

Ask HN: How can I start my own bank? (Let's redesign banks) - whalesalad

I'm sick and tired of banks. This all started with a personal irresponsibility, an overdraft fee I tried to pay by traveling to an ATM and depositing the difference in cash. My local bank doesn't accept cash in ATM's... so I might get nabbed with another fee tomorrow morning.<p>Decent banks still have their glaring flaws, and most big banks are quite simply crooks. Local banks typically do a decent job competing since they need to in order to steal customers from big institutions like Chase and Wells Fargo, but in places like Hawaii (where I live and work) those banks don't exist. So.. local banks such as Bank of Hawaii, First Hawaiian Bank, etc... don't need to do as much to compete because they're all there is. I get a $26 overdraft charge on even a $1 charge, and I don't get notified for 3 days via a note in the mail. By then things are even worse. Services like Mint help... but they don't work all the time. A bank needs to solve this, but they never will because so much of their profits come from these kinds of fees.<p>I'm also a customer with ING Direct where they do a great job providing more than all other banks by not having any branches. They exist purely online, so their online services are great. I can pay my rent online and they mail out a paper check to my landlord. If I need a check somewhere real fast, they can do that too and overnight it for a $20 fee. They also give you a line of credit for overdrafts, instead of charging you an overdraft. You pay a tiny bit of interest and solve the problem with a few cents down the tube. ING falls slightly short because while not having branches helps keep their overhead low, it makes it harder for customers to use their services. I have to mail a check to some place 5000 miles away (again, a lot of my anguish is probably due to being in Hawaii) and wait for it to appear in my account.<p>There are big stinky issues with our financial system today. My problems aren't incredibly large, I have $500 to my name and I'm 20 years old with zero investments. I'm not talking Enron here. I mean... why can't I receive money from a client overseas instantly into my account without going through someone like Paypal (who can take control of my funds at any time)? Why aren't all banks letting me take a photo of my check and get the funds like USAA does? Why doesn't a bank send me an email or text message as soon as my funds get to a certain point, or when I overdraft? Banks are OLD technology and they really need to be brought up to speed. I'd spend night and day working on something to revolutionize the banking industry, from top to bottom. What do we need to do guys? I imagine that all of you have LOTS of more ideas and feedback for banks and this problem in general.<p>Further reading on the topic - http://ma.tt/2009/08/starting-a-bank/<p>Come on HN, let's start a BANK! I realize it's incredibly hard... there are security issues and more legal issues than I care to shake a stick at. It will require capital, experience^200, etc.. No one is going to give their money to some jacknob 20 year old like myself. I want all of your feedback though, I know that we all hate our banks.
======
mcherm
Hi! I'm a developer for ING Direct, and I'm pleased that you speak so highly
of your experience here. I wonder if I can help out some with the concerns you
still have. You mention not having branches -- which is true, but we DO run
the occasional internet cafe complete with trained ING barista/bankers (no...
I'm really serious!). You say you live in Hawaii, so consider stopping by 1958
Kalakaua Ave, Honolulu HI and saying "Hi".

You also talk about the trouble of mailing a check 5000 miles (it's closer to
4000, but who's counting?). I'm sympathetic: what kind of system would you
prefer? For instance, do you think you should be able to scan the check at
your PC and enter it that way? Would you rather have a payments system so that
you don't need to use checks at all? Nothing will happen magically tomorrow,
but I'd be very interested to hear what HN readers think, and I'd keep it in
mind as we work to improve our systems!

Starting a bank is HARD... I wish you luck in your endeavor, but it MAY be
easier to find a "good" bank (different people may have different ideas about
what that means) and support them. You are certainly welcome to pass on your
good ideas to someone like me.

~~~
exogen
As a happy ING Direct customer, here are my comments:

\- I'm extremely jealous of USAA's Deposit@Home feature. Depositing a check
just by snapping a photo in an iPhone app? Yes, please.

\- I've received an answer about the required linked account before, but I
still don't like it. ING really can do everything I need from a bank - dealing
with another one is just annoying.

\- It sounds like you two are talking about depositing checks into an ING
account by mail? I didn't even know that was possible. The only thing I use my
linked checking account for is making deposits and then transferring them to
ING. Why isn't this option mentioned in any help topics regarding deposits?

~~~
blackguardx
Hey eggsagain,

I use USAA and it is awesome. I have never used deposit@home because I
generally go for direct deposit, but maybe I'll try it. They give you pre-paid
stamped envelopes for depositing checks. That is what I use for the rare times
I have to cash a random check. Now that I live in NYC with copious blue boxes,
it is even easier.

To join USAA you have to be a veteran or a relative of a veteran. I'm lucky
that both of my parents were in the Navy. I've tried other banks and always
felt I was getting shafted in some way. USAA, on the other hand consistently
makes you feel like you are getting a good deal.

~~~
shamir
Actually, you don't have to be related to the armed forces in any way to join
USAA bank. I am not even a US citizen, and I was able to sign-up without
trouble. All you have to do is answer no to all the questions about the armed
forces, and it will still allow you to open an account.

------
DanielStraight
I'm not saying banks are perfect, but it seems like 90% of your complaint is
about overdrafts. If you don't want to worry about overdrafts, check your
balance in the morning, write down the amount, and don't spend more than that.
Or pay for everything in cash from an ATM and use the ATM to double-check the
balance first.

As for the $26 overdraft charge, do you know how much it costs the bank? Do
you know that it makes a difference if it's only a $1 overdraft? If you don't
know the industry, how can you propose to change it? Sure, it might be nice
for me to say I think all banks should give 10% interest on accounts, but they
can't. Maybe there's nothing they can do about the overdraft fee.

~~~
prosa
Actually, fees can drive as much as half a bank's revenue, and overdraft fees
are typically the largest component of that income. These fees are almost
entirely driven from checking behavior of Americans earning less than $50K a
year. You would be shocked at how frequently overdrafts occur for a customer
with a low balance. These fees can add up to hundreds of dollars a year on
average for low balance customers. In fact, they are among the primary reasons
why "Free Checking" is an attractive offer for big banks. (Hint: it ain't
really free.)

There is serious congressional concern about the inherently predatory nature
of overdraft fees. However, with Dodd's impending departure from the Senate it
appears that the banking lobby will prevail in avoiding legislative
restrictions.

~~~
ErrantX
In this sense I believe it is more beneficial to change the spending habits of
people than fixing the banking system :)

~~~
prosa
That is a reasonable argument. (You'd make a great banker!) However, realize
that in today's world the message coming from banks is spend-spend-spend.

Furthermore, a huge amount of overdraft fees comes from the practice of auto-
enrollment in overdraft protection. If consumers need education, having
transactions go through at the point-of-sale despite having an empty bank
account is a recipe for trouble.

Last, is the issue of check ordering. (Considered a "courtesy" by most banks!)
Today, most banks clear all debit card purchases (and checks) at the end of
the day, after sorting them from largest to smallest. The idea is to run your
account into the red as quickly as possible, saving the small $1-5 charges for
the end. This simple greedy algorithm (no pun intended) maximizes the number
of overdrafts. The typical rationale is "big checks tend to be rent and other
important payments, which you would prefer to clear under any circumstance" --
laughable when the majority of overdrafts are on small, card-based debits.

So while I agree with you that consumer behavior needs to change, the people
that need to save and not spend are exactly the ones that banks are
(intentionally) targeting, and they have gotten exceedingly good at doing so.
Check order policies and automatic enrollment in OD protection only complicate
the issue.

~~~
ErrantX
I look at this the other way; assaulting the bastions of banking is probably
pretty difficult and could take years (though it might be a bit easier at the
moment).

But if we can brainstorm/think of other ways to modify _individuals_ behavior
- to help them manage money better, avoid over spending etc. then the banks
are a bit screwed and would have to adapt.

Actually better idea: we'll meet in the middle. :D

~~~
clavalle
Why 'assault the bastions'? Why not just chip away at the edifice? A smaller
bank with clear customer service pledges that rigidly controls costs through
as much automation as possible. Keep most transactions online. No large
physical locations with drive thrus and corresponding staffing...smaller loan
centers with loan officers paid by some sort of commission structure based on
loans given out and repayment rate.

Lean and mean...except when it comes to customers who will be treated with the
dignity they were used to 25 years ago. Make money with the bank's core
services instead of an abusive fee structure. Doesn't seem terribly outlandish
to me.

------
bdfh42
The simplest way is probably to do what Richard Branson (Virgin) just did and
buy a small existing deposit taking bank.That way you get the legal entity and
all of the controls and procedures already in place and can start to expand
the operation "on line" (as I am sure Virgin are now about to do in the UK).
The USA might still have some of those small local banks in existence that
could be purchased at a reasonable multiple of earnings - or perhaps you might
find one interested in an Internet based joint venture.

~~~
imajes
One falls every week. Just ask the FDIC. But i am sure the us is encumbered by
states vs national complications, as well as the need to route through larger
banks.

~~~
prosa
The critical issue here is the presence of a national vs. state charter.
National charters alone add substantial acquisition value to a bank.

Keep in mind that anyone buying a bank right now is competing with an
unprecedented amount of highly sophisticated Private Equity buyers with access
to plenty of cash.

~~~
i2pi
Most PE guys I know of are having a hell of a time trying to acquire banks.
While there has been some indication of a relaxing of the bank holding company
act (that would otherwise prevent PE, or any non-banking firm from acquiring a
bank), the issues that I mention in my other comment seem to be blocking any
acquisitions.

------
imajes
This is cute. I like the tenacity of what you're doing here.

Thing is, it's entirely impossible. To start a bank you need capital to
leverage your deposits. That's anything from 10-30%, so to have a liability of
$1000 you'll need $300 in capital reserves just to keep within the rules. Then
there's the insurance you'll need to buy on the risk you take, and the other
ways you'll need to turn profit - otherwise, why will i invest in you (with
retail deposits?)

As jacques said, credit unions are a simpler step- but even simpler are
lending groups where everyone pitches in money and then everyone takes a turn
in being able to borrow from the pool. I can't quite recall the name of these
structures, but they are on wikipedia- NPR's Planet Money podcast covered them
a few months ago. (which, if you are in any way interested in this stuff, you
should listen to back-to-front).

But i don't think it's the banking that's the problem.

If you have a bunch of money - liquidity - then it's easy to move it around to
ensure you're covered. Then you don't get hit by charges. In fact, most
systems (wells fargo included) do this by default now, and you don't even have
to care. You can realize then that cashflow is the lifeblood of small biz, and
if you have it, everything is great. If you don't, you're screwed.

The bottom line might seem to be that it's hard to be financially stable when
you're starting out/contracting/consulting/low paycheck, whatever. There are
two ways of dealing with this: making a strict budget and keeping to it
(boring) or deferring your care till you make enough money to just buy that
debt off - in which you risk bankruptcy and other nasty things.

~~~
quant18
_even simpler are lending groups where everyone pitches in money and then
everyone takes a turn in being able to borrow from the pool. I can't quite
recall the name of these structures_

[http://en.wikipedia.org/wiki/Rotating_Savings_and_Credit_Ass...](http://en.wikipedia.org/wiki/Rotating_Savings_and_Credit_Association)

------
kdaigle
Or simply join a Credit Union which has a much different approach than banks.
Focuses on returning profits as services to the consumer via lower rates, more
features, etc.

And, like others have said, if a big concern of yours are the overdraft fees
call your bank and tell them you no longer want overdraft protection.

------
mootothemax
One of the main difficulties is obtaining a banking licence so that you can
accept consumer deposits.

Personally, I like Virgin's take on this; buy a small bank that already has a
licence and go from there:

[http://www.telegraph.co.uk/finance/newsbysector/banksandfina...](http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/6952446/Virgin-
Money-primed-for-assault-on-UK-banking-market-after-Church-House-deal.html)

~~~
pbhjpbhj
I thought you bought a large bank on credit, paid off the creditors using the
banks funds and then asked the gov for money to cover you.

------
lutorm
The fact that the word "check" is still used regularly in US banking seems to
indicate that it's not a business that is amenable to a tech startup... I
mean, come on: "If I need a check somewhere real fast, they can do that too
and overnight it for a $20 fee." It's not ING's fault, of course. I don't
think anyone in Sweden has written a check in the past 30 years. Whenever I
talk to my family about this they just snicker.

------
raphar
I work for a bank (not from USA though) and what I see as the toughest barrier
in initiating a Bank is the massive amount of banking regulation that every
institution must comply (not negotiable). Also the impact of new regulations
on the systems running the business are usually non trivial. Missing any of
these, means that you cant operate (or you can't do certain operations,
generally critical).

As I said, the effort put in keeping with all this is very big. Usually the
split is 50/50 with regulation vs new features (my view is as a software
developer). The bank being global only makes things worse, as only adds more
regulations from different places to equation.

Well that was the boring part. I think theres a place for new financial
services but perhaps the way to get started is providing those new services
and avoiding being a bank. As the institution adds more services and grows, it
can begin to take into account the regulation little by little. That was my
simplistic view ;)

------
Raphael
See, I've been thinking that money is fundamentally broken. We don't need a
better bank; we need to abolish banks. (If they do serve some purpose, then
they can remain as a service for the wealthy.)

Paper money works in its simplicity. You always know how much you have,
because you can hold it and count it. There's no way to overdraft, or have it
charged without your consent. The main downside is having to be physically
present to transfer it to another person. Making change is also a minor
annoyance.

So, digital money should be designed to be very similar to cash. First, it
should be legally within your possession at all times, even if it is just a
number stored in a government database. You should never have to hand control
over to a bank if you do not wish. Because losing control means they can fuck
with your balance and delay transactions. Perhaps it could be thought of as
micro treasury bonds (not sure). Second, there are no transaction fees. It
does not make sense to hamper commerce; and any infrastructure costs for money
servers and bandwidth are a complimentary service of the U.S. Mint. Third:
transactions are completely controlled by the sole account owner. Nothing gets
in or out without the owner's permission. There is a combined transaction
history and queue, extending arbitrarily far into the past and future. You may
authorize a transaction or deny one without penalty at any time. If
insufficient funds are available, the transaction is either delayed or
canceled. You may also authorize a recurring transaction, but these will
appear in the same queue in case the need arises to cancel. The beauty of the
infinite queue is there are no surprises.

Now, I'd argue that Congress or the Treasury should get cracking on this
immediately, but I doubt that's going to happen. So if you start a bank,
please try to hold the principles of paper money in mind. Institute firm
policies of ownership and self control with zero fees. You can practice with a
virtual currency (maybe for a game) and just try to get the security and
interface down. Good luck!

------
jacquesm
Starting a real bank is hard, lots of solvency requirements and lots of very
large lawyer fees in your future.

It might be more feasible to start a credit union:

<http://en.wikipedia.org/wiki/Credit_union>

~~~
prosa
Not to mention that the OCC has to approve your business plan! "Lean startup"
proponents need not apply. This is a long, slow, paper-driven process.

------
WesleyJohnson
Banks are indeed incredibly frustrating. I recently posted a rant on Chase
bank which I'll link below. They really do make it unbelievably difficult for
you to monitor your balance properly, which is why I don't rely on the bank to
tell me how much money I have - I keep track of it externally and the bank is
more or less a verification. If there is ever a conflict, I go with what my
tracking indicates as it's almost always the lesser amount.

A relative works in the banking industry as a branch manager and they
literally have goals on how much they're supposed to collect via fee's,
especially overdrafts. These goals alone can make or break quarterly bonuses
and yes, they do indeed make a LOT of money from them.

I realize that overdrafting is in almost all cases the customers fault, but in
my mind a bank should be loyal to its customers in the same way a customer is
loyal to the bank. If I've been with a bank for 10 years and I overdraft 30
cents, cover it for me or at least reverse the fee without question if I call
and ask about it. Often times, the banks are also meeting quota's on how many
reverals they're allowed to give per day, month, quarter and per account. Call
them at the wrong time and your plight won't matter, they'll just deny you. It
really seems like customer service is no longer a top priority in most banks,
perhaps not even in the top 5.

Unfortunately, as much as I'd love to see progress and change made in this
area, I simply don't see myself ever giving my money to a bank or credit union
that isn't well established unless I have some expendable income that I could
test the waters with.

<http://wesleyjohnson.posterous.com/chase-bank-sucks>

------
zoba
I feel like there is a lot my bank could be doing but isn't. Most of it
relates to technology.

First, I think a decent web interface for my money would be nice. The bank
wont let me have 20 checking accounts, but it would be nice if I could have
the appearance of that many accounts in a web interface. One account for
bills, one account for the new computer I want to buy, one account for food,
one account for random transactions (i.e. where my debit card pulls from).
Then, when my direct deposit paycheck comes in, I want to be able to have it
automatically be split up into these bins. I do all of this mentally any way,
but if I could see it on screen then it would make things much easier.

I also want there to be text message alerts for things, especially overdraft.
I got $720 in over draft fees for spending something like $150 last fall, this
is absurd! If they had sent me a text message or email, or anything I wouldn't
have had to skimp on Christmas presents. Of course many will say "this is how
they make their money: fees." I would reply, "this is capitalism: have a
better service and make your competitors bend to your will, or let them go
bankrupt."

I have come up with other ideas on what a bank could do, and would like to be
updated if anything happens with this.

------
jhouse
Michael, open an account with someone nicer. Direct banks usually have to try
harder because they don't have local branches and need to incent you somehow.
ING Direct is good, but Charles Schwab
(<http://www.schwabbank.com/checking.do>) might be better; they even refund
your ATM fees. I'd keep an account at a local bank for convenience, sending
everything by mail to your direct bank sucks. I wouldn't use the local account
for anything else though to avoid getting nickel and dimed. Most banks allow
you to set up electronic transfers between your accounts and these transfers
are usually free. BOH allows this, just make sure that they won't ding you for
that. This way you will have a convenient way for making deposits and a more
sophisticated and friendly account for everything else. Your most pressing
problem is cash though. You really need to build up a savings cushion to avoid
the likelihood of overdrafts and even worse - falling into debt. I know that
it's easier said than done, but do set spending budgets. Mint.com or even a
simple Google doc spreadsheet are great ways of tracking your spending habits.

------
thaumaturgy
YES. I agree wholeheartedly with you. This is something that I've wanted to do
for years -- but unfortunately has been way too far out of the reach of my
resources. For now.

Most of the comments here seem to miss the point: banks act as liaisons
between people and money, and most banks -- even local ones -- aren't doing a
good enough job at that, so there is a notable opportunity here.

For example, lending practices: there are many individuals with poor credit or
financial liquidity issues that would still be reliable loan customers if the
relationship was handled carefully.

And, other people here are missing the point about fees: these are not small
sums of money which primarily target the poor. They are a _poor tax_. At what
point did that become socially acceptable?

Then there's the problem of interest-bearing accounts. Financially savvy
individuals don't bother investing in banks, because the yields are too low --
which in turn affects the bank's ability to lend.

So, yes. I'd love to see this.

------
steveplace
It's the 3/6/3 model, and it works beautifully.

Savings accounts at a 3% rate.

Mortgages at a 6% rate.

On the golf course by 3PM.

~~~
pragmatic
If it were a Savings and Loan in 1982.

~~~
bwanab
Except in 1982 the rates would have been 8% and 12%.

~~~
kbob
And who wants to start a golf game at 8:00 PM?

------
j_baker
Erm... don't take this the wrong way, but this is one of those things where if
you have to ask, you probably shouldn't do it. You'd probably be _much_ better
off finding a cofounder who has experience in banking. There are a _lot_ of
regulations that banks have to comply with, and every time you miss one of
them (which is almost unavoidable), it's a potential lawsuit.

Still, I hope you're successful. I'd love to see better banks.

------
volida
If it wasn't obvious that the banking system has its flaws, the recent crisis
made it crystal clear.

But, I'm not quite sure what's the exact problem you want to address. You are
confusing local banks problems or their services with international issues.

For example Zopa (<http://www.zopa.com>) targets the loan issue.

~~~
whalesalad
Well I think the problem I want to solve is a bank that the common tech-savvy
(wo)man can use. My sister in college, my girlfriends freelancing mom, my
defense contractor dad... anyone who is comfortable with online banking and
smartphones, anyone who is open to new technology and using it to make their
lives more efficient. The USAA scan-your-check-instant-fund-availability
concept is fantastic! Paying bills with my phone like the new Square concept
is amazing as well. This is the future and I want a bank that is pioneering in
these ways too. Combine all of that with a bank that doesn't wanna nickel and
dime me.. and I think we have a winner.

------
shykes
Right or wrong, the general public hates large banks. If you can find a niche
where you can compete with them on customer service and margins, while
avoiding major legal barriers, I would say the timing feels right.

Also, a lot of the innovation in that field is limited to the US. I don't know
of anything comparable to Mint.com in Europe, for example.

------
jokull
Banks in Iceland (yeah laugh away) are quite high tech. You get a text message
when your card is used online, you can create accounts and move your funds
around online. Transfers between accounts within Iceland are all instant (huge
DB2 database run on an interbank computer).

~~~
modoc
As an aside: I was in Iceland shortly after the bank crisis, and it was REALLY
weird to walk by large banks downtown on a Monday afternoon and see them all
closed.

------
ams6110
I am stunned to see this on the front page. It boils down to a bunch of
crybaby whining by people who can't balance their checkbooks. Banks by and
large give you more tools than ever to keep track of your transactions, and
it's all free. Good grief.

------
noonespecial
Since it seems that most of your complaint is centered around orverdrafts,
perhaps it would be more beneficial for you to start a service that helps
people avoid them?

------
cabalamat
I listened to a radio programme a few months ago which concluded that to set
up a bank in the UK would cost £100,000,000 to comply with regulatory
requirements.

~~~
streety
I don't know how true this is (I suspect at least part of that will be money
you need to have on hand rather than spend as such) but I do know that Virgin
have just bought an existing bank because it was quicker and easier than
starting from scratch. It would apparently have taken 6 months to jump through
all the regulatory hoops.

~~~
lil_cain
No, it took 6 months to _buy_ an existing bank. There's at least one group who
put in a request in 2008 for a license and is still jumping through hoops.

~~~
streety
Without knowing who this other group is the fact that they started the process
in 2008 and still hasn't finished does not mean that Virgin would be unable to
complete it in 6 months.

I got my figures from [http://www.fool.co.uk/news/investing/2009/12/30/virgin-
break...](http://www.fool.co.uk/news/investing/2009/12/30/virgin-breaks-into-
banking.aspx)

------
pengelbrecht
Check out Matt Mullenweg's take on it <http://ma.tt/2009/08/starting-a-bank/>

------
mhb
I think for about 1/10,000,000 the effort of starting a bank you could locate
a more user-friendly, local coop.

------
sunkencity
First: make your own currency.

~~~
clawrencewenham
That's almost what banks actually do. In the Federal Reserve system a bank can
literally write new money into existence with a flick of a pen.

What you're spending on food, rent, and iPhones day-to-day is a substance
called _bank credit_ that sprung into existence when someone, somewhere,
applied for a loan. When they spend that bank credit it goes into circulation
and eventually winds up in your paycheck.

The issuing bank doesn't need to find real money to service that credit until
they either have to correct an imbalance with another bank (call for a Brinks
truck), or increase their deposit with the Federal Reserve to cover their
mandatory 9:1 credit ratio.

It's all paper money and bits now.

~~~
j_baker
It's been that way for as long as banks have existed. The only difference is
that prior to the 60s, people were passing around notes that represent
theoretical gold somewhere, some place.

And the bank also has to find real money when you withdraw it.

~~~
shamir
And even before 1973, the gold in the Fed's vaults did not back all the
currency in circulation, only a fraction of ith (thats why it was called the
fractional reserve system).

Also, banks cannot actually create money. Before a bank can lend money to a
customer, it has to receive money from another customer. During any given
business day they may end up lending more money than they received (or vice
versa), but at the end of the day they just borrow it in the overnight Fed
Funds market (or lend the excess). The only agency that actually creates money
(electronically or physically) in the US is the Federal Reserve. They
typically do this by creating money electronically, and then buying bonds, so
that the money enters circulation.

------
greyfade
Two words: Credit Union.

