Startup Banking's Looming Leviathan

“The skill of making and maintaining Commonwealths consisteth in certain rules, as doth arithmetic and geometry; not, as tennis play, on practice only: which rules neither poor men have the leisure, nor men that have had the leisure have hitherto had the curiosity or the method, to find out.” ― Thomas Hobbes, Leviathan

Jack Gavigan wrote a blog post yesterday titled "What would a disruptive bank look like?" Read it. It is well worth the time.

I basically have the same blog post written. I actually also have the same blog post written as a detailed fifteen-page business plan ready to pitch Marc Andreessen. I outline the technology needed in a bank, the product offerings and their rollout, the legal structure I'd use, the capital structure, relevant bank regulations. Ah and therein lies the rub.

Regulation. I know I am supposed to be a big, bad startup entrepreneur who spurns restrictions of all kind. Particularly those restrictions put on me by the government. But that's just hard to do in this case since you need a license to operate.

Banks don't often fail. They don't often fail because there are real limitations on who can buy a bank and how one can run a bank in the US. Those two ideas – hard-pressed to fail and deeply restrictive operations – are two sides of the same coin.

So, how does that manifest directly for the bank-running entrepreneur?

  1. Maddening capital and other ownership restrictions;
  2. Deep restrictions on personnel and hiring;
  3. Writing a initial seven year business plan and sticking with it for seven years; and,
  4. Deep restrictions in the operations of a bank.

The key problem of restrictive category number (4), and why I walked away from spending so much time on building a bank, is that regulators artificially restrict a bank’s growth rate. The number one historical indicator of a shady bank is rapid, radical growth. Very good lawyers, regulatory advisors, and current regulators at the FDIC, Fed, and the FFIEC have all told me that any new bank would be restricted from growing more than 25% a year. Is that enshrined in law? No. However, latitude and discretion is.

25% a year. A good startup grows 25% a month for years.

I think you're left with four choices then:

  1. Figure out how to bring technology into the banking sector in a high-margin, fast-growing way (that's Standard Treasury);
  2. Build a bank and hold it for a long-time or buy an already big bank (despite all I've said, several investors have approached us about this);
  3. Build a bank someplace in the developing world that has less restrictive laws and then port it back to the US later (ready to talk when you are Marc); and,
  4. Avoid banking, per se, altogether. Build out different parts of banking like lending (Lending Club, SoFi, Capital Access Network, On Deck) and payments processing (Stripe, bitcon startup du jour).