Consumer banking is an industry that is ripe for disruption. Big banks and confusing fees can have people feeling trapped, and online-only banks are starting to offer a way out. Simple, a Portland, Oregon-based banking startup, got its start early and wants to lead the charge to the financial promised land: the Internet.
Think of Simple as an online-only bank with a heavy focus on customer-service that incorporates financial tracking and budgeting tools similar to those offered by Mint.com. The difference is that Simple acts as your money handler too, offering a Simple Visa card and account access via web, iOS, and Android.
Simple began when the co-founders Shamir Karkal and Josh Reich met in business school at the Tepper School of Business at Carnegie Mellon University in Pittsburgh. They approached the concept of banking as a consumer product that was difficult to use and even more difficult to understand. Ultimately, they felt that banks weren't doing enough to help customers manage their finances.
The advent of Simple's ideology came from the idea that large banks have a revenue model that relies on customer confusion about hidden fees and money management. They decided to do away with fees and provide a solid customer service team to help make things as clear as possible for customers.
Co-founder and CFO, Shamir Karkal, said the mission of Simple is, "to provide a banking experience to customers that helps them spend smarter and save more."
So, how can Simple hope to compete in a land of giants?
Simple's recipe is easy-to-use apps and great customer service. Their website and apps are attractive and clean, with a minimal design that is easy to navigate. They focus on their financial management tools like Goals, which allows customers to set financial goals to save toward, such as a vacation or car down payment, and shows them the progress they are making toward that goal. Another innovative tool they offer is Safe to Spend, which displays the amount in the checking account that will be available after scheduled bills will be paid and money will be saved towards goals.
Probably one of the most unique features Simple offers is a push notification that is sent to your smartphone after a purchase is made. You can enter the app through this notification and take a picture of your purchase, which is automatically geotagged, and you can add notes about the purchase for your records. This metadata can help customers better understand their spending habits and track specific types of purchases they have made in the past.
All of the design is done in-house and the design team works closely with the engineers. The site was coded in a variety of languages, but Karkal said the team is partial to Java Virtual Machine (JVM) languages. The team also worked with Scala to beef up the backend and ease the load of customer data. Simple is cloud-hosted, which could add to the initial fear of placing your entire financial life online.
Simple as a startup
Simple began in 2009 and ran in stealth mode until they began sending invites in 2012. In total they have raised $18.1 million from investors and partners and currently have roughly 100,000 open accounts and well-over 250,000 waitlisted users. The wait is typically only a few weeks and Simple keeps a waitlist so they can scale efficiently. They currently offer personal checking accounts, debit cards, bill pay, and instant money transfer, completing $1.6 billion in transactions in 2013.
Instead of seeking a new bank charter, the company chose to partner with Bancorp to sponsor them in the payment networks and make sure that all of their banking services are FDIC insured. Bancorp also works with PayPal and Google Wallet, acting as a backing service for those products. Karkal insists that having a major bank as a partner does not hamper the progress of Simple as a disruptor. He believes, instead, that the banking industry as a whole is resistant to change.
"We are a startup operating in an industry where change is measured in decades," he said.
They pull revenue from interest margins and interchange revenue from payment networks, which is the fee that companies pay to be able to accept card-based transactions. Simple has no legacy infrastructure to support and they don't need to keep the lights on in physical branches, so they are able to operate on a lower profit margin than the big banks.
Many people still feel safe with big banks because they have been around for a long time and they give customers the opportunity to cognitively connect their money to an experience with tellers at brick-and-mortar location. Simple will need to seriously build trust with prospective customers, but they have a unique opportunity to target the 18-24 year-old demographic; most of whom believe their bank to be neither fair nor transparent.
Devi Aurora, a senior director for financial services at Standard & Poor's, said one of the ways they rate banks is on the stability of their deposits. While Standard & Poor's does not currently rate online-only banks, Aurora said online payment services are helping pull online-only banks into the mainstream.
"The generational shift relates to the appeal of 'banking on the go' for technology-savvy consumers — as these consumers approach their peak earning years, they are most likely to adopt the new technology of banking and usher in greater convergence between online and traditional platforms," Aurora said. "We don't expect this to happen overnight — indeed the promise of internet banking has been around for many years already. Over time, we expect changing attitudes to online banking services will evolve with shifts in the payments industry."
The Simple opportunity
The market that Simple inhabits is paradoxical in the sense that banking customers desire the convenience and modernity of Internet banking, but they are still wary of the Internet itself. Pew research reported in 2013 that 51 percent of all U.S. adults bank online, that's 61 percent of all U.S. Internet users. Internet banking as part of traditional banking has been around, in some degree, since the 1980s, but the concept of an online-only bank is still novel and potentially ahead of its time. Ben Rogers, research director for consumer finance research institute Filene, said that he believes the current system is not yet ready for disruption.
"It's like that new Spike Jonze movie about a man who falls in love with his computer. It's possible, but we're not there yet," he said. "Online-only banks are not fully disruptive yet, because what most of them are great at — taking deposits and paying competitive rates — is only one fraction of a deep banking relationship. But the barriers to maintaining a full online banking relationship with loans, investments, and business services, are falling all the time. The big shift, and this is what banks and credit unions are worried about, will come with the up and coming generation that is mobile-first with everything, not just their banking. If you can watch Game of Thrones on your phone, why not do your banking there too?"
Pew research done in 2013 also reported that 86 percent of Internet users have taken steps online to cover their tracks or use the web anonymously. The Internet is still a scary place for many people. In a post-Snowden era, where encryption and security should be at the forefront of every company's agenda, data breaches like the recent one at Target are still a reality. Simple's mission raises a bigger question: Are consumers ready to give aspects of their lives that are as personal as their finances over to the Internet completely?
What do you think?
We want to know: Do you think online-only banking is a safe bet, or a data disaster waiting to happen?
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Conner Forrest has nothing to disclose. He doesn't hold investments in the technology companies he covers.
Conner Forrest is a Senior Editor for TechRepublic. He covers enterprise technology and is interested in the convergence of tech and culture.