Financial interaction: the next generation
I have spent over 25 years creating, processing and analyzing financial transactions. I like studying them - a lot - whether an outgrowth of my time on Wall Street helping sophisticated entities manage risks, or through IA Ventures’ investments in Simple, TransferWise, and BillGuard. Transactions are fundamentally about people interacting with other people, and are initiated at the speed of real life. But at one time or another they have to touch our byzantine, outmoded, friction-filled financial architecture, and get completed at the speed of banks. Charting the path of a transaction through the bowels of the banks and other intermediaries in our current system would require tons of boxes and arrows and round-trips that would seem absurd to the Internet-savvy crowd. This is where we are today.
Simple was founded in 2010 with the mission to offer the first truly seamless user experience to retail customers, hiding that messy underbelly of the banking world. Transparent. Low-cost. Mobile-optimized. Goal-oriented. First-rate customer service. They did a ton of things right. But in order to get up and running (relatively) quickly and with a modest amount of capital, they had to work with partners and not actually become a bank. This involved a series of known trade-offs that Josh, Shamir and the Board made with an eye towards releasing a basic product, collecting feedback, iterating on the product and creating a delightful experience for Simple users. Obtaining a bank charter was always in the long-term vision, but involves a completely different magnitude of capital, legal and consulting work - and time. Rather than innovating in a vacuum, the Simple team wanted to get a product into the wild and let users help shape the roadmap. They never could have gotten it out so quickly (and without many times more capital invested) if they had pursued the charter route.
Much has been written of Simple’s recent sale to BBVA. Separate from the impact the sale has on my firm, I personally view the acquisition as a rare example of a “win-win.” By mid-2013, Simple had grown to the point where seeking a charter was a very real consideration, but one that would have required a massive capital raise and a fundamental re-shaping of the organization due to a raft of new operational, legal and regulatory requirements. In the process of thinking about a raise, Simple received a bunch of inbound M&A interest, the most exciting of which was from BBVA. Their executive leadership had met Josh and Shamir back in 2010 and they were early believers in the Simple team and mission. By late last year, they were ready to disrupt themselves by injecting Simple’s product-focused, tech-forward DNA into their $820 billion organization. BBVA has a scale US-based banking operation, Compass Bank, which can help support Simple’s infrastructure and capital requirements in the future. Terms were hammered out pretty quickly and a deal was done. I couldn’t be happier for the Simple team that they are joining a group that really gets them, will enable them to preserve their independent and entrepreneurial spirit while providing both capital and an enlarged customer base to change the face of retail banking. However, make no mistake: Simple is optimizing the banking experience. But that experience is necessarily tethered to all that comes with being a bank, for better and for worse.
Prior to the Simple announcement there has been a bunch of stirring around re-shaping the banking experience as we know it in a more fundamental way:
@cdixon @JackGavigan @Kwdmiller @aweissman I am dying to fund a disruptive bank.
— Marc Andreessen (@pmarca)February 9, 2014
In the same Twitter thread Marc went on to say:
@maxrogo @rabois @cdixon I want the pure software bank w/no physical infrastructure, + a full API for financial apps on top.
— Marc Andreessen (@pmarca)February 10, 2014
Zac Townsend of Standard Treasury weighed in as well, subsequently sharing a write-up describing a syndicate approach to raising the capital necessary to start a bank that doesn’t run afoul of Bank Holding Company regulations. But Marc and Zac’s ideas, along with concepts proposed by several founders we’ve recently met, all share a common thread: operating within the current banking strictures. A Bank’s involvement as the centerpiece of disrupting banking simply isn’t disruption, it’s derivative.
I believe disruption will be found by identifying the atomic unit - the financial interaction - and designing a set of user experiences that make these interactions as easy yet robust as possible. This is not limited to retail banking but involves commercial banking and investment management. And with protocols like Bitcoin (see Marc’s post on Why Bitcoin Matters) and others to follow, why remain shackled to the notion of being a bank? As the incumbents become smarter and take more risks (e.g. BBVA) the opportunity within the traditional banking sphere would seem to be muted. There’s a very high price to even play the game (call it $25 million for the charter, legal work and start-up costs, plus another $100 million for regulatory capital) and an interminable period of time that is most assuredly NOT start-up time (two years, minimum, to get all the legalities hammered out and to get up and running. And, oh yes, you need a processor and a bunch of other stuff, too). If you believe that truly disruptive alternative financial protocols such as Bitcoin will be the foundation of our financial world in ten years, then trying to re-create a better bank by connecting with existing ones or building a brand new one seems like a costly and backward-looking play.
However, I can see a place for a small, tightly-knit skunk works team of product and UX people to rapidly iterate on optimizing the UX for a single use case they’re passionate about, be it retail or commercial. They can use an enabling platform such as BancBox (I’m not an investor) to rent the pipes so they can be 100% focused on user experience. They’ll find the ‘wedges’ into peoples’ financial lives that engender trust and make people want to drop their old-line banks. And then when the landscape becomes clearer for which non-bank protocols are winning, this team can simply lay their market-tested interface on top and be a ground-breaker in the next generation of financial interaction. Now this, to me, is disruptive. The bank of the future probably won’t be called a bank. By focusing solely on making the atomic unit - the transaction - fit within users’ lives, we can avoid the interim step of building a brand new bank and skip to the good part, requiring far less expense than buying a ticket to our highly dysfunctional banking show.
If you are such a team that’s excited to figure out what people really want from their financial interactions, and have a heavy emphasis on product design and user experience, then give me a shout. It would be fun, indeed.
