
Startup Banking’s Looming Leviathan - zt
http://blog.zactownsend.com/government-trouble-with-disruptive-banks
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nostrademons
These blog posts miss the point of disruption: a disruptive bank does not look
like a bank. If it looks like a bank, it's a sustaining innovation, and is
subject to all the regulations, competitive pressures, incumbent advantages,
etc. of the banking industry. A disruptive bank will at first appear to be an
entirely different industry, and it's only when people start using it that it
becomes apparent that it's really a bank in disguise.

Kickstarter is a disruptive bank. Bitcoin is a disruptive bank. Zidisha is a
disruptive bank. GitHub is a disruptive bank. Most people will probably think
I'm crazy for listing them, but they all serve the purpose of connecting
people with productive ideas to those with capital to fund them, exactly what
banking's purpose is.

~~~
7Figures2Commas
I agree with the notion that "a disruptive bank does not look like a bank" but
I think you oversimplify the purpose of a bank.

Today's banks provide a variety of services to a variety of different
customers with different needs. Lending is just one of them.

Providing a variety of services well as an integrated business is very, very
difficult for banks today. That has created opportunity for smaller companies
and upstarts to succeed by unbundling services that have historically been
accessed through traditional banks[1].

For some reason that isn't clear to me, the OP seems to have fallen in love
with the idea of the traditional integrated bank even though the market is
clearly suggesting that this isn't where the opportunity and action is.

[1] [http://blog.aweissman.com/2013/01/banking-and-
unbundling.htm...](http://blog.aweissman.com/2013/01/banking-and-
unbundling.html)

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mikegreen
As I think of the technology changes (hw & sw) in my recent experience, I
struggle to think how my personal banking (yes, business banking & financial
services is a nightmare) experience need to be disrupted. Its a real question,
not trying to be flippant - but what do you think are the top problems today
(outside of commercial banks needing an API to their data, I've heard)?

I use uber; before I used uber I constantly complained about getting a cab in
NYC or having to schedule a black car only to find them late with a smelly car
and no way to review a poor experience. That was something I actively knew
needed to be changed, and uber did just that.

Contrarily, for banking it isn't as acute to me: I use USAA as my personal
bank and I can't think of much I'd change to have a better experience. Apps
are good. Technology is reliable and (assumed :-)) secure. My money has been
safe and available when I need it. I can download transaction history to csv
with a few clicks. Everything is online, cant remember the last time I got
post mail from them. Yes, every once in a while I run into a situation where
some regulation is in the way (mostly in brokerage services), but mostly its a
smooth experience.

Similarly to other regulated industries, I'd like to see air travel disputed.
Flytenow, AirPooler, and FlightHike are trying to do this but will likely be
crushed by FAA regulation on air taxi and commercial operation rules. Are the
regs bad? Not really, they are there for safety. Are bank regs bad? Not
really, I think they are there for security of our financial system.

~~~
mzd348
> how my personal banking experience need to be disrupted

Free wire transfers. Free (or very close) for both sender and receiver, like
checks, but instant. I believe Europe already has something like this. [1]
Current US banks seem uninterested in this, so a startup bank providing this
service could probably steal tons of banking customers.

[1]
[http://en.wikipedia.org/wiki/Wire_transfer#Regulation_and_pr...](http://en.wikipedia.org/wiki/Wire_transfer#Regulation_and_price)

~~~
NickNameNick
It astonishes me how apparently backwards retail banking is outside New
Zealand. We've had free (or effectively free) inter bank transfers since
internet banking became available. probably almost 20 years. I've used a
cheque exactly twice in my entire life. I get paid by direct credit, pay my
bills by direct credit. Transfers within the same bank instant for most banks,
and inter-bank transfers usually clear hourly inside business hours.

I rarely use cash - I don't even carry any most of the time. EFTPOS is
available in taxi's, its available in the tiniest corner store, ice cream
trucks have it. I once visited a small restaurant in a 3 house township
surrounded by a national park, I wasn't even sure they had phones, still had
EFTPOS.

I went from mid Feb through last week without having any cash in my wallet.

I believe Australia is pretty close in terms of ubiquity of electronic banking
services. But I've only visited, not lived there. I know the UK wasn't
anywhere near as well set up when I was living there ~8 years ago. My recent
visits to the US and Canada involved truly uncomfortable amounts of cash.

Now, NZ is a small country, with a single set of laws. I know that the scale
of business in the US, and having to deal with fragmented state and federal
laws and regulations make everything much harder, but I would have thought
that someone would have managed to improve things eventually.

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7Figures2Commas
It's funny. This post, and the post it references[1], gloat about technology
but they don't speak much at all about the value provided to bank customers,
which, by the way, are a very diverse group. It's very "if you spend countless
of millions of dollars to build it, they will deposit."

I don't think anyone would argue that technology doesn't have the potential to
be used as a competitive differentiator in the consumer banking sector, but as
somebody commented on the referenced post, "Disruption is much more
fundamental. It is about rethinking the needs and desires."

Interestingly, if you focus on the needs and desires of customers, you might
come to the conclusion that building a bank is the worst way to pursue the
opportunities technology has created in financial services. USV's Andy
Weissman had a great post that talks about this[2].

[1] [http://jackgavigan.com/2014/04/14/disruptive-
bank/](http://jackgavigan.com/2014/04/14/disruptive-bank/)

[2] [http://blog.aweissman.com/2013/01/banking-and-
unbundling.htm...](http://blog.aweissman.com/2013/01/banking-and-
unbundling.html)

~~~
notahacker
The other point is the majority of banking services that seem ripe for
improvement - day to day bank account administration - is a cost centre for
banks rather than a profit driver. The banks actually pay back their overheads
through customer-hostile characteristics of the service like not discouraging
people from going overdrawn and fees for faster money transfers, and the broad
customer base is desired primarily as an audience to sell financial products
to.

Trying to beat banks by offering better day-to-day banking is like trying to
beat Amazon by building a better Kindle. Even if you beat their economies of
scale and focus on customer value to the point where large numbers of
consumers actually switch, you'll still be less profitable than the big retail
banks unless you're better than them at marketing and pricing loans and
mortgages. And if you have got a better money lending strategy, do you really
need to bother with thousands of small deposit accounts to be successful?

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ballard
So I know this article is BS whining for two reasons:

0\. Someone I met acquired the charter of a failing Midwestern local regional
bank in order to save a ton of cash on moving funds into the us. This person
was under 30 at the time. And it was tax and banking legal considering the law
firm.

1\. Defensibility of a business model is your friend, not you enemy. Look to
how incumbents do it. What can you improve on? Just remember that the harder
it is for you the harder it is for everyone else. If it were easy, everyone
would do it and the competition would be even more cutthroat elsewhere
(patents, distribution, connections, etc.).

To potential investors they probably signaled lack of hustle to find creative
solutions to get past their current and all other future dilemmas. Without an
unique, defensible, competitive advantage there's really no for an investor to
throw down on a venture.

~~~
kchoudhu
Regarding (0): could I ask how your acquaintance ended up obtaining the
regional bank's charter?

~~~
ballard
Finding them, contacting them, money, paperwork, lawyers and
stickytoitiveness. In the end it saved like a few pct over just paying taxes,
but this curly haired Cornell grad doesn't like paying The Man if at all
possible. In the end it was a hassle but having something badass seemed worth
it to them.

This person also has/had a privacy-oriented domain registrar, so no stranger
to putting in the work.

~~~
danielahn
Assuming kchoudhu is somewhat familiar with the banking space in the US, I
think his question is - on what grounds was this individual able to get
FDIC/OCC/FRB approval?

~~~
oijaf888
Is it that difficult for individuals to get approval? There are tons of small
1-3 branch banks in the US owned by individuals. I would expect it's on par
with getting a liquor license or similar, background check and assets check.

Years ago I worked for a bank that was > 75 years old and had recently been
bought by a guy who had immigrated to go to college and then in the next 20+
years done very well in construction. As far as I know there was more uproar
over him changing the name of the bank than actually buying it.

~~~
danielahn
It is and it isn't - as was stated elsewhere, for example if starting a new
bank, regulators will require (and enforce) specific business plans, will
limit dividend payments, will limit growth, etc. - there will be a lot of
scrutiny on the (proposed) management team and you would find it hard-pressed
to be able to get away without having someone with previous bank executive
experience. Would imagine for a failed bank there would be similar questions
on what is changing with the bank model (which may be as simple as operating
with a higher level of equity to support the bank's risk profile).

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samstave
If there is anything in the financial world that needs disrupting, it is the
credit rating system.

If anyone is interested in talking about how this could be done - I'd love to
just chat about it.

I was thinking about this a lot last night actually, so this post is timely...
where instead of using a crytocurrency, like bitcoin, to disrupt money - what
if you used a crytocredit system which could be bought into, and leveragd as a
secured form of a credit score - defaults, penalties, late payment etc can be
covered by the cryto-credit and result in higher earning difficulties applied
to your ID.

Use this to be the basis of loans, backed by your earnings etc.

Currently, if some perfect storm of things happens to people , once you
destroy your credit, you're completely fucked.

\---

The other thing I have always wanted was a layaway account for various goals.
Where I also can have links for others to contribute to easily as a charge
into that account.

"Johnny's college fund"

"auto bill me $X per month into my vacation goal account"

etc...

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surfearth
In practice, US banks are most certainly able to grow at over 25% a year. This
is most typically done via series of acquisitions rather thank organic growth.
There is an undefined upper limit placed on inorganic growth by regulators,
but this has more to do with ensuring the proper integration of acquisitions
rather than a fear of growth in general. The reason one does not see banks
grow organically much faster than 25% pa is because (i) owners can not put
raise equity capital at a sufficient pace and (ii) rapid loan portfolio growth
(on the asset side of the balance sheet) typically results in a deterioration
of underwriting standards, this in turn requires additional capital and
increased scrutiny from regulators.

Source: I've worked in bank-focused private equity for the past decade both in
and out of the US.

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AnimalMuppet
Maybe you can't do it with a startup - or rather, not with _one_ startup.
Maybe you need four, none of which look like a bank. One does payment
processing, one's just a loan operation, etc. But when all four startups
succeed, they together look like a bank. And they can each use each other to
fill in the parts that they don't do. (That is, they each outsource to each
other.)

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justincormack
As the linked article says "The UK is arguably the best location for a
disruptive bank to launch". No point starting in the US, which is hostile to
new banking changes. The UK regulator has said they are pro new startups, and
it is where most of the innovation actually takes place, regardless of the
ownership of the parent bank.

~~~
oijaf888
Also I think the UK regulator pretty much lets anything go inside the City of
London due to historical restrictions on enforcement and such.

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anonymousDan
How is it possible that this guy can do all this while he's still at stripe?

