The Path Not Taken by Simple (Bank) to Remake Finance

This morning Simple sold for $117M to BBVA. It's great news for the team, and I think it's going to be great news for retail banking.

Simple had amazing potential but also ran into many problems and difficulties caused by being built on top of Bancorp, not owning their own rails, and starting on the retail side. Simple could never build the infrastructure they needed for the product they really wanted to ship because what they have is not a bank account as people understand it. BBVA will change that.

We chatted with Shamir for awhile in Standard Treasury’s early days. Simple walked down the path of trying to get a bank charter but never followed through. It was partially timing — they were looking into buying or becoming a bank at the worst time possible — and partially that they did not build the company's capitalization to allow them to go down that path.

Also, looking at their history, it seems like they didn’t become a bank because along the way, at every step, it appeared to be the wrong choice — why build infrastructure when seemingly there are off-the-shelf options? But when one looks at the course of the company in aggregate and all the trouble they had with their service providers (I think they restarted their integrations three times), it would likely have been easier for them and better for their customers (not to mention their shareholders) if they had gone down the bank route.

It also seems like Simple never considered starting with the business-and-commercial side of banking. From the start (according to Josh’s blog post) they were focused on retail. We think starting on the other side is the right strategy to build a large bank. That’s why Dan and I have written a step-by-step product plan for a commercial bank.

Let me talk about what I see in the idea of building a bank. (Bear in mind, though, that this is not a likely outcome for Standard Treasury).

Building A Bank Directly

Everyday I read the Financial Times because it is wise to study the ways of one’s customers. But it can be depressing. With the headlines focused on bad bets, fines and settlements, price-fixing, and inquiries into malfeasance, it can be hard to focus on what I think of as the positive power of banking. To me banking is not about capital markets, investment banking, "the one percent", or high-frequency trading. Banking's true potential is not even seen in a better retail product experience like Simple. Instead, banking is about making commerce simpler and easier for businesses and consumers alike. It’s about empowering calculated risks and enabling trade in all its forms.

I want to build a bank with the simple mission of making it easier to do business - easier to be a business and easier to be a customer of businesses. Build a bank that had that simple creed at its center and you would make different product decisions and different hiring decisions than most banks do today.

This is not a casual interest of mine (although it’s a side interest to the business I am running now). Standard Treasury builds software for banks. That is the first approximation I can get to making the world I want inside the sanity and capital bounds that most venture capitalists seem to operate under.

We need a small — technology driven — bank.

Dan and I have chatted with former and current regulators at the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency, and the Federal Reserve. We have also chatted with lawyers and bankers in the business of buying and forming banks. There is no doubt that building a bank is hard. It is the ultimate schlep. But it is possible. Every conversation seems to start with people thinking we're a little bit crazy. Every conversation seems to end with an agreement that our dream is not only possible but desirable.

I won't publish our full step-by-step product plan but I do just want to talk about what a bank run like a technology company might mean in the abstract.

Bank As Startup

One key and obvious idea to anyone who works in technology is that banks have way too many people working for them. As Dan reminds the Standard Treasury team and all our customers, the banks that will survive in the future will be those that are most able to alter their cost structures.

One senior banking official recently told us that banks are likely to go through the same type of restructuring that the airlines went through in the 80s and 90s. They had large costs and outdated ways when the money was easy. But when the well dried up and airlines had to remake themselves, many airlines simply died. Well, now, the easy money is drying up for banks, This is the moment to build the Southwest Airlines of banking.

Without focusing in on capital markets, a new bank could defeat banks on product, technology, segmentation, and customer acquisition. The bank could do this with few people (mostly engineers) and a lot of software. This is because today’s business customers don't want to talk to their banker and rarely need a branch. They want to be able to trust their bank, to feel like the goals of the bank and their goals are one, and they’d like a great product experience with a customizable and open ecosystem at its core.

What does this mean in reality? It means the elimination of the physical (“wet”) signature and the start of instant risk determinations, easy to use but powerful tools to manage money laundering and customer identification requirements, and dynamic offerings targeted to the needs of the customer, with simple user interfaces and transparent pricing. In short, the anthesis of today's banking experience.

(Notice that banks are one of only two retail categories where you walk in and cannot find a list of products or their prices. The other is healthcare.)

The Problems

Regulations. Politics. More regulation. Acronym soup. Capital requirements. Passivity requirements. Etc. I won't bore you with the details but this isn't for the faint of heart. I think that most venture capital is ignorant to the nuances of just how complicated (and expensive) this gets, and just how quickly.

We have had a lot of these ideas floating around for awhile as have others, and as we participated in a recent Twitter conversation and after today’s sale, I wonder if maybe someone is willing to take the jump with us.