Online bank Simple, founded in 2009 and acquired by BBVA bank in 2013, is clearly underperforming (launched aiming to disrupt banking, had only 33,000 customers in 2014 with a deceiving 5% monthly growth – curious about how it compares to Airbnb?). It was set for failure since the very beginning when it designed its operating model. The company thought it was a good idea to become only a software interface, and outsource the real banking business (managing balances and transactions) to old brick-and-mortar banks (Bancorp first, BBVA after the acquisition).
Failing to deliver value
“The way banking should be”. The website and video makes one rightly feel that it sounds too good to be true. Operating as a software-only company, the ‘anti-bank’ has no real chance to deliver on any of its main value promises:
- Budgeting and financial planning: Budgeting is the ‘holy grail’ of financial planning: discover how much you spend in each category (e.g., lunch, grocery) and identify ways to smartly save on them. However, Simple falls very short from their promise: it doesn’t provide a full picture (i.e., doesn’t integrate accounts from other banks) and the amount of data they can analyze is more limited (regulation prevents Simple from accessing key customer info saved in the partner bank), making the results less insightful to the customers.
- Deposits and transactions: if there’s one thing a bank has to do, is to allow you to pay anytime anywhere with your money. Simple has had issues with information integration with its bank partners(e.g., declining payments, reporting wrong account balances), mainly due to legacy programing protocols that generate errors continuously, leading to prolonged customer dissatisfaction.
Failing to capture value
Banks don’t want to become ‘dumb pipes’ like it is happening in the telecom industry, and regulation is in their side. Many of the operations of Simple need to be processed and approved on their side, hindering the opportunity to capture value as well:
- Slow customer acquisition: Physical bank branches still account for 95% of account openings. To change consumer behavior (i.e., get customers to open an account online instead of in a branch), Simple needs to produce an ‘aha’ moment for early adopters: be simple, delightful and fast. However, Simple takes up to 72h to open an account and, after that, it denies many of the applicants (an issue that the company recognizes is it’s main limiter of growth) given to –again- extremely high restrictions from its partner bank. The worst part of the story? Neither Simple nor the potential customers get to know why they have been rejected (see below):
- Minimal net interest and transaction interest margins: These margins are the main source of revenue (specially for Simple, that ditched almost all fees). However, deposits and payments are not handled with modern and lean technology, but rather by the partner’s legacy mainframe computers. This archaic technology is expensive to operate so the margins that Simple manages to retain are extremely low (source: former investor interviews).
The rational behind the flawed operations strategy
Simple wasn’t founded as a software interface to a bank by mistake. The founders had the vision to launch a full retail bank, but would soon be faced with reality. The FDIC has a long list of very restrictive requirements to launch a bank in the US that even some startups with great and banking-experienced funding teams have failed to meet (see the assessment by Standard Treasury, a 2015 failed bank startup).
Is there any hope?
The answer is yes, but elsewhere for now. The UK, hoping to increase competition, reformed in March 2013 the banking law to favor the creation of bank startups, leading to the proliferation of promising new bank startups: Atom, Starling, Mondo and Tandem.
The video above sounds like it’s too good to be true all over again. The only difference is that this time the operational model is right: obtain full UK banking license, use modern flexible technology, and be obsessed with the user experience (and BBVA seems to agree, investing now in UK mobile bank Atom after buying US Simple). This time the customer promise will be true. Let the revolution of banking begin.