

Ask HN: Bank 2.0. How would you build a better bank? - dkokelley

I was thinking about consumer banking while reading this thread: http://news.ycombinator.com/item?id=948460<p>I came to the conclusion that consumer banks have a lot that are in need of fixing/improving. I posted a comment about how I would build Bank 2.0 if I had the means. I figured that I would post a discussion on the subject to hopefully get a lot of input from a lot of smart people.<p>My question to you is, how would you build your Bank 2.0? How would you make money? How would you be different from other banks out there? You have some seed money (for new banks, this might be about $20M), and your goal is to start a bank in your town. How would you start, and how would you grow?<p>I'd like to focus this discussion more on consumer banking (think, checking, saving, and small business accounts).
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maxdemarzi
Marketing Idea - Make checks "Viral": Add "Deposit this check into a new
account at X bank and receive an additional $100 _".

_ is for the disclaimer on back with legal requirements. $100 or $50 or
whatever you think your new customer acquisition costs should be.

Different way of banking idea: Get rid of checking accounts all together.
Instead you have a 2 Line of Credit accounts plus a Money Market account.

1 Zero interest LOC (ZLOC)and 1 variable interest LOC (VLOC).

At the end of the month the money in the MMA pays off the ZLOC completely
assuming 100% coverage. Any overage goes to the VLOC.

Having the ZLOC eliminates the NSF fees a customer gets when they go over but
it lets the bank generate interest fees on the VLOC if not payed by the end of
the month. The deposits go to the VLOC first until it is zero, then move to
the MMA.

Bank collects interest on MMA from the FED and makes money on loans
fees/interest since you are bypassing the 10% reserve requirement and not even
using the sweep method.

~~~
abstractbill
_Marketing Idea - Make checks "Viral": Add "Deposit this check into a new
account at X bank and receive an additional $100"._

Just fwiw, this is a good example of how far behind US banks are. Until I
moved to the US, I had barely used a check in the past 5 years. Now not only
do I _have_ to use them for a bunch of stuff (e.g. paying rent), I even have
to _pay_ for the checks themselves!

Banking 2.0 in the US should be less about adding features, and more about
fixing all the blatantly broken stuff and dragging the whole system into the
modern age, imho.

------
vaporstun
One thing that irks me about banks is that checks don't appear on your balance
sheet until they are cashed.

More and more people these days aren't balancing their checkbooks and simply
using the bank website's readout of available money to determine whether or
not they have enough money in their account to pay for something. However,
this is flawed for checks as they aren't logged until cashed. I've had more
than one occasion where I got burned by this thinking I had more money in my
account than I actually did because I had sent out a check that my landlord
didn't get around to cashing for a few weeks.

This seems like the way the world is headed and it still kind of boggles my
mind as to why we have both the account ledger at the bank's website and a
separate piece of software to balance our books. (Mint.com, Quicken, etc.) The
only reason this dichotomy exists as far as I can tell is for things like
checks which are outstanding and not debited against your account when you cut
them. (Ok, obviously there are other things they do like budgeting, etc. but
why can't that all be done with my bank's website?)

My ideal Bank 2.0 would incorporate things so if I pay my rent with a check or
send a check to someone through the web billpay, it is deducted from my
account immediately so I cannot accidentally spend that money which is out
there. Obviously it would take user interaction to log the check they wrote to
someone in the case of a personal check, but with the web billpay it could be
done automatically. By reducing the balance when that check is cut, it should
do it throughout the system (aka not simply symbolically) so if I go to the
store and make a purchase with my debit card, my balance with the check cut is
taken into account and it doesn't allow me to spend the money for the check.

In the event of a stop payment on the check or a lapse of a certain period of
time, the money would be returned to my account, so a lost check wouldn't
screw me over. This would eliminate this huge problem along with the pain of
having to maintain an additional piece of software to monitor my account.

~~~
kd5bjo
ING Direct debits the money from your account when they cut the check, and
then re-deposits it (without interest) if it hasn't been cashed in 90 days or
has payment stopped. They also don't issue manual checks, so that isn't an
issue. Anecdotally, it seems to work well.

In regards to maintaining your own ledger instead of just using the bank's,
the primary purpose is to help catch any errors that the bank makes with your
account. Personally, I have few enough transactions that I can generally keep
track of them in my head, but I could easily see how you might need some help
with that if your finances were even a little more complicated than mine.

------
Ennis
Check out pcfinancial.ca.

Here in Canada I thought we were totally behind on just about everything the
states has. That was until I tried living there. Banking in the states is so
fragmented and difficult! The big banks were a nightmare to deal with when
something goes wrong and merely average when everything was fine. The smaller
banks, some of which are awesome, are useless when you leave their prime
territory. Even in Manhattan, it was difficult to find a branch let alone a
bank machine of WaMu - which is the one I finally settled for. I'll admit that
if you can get an employee type plan from Bank of America that cuts fees and
makes it all nice and dandy then you are better off doing that.

OTHERWISE, look at pcfinancial. It's so basic and hasn't changed it's services
much in the last 10 years I've used it. Use that as a base model and innovate.
Also, look up how much money you need to have to legally register as a banking
institution.

------
mseebach
My bank 2.0 wouldn't be a bank as such, it would be an infrastructure provider
with APIs for everything. Anyone could then build their bank-service on top of
that. Want that debit card, this checking service and venmo.com for mobile
micro payments? Just authorize them to your account, and you're going.

Any withdrawal from the account would require a full trace with timestamps and
as much data as is available to be filed in the system. E.g. it would be
expected for a web shop to save the invoice for your order directly in your
account.

Still, I'd expect this to be regulation and liability hell, and if it isn't,
I'm sure our friendly neighbourhood politicians and litigators will make it so
in a jiffy.

------
wmf
Semi-related: Does anyone know why credit card transactions can be authorized
in seconds but ACHs (or whatever underlies online bill payment) take days to
go through?

~~~
randallsquared
ACH uses the check clearing system (since that's exactly what they are:
checks). This system was originally designed in a time when checks needed to
physically move from bank to bank, and while there have been attempts to speed
it up, debit cards have removed much of the pressure for making this timely.

~~~
jakehow
Check21 should have alleviated this but I think ACH and Check21 are separate
rules systems. A bank I use (USAA) lets me scan checks and upload the image to
deposit the check. Funds are available instantly (I do not know if they are
lending me the funds interest free during the window, or if it is actually
cleared instantly).

------
jakarta
Take some time to read about what Vernon Hill did at Commerce Bancorp.

Hill came from a non-banking background, he was an owner of Burger King
franchises. As a result though, he really figured out that one of the keys to
creating a thriving bank was to make a bank that had great customer service.

Mostly, innovations are used to get cheap deposits. If there is a bank that
can innovate and do it correctly, then it can work well. Commerce is a great
example of one that did achieve it. Their efficiency ratio was higher than
most peers but that’s because they kept their bank open 7 days a week and they
made it so you really wanted to visit their branches. They used nice colors,
had super friendly tellers (they weren’t stuck behind bullet proof windows or
a mini gate), and they didn’t make branches look like a post office or a jail
cell.

Their whole idea was putting more money towards non-interest expense but they
were able to charge less for deposits since they were more convenient. It
definitely worked. If you could invest in safe assets you could earn a wider
NIM than peers.

HOWEVER:

You can be the most innovative banker in the world but if you make bad loans
you’ll go down.

~~~
something
vernon hill writes regularly at <http://www.bankstocks.com/>

~~~
jakarta
Just be cautious of Tom Brown (the owner of that site). The guy is basically a
huge gambler/perma-bull on banks. A lot of his insights were proven to be
wrong during the crisis.

------
sophacles
First I would cut the "Checks take N days to clear", "electronic transfers
take 3 days", and other similar crap. Second I would allow the creation of
multiple sub-accounts which can be used for single transactions, single
receiver, or rate limited transactions. Think ING Orange sub-accounts but with
external interfaces and on sterioids.

~~~
randallsquared
_First I would cut the "Checks take N days to clear",_

The only way to do this unilaterally is to loan your customers money you don't
have for certain, yet. Legally, checks can be revoked up to _six months_
later, so how many days a check takes to clear indicates nothing more than the
confidence the bank has in final clearing, which won't happen for some time
after that. So, people with bad credit, or who have previously overdrawn, are
probably higher risks for depositing checks (especially personal checks) which
may be revoked later.

------
lsd5you
It's perhaps more a matter for regulation, but the current disparity between
the value of the service and the cost should go. The customer should pay
small, reasonable fees for everything. It is highly distortionary and is
symptomatic of a dysfunctional market for banking services.

In the UK a few years ago the 'public debate' raged over ATM fees. Banks
stopped cooperating and started charging about 2 pounds to the customers of
other banks. It was pointed out that the amortised cost to them for a
withdrawal was 30p. There was outcry and now they charge nothing. Apparently
there are but two stable pricing policies - exorbitant and 0.

In general all basic banking is free, and they make profits by getting people
into debt, or selling daft insurance schemes, or giving terrible rates of
interest. Of course for the sensible individual this is not wholly a bad
thing, if you can weather the hail of junk mail/promotions this business model
entails and are prepared to move your savings account every year to make sure
it has a reasonable return.

In my mind there is no reason for credit cards to exist at all - if you want a
loan or overdraft, then get one - really they are a conflation of services:
Visa/mastercard + overdraft + purchase insurance. What is desirable is a debit
card that has visa/mastercard (encouragingly these do exist more and more, but
are not the norm) and purchase insurance. i.e something functionally
equivalent to a credit card, but without the capacity to get the owner into
debt.

I like some of the other things people have suggested as well. Of course most
of the ideas being voiced here are not exclusive!

------
dkokelley
To start, my Bank 2.0 would do a lot to change the way credit/debit cards are
authorized. clawrencewenham had some great ideas about this here:
<http://news.ycombinator.com/item?id=948965>

Basically the owner of the card would have final control over charges on it.
The bank could automatically call or text you and ask for a code before
authorizing a transaction, and the cardholder would have white and blacklists
with custom rules about when/how much a particular merchant could charge.

In my bank, I would probably stay away from mortgages and credit cards (I
could offer them through a 3rd part supplier, but I wouldn't carry any of the
balances). This is to make reserves more manageable. Today's banks have
massive departments dedicated to managing reserves and working with overnight
and discount loans. By eliminating/outsourcing these functions, I think more
could be dedicated to serving the customer. Most of the money for the bank
would be made through an agreement with someone like Visa or Mastercard, so
that whenever someone charges their card, part of the fee that merchants pay
goes back to my bank as the card issuer.

~~~
jakarta
I don't see why you would not offer mortgages.

The point of a bank is to have a healthy net interest margin on the funds that
they are borrowing and the funds they are loaning out.

Mortgages are like having a long term contract where that margin is secured.
Also, think about it. If you are not making mortgages, you're going to be
looking at more consumer-focused later credit stage loans.

Commercial real estate, construction, small business loans. All of these are
loans that are more difficult to write and typically carry higher loss rates.
When I look for banks to invest in, I am typically looking for banks that
write mostly single family mortgages because they are more secure than those
lending to local businesses/developments.

Also, I think you are confusing most banks with the dealer broker model -
Bear/Lehman/Merrill/Goldman/Morgan Stanley. Those banks had massive amounts of
overnight lending. Commercial banks like JPM, Wells, and BoA did not. That's
why they are able to thrive and consolidate during the crisis.

A great bank will have sticky deposits -- low yield Savings accounts, checking
accounts. Not high yield CDs.

~~~
dkokelley
I was thinking about mortgages in terms of a bank in my home town. Being a
smaller bank, I'm not sure I would like to be carrying a lot of loans, but I
could create them for other's to carry in return for a commission. You are
right, I might be confusing banks and brokers.

~~~
jakarta
You would be pretty surprised. The loan books on most tiny banks are mostly
comprised of single family mortgages.

------
nzmsv
Never call me on the phone. The promise of that alone would make me want to
switch banks. Calls for security reasons are fine.

Seriously, the number of times my bank calls me is ridiculous. Usually it's to
sell me extra stuff. Sometimes it's "to make sure my experience is
satisfactory". It would be satisfactory if they'd switch to using email ;)
Asking nicely to stop calling has not worked. Getting mad stops the calls for
a few months. Then they start again. I guess their telemarketers are paid
commission only.

Have an awesome web interface. Something like Buxfer, but built right in. In
fact, I think Buxfer should become a bank :)

------
allang
Perhaps it's a lofty suggestion, but I would definitely bank at any bank
partnered with a gold mint which allowed me to convert my savings to gold
bullion with one-click. After the purchase, I would be allowed to visit my own
safe with the physical bullion. That would be incredible.

Add a beautiful/easy online interface to manage your accounts, your gold, and
foreign currencies.The bank would charge premiums for conversions in small
quantities, or add a premium to the spot price.

Plus all the best aspects of current banks - as few or as low fees as
possible, weekend hours, etc.

------
eli
If ingdirect.com had paper checks (even for a fee) and a branch I could visit
(if I really wanted to talk to a person) it would basically be perfect.

~~~
philwelch
They're surprisingly good about answering the phone. No menu bullshit, just
call and someone picks up.

If ING Direct interoperated with Mint, it would basically be perfect.

------
lleger
No more overdraft fees. That's a start—a big start.

------
elmindreda
Give people interest on their savings.

------
sleepingbot
Here, accountability is key: <http://en.wikipedia.org/wiki/Accountability>

So I'd use a social way to make all the structure accountable. A "real time"
way of figuring out how any portion of the money deposited in the bank is
being used, and the possibility to opt-out with one's money if, say, high
executives have deep pockets or they invest in coal, oil, weapons, etc. (via
funds, etc.)

------
zackattack
I would eliminate overdraft fees on DEBIT accounts.

~~~
wmf
It does seem odd that almost anyone can get a no-fee credit card but it's hard
to find a no-fee overdraft line of credit.

~~~
philwelch
ING Direct and US Bank both have no-fee overdraft lines of credit.

