It's clear the banking industry is in a time of transition. A profoundly changed regulatory and economic environment has made it difficult for many banks, especially larger ones, to make money doing business they way they did before the financial crisis.
Many national banks have tried to get their checking account offerings back to profitability by cutting services such as debit card rewards programs and raising fees, but that's provoked considerable anger among customers already squeezed by the sluggish economy.
I've been taking a look lately at how some new startups are trying to reinvent consumer banking so it can survive without the "mistake fees," such as courtesy overdraft, banks have traditionally depended on to fund their checking operations.
One such startup is PerkStreet. Like Simple, the startup I wrote about last week, PerkStreet outsources much of the work of maintaining checking accounts and complying with government regulations to Maryland-based Bancorp Bank, focusing instead on developing Web-based tools for customers to interact with their money.
I spoke to PerkStreet's CEO and Co-Founder Dan O'Malley about how his company does hopes to change consumer banking.
How is PerkStreet different from a traditional bank?
We take all the cost savings from not having branches and give it all back to our customers. It's a much more efficient business model, and it gets people really excited about their bank. Our bank accounts allow people to earn a phenomenal amount of cash back. For the average family it's about $600 every single year just for using it.
Is this a high-interest checking account?
No, it's not an interest-bearing checking account, it's a rewards-bearing checking account, and let me explain why that's really important. The average person in this country just doesn't have enough in their account for an interest rate to really matter, and that's why all the direct banks that have been launched to date have really gone after the wealthy. I mean, if I've got $50,000 sitting in my account, I really should be in an ING or an Ally or a Capitol One account, of course.
But if I'm the average American, I just don't care about an interest rate that's 1 percent, 2 percent, 3 percent; it doesn't really matter to me. But we give customers up to 2 percent cash back for everything they're going to buy, and everybody has lots of things to buy every year. So that's why the average family is going to earn far more from a PerkStreet account than anywhere else they could bank.
Has the Durbin cap on swipe fees affected your business plans?
It has not. We work with a bank and we host our accounts at a bank that's under the $10 billion cap and our interchange hasn't changed since Durbin got rolled out. We still offer the same amount of cash back that we offered before.
So you guys are not technically a bank, but you work with a bank partner?
We're not a chartered bank. We create and manage checking accounts that we host at a chartered bank. So our customers still get FDIC insurance, MasterCard zero liability and all the things that you want to have with a checking account.
Do you foresee a day when PerkStreet grows beyond that $10 billion cap?
It's not something on our immediate radar. It would be a high-class problem to have, and maybe years down the road it might be something we have to deal with.
Are you guys going to be providing other types of accounts, such as savings accounts, or will you be sticking with rewards checking?
Our vision is to create more and more ways to earn cash back for everything they do. Soon we'll be launching a savings account. But here's the really exciting thing about what customers are going to be able to do: In addition to getting a good interest rate, you're going to be able to set financial goals.
We've built a piece of technology that's going to track your performance against those goals and when you get there, it's actually going to pay you cash back. Gone are the days of Quicken, where you had to pay for your financial tools. But soon, gone are the days of Mint, where you didn't have to pay, but where you didn't really get anything back. As your financial institution, we can actually pay you to hit those goals.
Are you planning on tracking and categorizing expenses like Mint?
You know, it's less about precision of where transactions end up, and it's more about helping people save.
The other product that we are going to launch as well, though, is going to be an envelopes-based budgeting product. I don't know if you're familiar with it, but it's kind of the No. 1 thing a financial adviser is going to tell you to do when you need to get on the straight and narrow. And unlike a Mint or a Quicken, which is kind of backwards-facing, this is going to let you basically not spend more money than you should this month, so it's forward facing.
Is there actually going to be a hard cap on how much someone can spend in a certain category?
We want you to see that if the end of the month is coming and you have no more money left in your restaurant envelope, that you're dry. We want you to really sit down and think about that and force yourself to stay on budget.
So we'll be letting our customers basically implement it however they wish, whether it's just tracking or whether they want to get proactively notified. But just like you do in a paper envelope-based system, we want you to feel like at the end of the month you could be running out and you should slow down.
What's the fee schedule like, and do you publish it on your site?
Yes. It's super easy to find. It's never more than a click or two away. When we started the company, we basically all believed in leaving the big bank jobs we were at because those organizations just aren't transparent enough. We actually do things like try to optimize SEO results around PerkStreet and fees to take people right to our fees landing page so they can understand the fees we charge as soon as possible.
Since we started the company, we've always believed in being extremely transparent, knowing that typical banks are not. It's been interesting to see over the last three months, and even before "fee-gate," how trust has eroded in these big institutions.
These big banks are getting absolutely crushed in their customer satisfaction numbers. They have a gotcha model that people are getting wise to, and it's driving them out, and that's been driving our growth, for sure. The day after Bank of America announced that $5 debit card fee, we had the single best day for customer acquisition in the history of the company by a factor of two, and the day after that, we doubled our customer acquisition rate again. It's been phenomenal to see people switching in pretty big groups away from big banks.
You've signed on to the "/declare" movement among financial startups to attempt to define a new way of doing business in financial services. How would you define PerkStreet's way of doing business?
It's so frustrating that the typical relationship between a consumer and their bank today is one of pain. Especially big banks just try to extract value from their customers as job No.1.
We're not a nonprofit either. We like to make money. But there's just so many better ways to make money, and for us, that starts with reinventing the model and stripping out costs. The industry spends $800 per household in this country on branches. It's outrageous, and what a waste it is.
If you get rid of that, it enables this new business model, where you can just pass on profits to customers. I mean, that's what we do with our debit card, right? You buy things you're already going to buy, and we're going to turn around and basically going to give you all of our profits from those transactions back in your pocket. We're going to let people set savings goals, and get paid to hit them.
We're doing that because as you build balances with us, it makes us money, and we can turn around and we can pay you for that. And that's what we see as the future of banking.