with Simple on structuring all these transactions so that they'll work with the system you're setting up?
The way it works is, all of the funds live on their balance sheet. They're fully FDIC insured. We then do some things that are a little bit different from sort of typical bank technology. We work with a third-party transaction gateway, which means instead of transactions flowing directly to a bank, they flow through our gateway, which means we can do this real-time matching technology. And then the bank works on helping us with the settlement and paying interest and FDIC insurance and compliance and all the things that banks are typically quite good at doing.
4. What kinds of fees are going to be associated with using Simple, and what kind of disclosure process is Simple going to use?
On fees, we have a stated rule that we don't profit from fees, so on most day-to-day banking, you're not going to run into fees. No overdraft fees, no late payment fees, no domestic transfer fees, because they don't cost anything, so why would we charge for them? The few circumstances where we do have fees are things like international SWIFT transfers; those are just expensive for us to do, and we just pass that cost on directly. We fully disclose to all of our current customers the rate schedule before they sign up.
The product that's out right now is sort of a core subset of the features. It's the core transactional features. We don't actually support international transfers just yet, so there's no actual spot today where we charge a fee.
5. Does Simple have plans to branch out to mobile devices?
It's not that we have a plan. We actually designed our mobile application before we designed the Web application. I think mobile is critical. We're currently out on iPhone. We're still waiting for the app to go through the App Store process, but that should be out in a couple of weeks. All of our current customers have a beta version of that app.
Mobile is really important. Going back to the two things we're trying to achieve. The first thing is letting people better engage with their finances, and people aren't in front of their computer when they're spending money. What we want to do is we want to close this feedback loop between transacting and sort of seeing the impact of that transaction. So we've invested heavily in real-time processing, and what that means is, you can swipe your card at a store, and within a couple of seconds, you can see that transaction on your phone. You get a push notification.
And this is really important, because people go through this process where they get themselves in a financial hole. Say it's tax time, and they'll spend time, at the end of the quarter or whenever these issues arise, going through historically and retrospectively trying to categorize and understand their finances. By bringing that feedback loop down to a second, people have this practical awareness of what's going on with their money, and that's really powerful.
6. What about customer service. Say somebody is having an issue with their account. Who are they going to contact?
Right now, you call us. We are building out a customer service team right now. These are employees, employed by our company, run out of our headquarters in Portland, Ore.
And it's going to be primarily by phone and over the Web? Because there's not going to be a physical presence?
No physical presence, and so Web and phone.