Startup Banking’s Looming Leviathan(blog.zactownsend.com)
blog.zactownsend.com
Startup Banking’s Looming Leviathan
http://blog.zactownsend.com/government-trouble-with-disruptive-banks
9 comments
I agree with the notion that "a disruptive bank does not look like a bank" but I think you oversimplify the purpose of a bank.
Today's banks provide a variety of services to a variety of different customers with different needs. Lending is just one of them.
Providing a variety of services well as an integrated business is very, very difficult for banks today. That has created opportunity for smaller companies and upstarts to succeed by unbundling services that have historically been accessed through traditional banks[1].
For some reason that isn't clear to me, the OP seems to have fallen in love with the idea of the traditional integrated bank even though the market is clearly suggesting that this isn't where the opportunity and action is.
[1] http://blog.aweissman.com/2013/01/banking-and-unbundling.htm...
Today's banks provide a variety of services to a variety of different customers with different needs. Lending is just one of them.
Providing a variety of services well as an integrated business is very, very difficult for banks today. That has created opportunity for smaller companies and upstarts to succeed by unbundling services that have historically been accessed through traditional banks[1].
For some reason that isn't clear to me, the OP seems to have fallen in love with the idea of the traditional integrated bank even though the market is clearly suggesting that this isn't where the opportunity and action is.
[1] http://blog.aweissman.com/2013/01/banking-and-unbundling.htm...
As I think of the technology changes (hw & sw) in my recent experience, I struggle to think how my personal banking (yes, business banking & financial services is a nightmare) experience need to be disrupted. Its a real question, not trying to be flippant - but what do you think are the top problems today (outside of commercial banks needing an API to their data, I've heard)?
I use uber; before I used uber I constantly complained about getting a cab in NYC or having to schedule a black car only to find them late with a smelly car and no way to review a poor experience. That was something I actively knew needed to be changed, and uber did just that.
Contrarily, for banking it isn't as acute to me: I use USAA as my personal bank and I can't think of much I'd change to have a better experience. Apps are good. Technology is reliable and (assumed :-)) secure. My money has been safe and available when I need it. I can download transaction history to csv with a few clicks. Everything is online, cant remember the last time I got post mail from them. Yes, every once in a while I run into a situation where some regulation is in the way (mostly in brokerage services), but mostly its a smooth experience.
Similarly to other regulated industries, I'd like to see air travel disputed. Flytenow, AirPooler, and FlightHike are trying to do this but will likely be crushed by FAA regulation on air taxi and commercial operation rules. Are the regs bad? Not really, they are there for safety. Are bank regs bad? Not really, I think they are there for security of our financial system.
I use uber; before I used uber I constantly complained about getting a cab in NYC or having to schedule a black car only to find them late with a smelly car and no way to review a poor experience. That was something I actively knew needed to be changed, and uber did just that.
Contrarily, for banking it isn't as acute to me: I use USAA as my personal bank and I can't think of much I'd change to have a better experience. Apps are good. Technology is reliable and (assumed :-)) secure. My money has been safe and available when I need it. I can download transaction history to csv with a few clicks. Everything is online, cant remember the last time I got post mail from them. Yes, every once in a while I run into a situation where some regulation is in the way (mostly in brokerage services), but mostly its a smooth experience.
Similarly to other regulated industries, I'd like to see air travel disputed. Flytenow, AirPooler, and FlightHike are trying to do this but will likely be crushed by FAA regulation on air taxi and commercial operation rules. Are the regs bad? Not really, they are there for safety. Are bank regs bad? Not really, I think they are there for security of our financial system.
There's already been some disruptions (Paypal, BTC (Coinbase, USV)), but copying isn't sufficient for disruption. Chase although mostly evil was the biggest to roll out check deposits by mobile camera. Also citi offers a basic card that has an online sorta crappy Flash widget that will generate limited time / amount virtual cards on the fly, good card optimized for travel and online purchases.
I would see what is the biggest customer hassle and find the MVP to test offering that. Also, chatting up bank employees can be a way to see what's going on and what's missing in terms of oppy... There's a bank manager in downtown PA that's aching to join a startup, not in the BS small-talk sense, but passionate to escape corporate backwards-processes hell.
I would see what is the biggest customer hassle and find the MVP to test offering that. Also, chatting up bank employees can be a way to see what's going on and what's missing in terms of oppy... There's a bank manager in downtown PA that's aching to join a startup, not in the BS small-talk sense, but passionate to escape corporate backwards-processes hell.
> how my personal banking experience need to be disrupted
Free wire transfers. Free (or very close) for both sender and receiver, like checks, but instant. I believe Europe already has something like this. [1] Current US banks seem uninterested in this, so a startup bank providing this service could probably steal tons of banking customers.
[1] http://en.wikipedia.org/wiki/Wire_transfer#Regulation_and_pr...
Free wire transfers. Free (or very close) for both sender and receiver, like checks, but instant. I believe Europe already has something like this. [1] Current US banks seem uninterested in this, so a startup bank providing this service could probably steal tons of banking customers.
[1] http://en.wikipedia.org/wiki/Wire_transfer#Regulation_and_pr...
It astonishes me how apparently backwards retail banking is outside New Zealand.
We've had free (or effectively free) inter bank transfers since internet banking became available. probably almost 20 years.
I've used a cheque exactly twice in my entire life. I get paid by direct credit, pay my bills by direct credit.
Transfers within the same bank instant for most banks, and inter-bank transfers usually clear hourly inside business hours.
I rarely use cash - I don't even carry any most of the time. EFTPOS is available in taxi's, its available in the tiniest corner store, ice cream trucks have it. I once visited a small restaurant in a 3 house township surrounded by a national park, I wasn't even sure they had phones, still had EFTPOS.
I went from mid Feb through last week without having any cash in my wallet.
I believe Australia is pretty close in terms of ubiquity of electronic banking services. But I've only visited, not lived there. I know the UK wasn't anywhere near as well set up when I was living there ~8 years ago. My recent visits to the US and Canada involved truly uncomfortable amounts of cash.
Now, NZ is a small country, with a single set of laws. I know that the scale of business in the US, and having to deal with fragmented state and federal laws and regulations make everything much harder, but I would have thought that someone would have managed to improve things eventually.
I rarely use cash - I don't even carry any most of the time. EFTPOS is available in taxi's, its available in the tiniest corner store, ice cream trucks have it. I once visited a small restaurant in a 3 house township surrounded by a national park, I wasn't even sure they had phones, still had EFTPOS.
I went from mid Feb through last week without having any cash in my wallet.
I believe Australia is pretty close in terms of ubiquity of electronic banking services. But I've only visited, not lived there. I know the UK wasn't anywhere near as well set up when I was living there ~8 years ago. My recent visits to the US and Canada involved truly uncomfortable amounts of cash.
Now, NZ is a small country, with a single set of laws. I know that the scale of business in the US, and having to deal with fragmented state and federal laws and regulations make everything much harder, but I would have thought that someone would have managed to improve things eventually.
I use USAA and tend to agree with you, however I think USAA is just that much better than an average bank - they've let you use scanners and phones to deposit checks for what seem like ages at this point, you can do everything online easily, there aren't weird fees, easy to transfer money to other USAA members, etc.
That said, the one thing all banks have in common that seems really dated is the ACH Deposit system. And I'm not sure it can be replaced just by making a new bank.
That said, the one thing all banks have in common that seems really dated is the ACH Deposit system. And I'm not sure it can be replaced just by making a new bank.
It's funny. This post, and the post it references[1], gloat about technology but they don't speak much at all about the value provided to bank customers, which, by the way, are a very diverse group. It's very "if you spend countless of millions of dollars to build it, they will deposit."
I don't think anyone would argue that technology doesn't have the potential to be used as a competitive differentiator in the consumer banking sector, but as somebody commented on the referenced post, "Disruption is much more fundamental. It is about rethinking the needs and desires."
Interestingly, if you focus on the needs and desires of customers, you might come to the conclusion that building a bank is the worst way to pursue the opportunities technology has created in financial services. USV's Andy Weissman had a great post that talks about this[2].
[1] http://jackgavigan.com/2014/04/14/disruptive-bank/
[2] http://blog.aweissman.com/2013/01/banking-and-unbundling.htm...
I don't think anyone would argue that technology doesn't have the potential to be used as a competitive differentiator in the consumer banking sector, but as somebody commented on the referenced post, "Disruption is much more fundamental. It is about rethinking the needs and desires."
Interestingly, if you focus on the needs and desires of customers, you might come to the conclusion that building a bank is the worst way to pursue the opportunities technology has created in financial services. USV's Andy Weissman had a great post that talks about this[2].
[1] http://jackgavigan.com/2014/04/14/disruptive-bank/
[2] http://blog.aweissman.com/2013/01/banking-and-unbundling.htm...
The other point is the majority of banking services that seem ripe for improvement - day to day bank account administration - is a cost centre for banks rather than a profit driver. The banks actually pay back their overheads through customer-hostile characteristics of the service like not discouraging people from going overdrawn and fees for faster money transfers, and the broad customer base is desired primarily as an audience to sell financial products to.
Trying to beat banks by offering better day-to-day banking is like trying to beat Amazon by building a better Kindle. Even if you beat their economies of scale and focus on customer value to the point where large numbers of consumers actually switch, you'll still be less profitable than the big retail banks unless you're better than them at marketing and pricing loans and mortgages. And if you have got a better money lending strategy, do you really need to bother with thousands of small deposit accounts to be successful?
Trying to beat banks by offering better day-to-day banking is like trying to beat Amazon by building a better Kindle. Even if you beat their economies of scale and focus on customer value to the point where large numbers of consumers actually switch, you'll still be less profitable than the big retail banks unless you're better than them at marketing and pricing loans and mortgages. And if you have got a better money lending strategy, do you really need to bother with thousands of small deposit accounts to be successful?
It's techshedding, not focused on how they're going to provide a better or different service.
So I know this article is BS whining for two reasons:
0. Someone I met acquired the charter of a failing Midwestern local regional bank in order to save a ton of cash on moving funds into the us. This person was under 30 at the time. And it was tax and banking legal considering the law firm.
1. Defensibility of a business model is your friend, not you enemy. Look to how incumbents do it. What can you improve on? Just remember that the harder it is for you the harder it is for everyone else. If it were easy, everyone would do it and the competition would be even more cutthroat elsewhere (patents, distribution, connections, etc.).
To potential investors they probably signaled lack of hustle to find creative solutions to get past their current and all other future dilemmas. Without an unique, defensible, competitive advantage there's really no for an investor to throw down on a venture.
0. Someone I met acquired the charter of a failing Midwestern local regional bank in order to save a ton of cash on moving funds into the us. This person was under 30 at the time. And it was tax and banking legal considering the law firm.
1. Defensibility of a business model is your friend, not you enemy. Look to how incumbents do it. What can you improve on? Just remember that the harder it is for you the harder it is for everyone else. If it were easy, everyone would do it and the competition would be even more cutthroat elsewhere (patents, distribution, connections, etc.).
To potential investors they probably signaled lack of hustle to find creative solutions to get past their current and all other future dilemmas. Without an unique, defensible, competitive advantage there's really no for an investor to throw down on a venture.
Regarding (0): could I ask how your acquaintance ended up obtaining the regional bank's charter?
Finding them, contacting them, money, paperwork, lawyers and stickytoitiveness. In the end it saved like a few pct over just paying taxes, but this curly haired Cornell grad doesn't like paying The Man if at all possible. In the end it was a hassle but having something badass seemed worth it to them.
This person also has/had a privacy-oriented domain registrar, so no stranger to putting in the work.
This person also has/had a privacy-oriented domain registrar, so no stranger to putting in the work.
Assuming kchoudhu is somewhat familiar with the banking space in the US, I think his question is - on what grounds was this individual able to get FDIC/OCC/FRB approval?
Is it that difficult for individuals to get approval? There are tons of small 1-3 branch banks in the US owned by individuals. I would expect it's on par with getting a liquor license or similar, background check and assets check.
Years ago I worked for a bank that was > 75 years old and had recently been bought by a guy who had immigrated to go to college and then in the next 20+ years done very well in construction. As far as I know there was more uproar over him changing the name of the bank than actually buying it.
Years ago I worked for a bank that was > 75 years old and had recently been bought by a guy who had immigrated to go to college and then in the next 20+ years done very well in construction. As far as I know there was more uproar over him changing the name of the bank than actually buying it.
It is and it isn't - as was stated elsewhere, for example if starting a new bank, regulators will require (and enforce) specific business plans, will limit dividend payments, will limit growth, etc. - there will be a lot of scrutiny on the (proposed) management team and you would find it hard-pressed to be able to get away without having someone with previous bank executive experience. Would imagine for a failed bank there would be similar questions on what is changing with the bank model (which may be as simple as operating with a higher level of equity to support the bank's risk profile).
This is fascinating. I hate to ask, but nothing ventured, nothing gained: is there anyway you'd be willing to talk about this more offline? My email address is on my profile.
If there is anything in the financial world that needs disrupting, it is the credit rating system.
If anyone is interested in talking about how this could be done - I'd love to just chat about it.
I was thinking about this a lot last night actually, so this post is timely... where instead of using a crytocurrency, like bitcoin, to disrupt money - what if you used a crytocredit system which could be bought into, and leveragd as a secured form of a credit score - defaults, penalties, late payment etc can be covered by the cryto-credit and result in higher earning difficulties applied to your ID.
Use this to be the basis of loans, backed by your earnings etc.
Currently, if some perfect storm of things happens to people , once you destroy your credit, you're completely fucked.
---
The other thing I have always wanted was a layaway account for various goals. Where I also can have links for others to contribute to easily as a charge into that account.
"Johnny's college fund"
"auto bill me $X per month into my vacation goal account"
etc...
If anyone is interested in talking about how this could be done - I'd love to just chat about it.
I was thinking about this a lot last night actually, so this post is timely... where instead of using a crytocurrency, like bitcoin, to disrupt money - what if you used a crytocredit system which could be bought into, and leveragd as a secured form of a credit score - defaults, penalties, late payment etc can be covered by the cryto-credit and result in higher earning difficulties applied to your ID.
Use this to be the basis of loans, backed by your earnings etc.
Currently, if some perfect storm of things happens to people , once you destroy your credit, you're completely fucked.
---
The other thing I have always wanted was a layaway account for various goals. Where I also can have links for others to contribute to easily as a charge into that account.
"Johnny's college fund"
"auto bill me $X per month into my vacation goal account"
etc...
In practice, US banks are most certainly able to grow at over 25% a year. This is most typically done via series of acquisitions rather thank organic growth. There is an undefined upper limit placed on inorganic growth by regulators, but this has more to do with ensuring the proper integration of acquisitions rather than a fear of growth in general. The reason one does not see banks grow organically much faster than 25% pa is because (i) owners can not put raise equity capital at a sufficient pace and (ii) rapid loan portfolio growth (on the asset side of the balance sheet) typically results in a deterioration of underwriting standards, this in turn requires additional capital and increased scrutiny from regulators.
Source: I've worked in bank-focused private equity for the past decade both in and out of the US.
Source: I've worked in bank-focused private equity for the past decade both in and out of the US.
Maybe you can't do it with a startup - or rather, not with one startup. Maybe you need four, none of which look like a bank. One does payment processing, one's just a loan operation, etc. But when all four startups succeed, they together look like a bank. And they can each use each other to fill in the parts that they don't do. (That is, they each outsource to each other.)
As the linked article says "The UK is arguably the best location for a disruptive bank to launch". No point starting in the US, which is hostile to new banking changes. The UK regulator has said they are pro new startups, and it is where most of the innovation actually takes place, regardless of the ownership of the parent bank.
Also I think the UK regulator pretty much lets anything go inside the City of London due to historical restrictions on enforcement and such.
How is it possible that this guy can do all this while he's still at stripe?
Kickstarter is a disruptive bank. Bitcoin is a disruptive bank. Zidisha is a disruptive bank. GitHub is a disruptive bank. Most people will probably think I'm crazy for listing them, but they all serve the purpose of connecting people with productive ideas to those with capital to fund them, exactly what banking's purpose is.