Another answer: because regular banks are awful to deal with. They don't have nice APIs to just move money around. They apply velocity limits at surprising times. They can terminate your account suddenly for opaque reasons. They charge high regular fees and even higher "gotcha" fees if you make a mistake. They can take back money sent to you for up to 90 days, but often can't get back money you sent to crooks even if you discover your error the next day. And 100 other complaints.
So if you're doing something involving moving a lot of money around, you may need to be your own bank to make the whole system work well.
> Another answer: because regular banks are awful to deal with. They don't have nice APIs to just move money around. They apply velocity limits at surprising times. They can terminate your account suddenly for opaque reasons.
Do you think Google is going to do any better at this? They already have no customer support, close accounts without notice....etc... The article is right, this is about engagement.
The traditional banking system is about 150 years old by now. Increasingly, it seems to serve a smaller segment of society, regardless of its half-hearted attempts at innovation.
I have a number of friends working in finance. Lovely people. Absolutely arrogant, though, when it comes to the question of whether their industry will face non-trivial disuption.
Maybe Google and other current tech giants will not be the ones, but someone is going to come along, take a chunk out of financial services, and start the ball rolling on a non-trivial amount of disruption in that space.
I often see people questioning why others would want a new finance/banking system. Yes, the traditional one has some negatives, but how could you want something almost completely new?
I think this line of questioning misses the phenomenon underway. The banking system works for well for me, so it can seem counterintuitive to see people pushing for quite major changes. But, clearly enough people are fed up that things are starting to move in that direction. At what point do I just say, "does it matter whether these people can provide a litany of reasons?"
Either traditional players sack up and satisfy current and potential customers, or someone else will.
I'm pretty sure that whoever disrupts banking will do it the Uber way, by disregarding all the laws that they are required to follow and trying to claim not to be what they actually are, with the same eventual success this route has had for Uber.
Yeah, but it's generally enforced by freezing your funds until you show up in court. If you've come up with an alternative, maybe just leave out the government-facing API that lets them freeze funds.
This is now how the banking sector works. Most of the newcomers like N26 and Revolut are pretty much just an average bank with modern technology. The reality however is that they don't have a sustainable business model. They offer bank accounts for free and keep bleeding cash because no one wants their premium accounts, presumably because people don't use them as their primary bank account and just as a middle man for easy access to Google or Apple Pay.
Twitter has made profit now. But didn’t for a while. I worked there until 2015 and the consensus was that they had enough money to continue operating at the then current loss levels for like 50 years.
It’s hard to visualize how much money these big tech cos are actually taking in investment. If you have a $B you can lose $10mm a year for one hundred years.
In English if you say "their lack of morality will lead them to have the eventual success of Al Capone" one is generally assumed to mean that the person under discussion will end up in Federal Prison, although also with the chance of running a highly lucrative criminal enterprise first.
Branch banking as we know it was effectively invented by AP Giannini in the 1920's - arguably modern banking didn't exist till the computer and ATM networks arrived in the 1970's.
> Increasingly, it seems to serve a smaller segment of society,
I am not certain that it serves a smaller segment of society than ever, I suspect it's always served a small segment of society. Would want to see some data.
No one can disrupt the traditional banking system without getting enabling federal legislation passed first. This isn't an industry where startups can just disregard the laws. The government literally seizes assets and puts violators in prison.
It seems like they're making the point that this will be better for Google and for things like Google Pay/Wallet which can now operate at a bank level rather than at a customer of a bank level.
> Do you think Google is going to do any better at this?
Google's new checking account isn't really Google. They don't currently have the licenses needed to act as a bank. It's basically a Google branded checking account from Stanford Federal Credit Union.
From what I've read, Google's checking account will be similar to Uber's credit card in that you will sign up and get some benefits through Google/Uber, but pretty much all maintenance will be handled by the issuing bank.
And this is intentional. Google definitely doesn’t want to be regulated as a bank. It just wants your financial data, so it can send better targeted ads.
Isn’t access to that financial data extremely well regulated?
I’ve often thought of launching a credit card company solely for access to people’s transaction data. That provides tremendous insight into many companies turnovers allowing to anticipate earnings.
Half of Visa's, and MasterCard's business model is selling payment flow. This isn't some novel development for these processors - they've been doing it for decades.
Shockingly enough, people don't care enough to shred all their credit cards! Even people who tend to get outraged on the internet about these sorts of things still have, and use at least one.
(And before someone brings up that EU is not heavy on credit cards - the function of European debit cards in this space is not one whit different from that of a credit card.)
> Do you think Google is going to do any better at this? They already have no customer support, close accounts without notice....etc... The article is right, this is about engagement.
Absolutely. I say this as someone who is still angry with them over Reader. I don't trust Google, but I trust them a hell of a lot more than Wells Fargo, Bank of America, et al.
I trust Google much as I trust the sun. I believe it’ll keep doing its thing, and that this will probably overall be beneficial. I’m glad there’s a sun. But the problem with the sun is that it doesn’t give a crap about me. If I have a problem I’m going to have a helluva time contacting the sun’s customer support people, and they’re not going to be well incentivised to take care of my problem if I do.
Perhaps that analogy had got away from me a little, but the point is: I like having a bank with branches where I can go in and talk to a person if I ever really have a serious problem. I feel confident that the bank isn’t going to accidentally swallow all my money and then become uncontactable, whereas I tend to worry that about big tech companies.
Really? Wells Fargo isn't mining my search history using a black-box algorithm to decide without transparency whether to close my account or decline a transaction because I might have become a risk of some sort.
You literally just described fraud protection, which is something most banks nowadays use. It might be opt-out (or even opt-in) but that's very much a thing that banks do, and they get plenty of false positives with it.
Well...latter is illegal and the former isn't (usually) so I think there's a bit of apples-to-oranges, but yeah you got me, as we've seen being a regulated institution isn't a guarantee of good behavior. I still think the incentive, opportunity and the inclination of Google to not act in my interest is pretty high.
I work for a bank. As bad as we can be, there's always a recourse of some sort (not always useful, but sometimes). There's always a regulator (not always activist, but sometimes). There's always an alternative (not always equivalent, but sometimes).
With Google, it's up to Google whether the answer is 'screw you' (unless you're spending tens of millions, it is).
I will bet, without any specific inside knowledge, that the reason that Google hasn't already gone into banking is that they are looking at how to construct a "financial service company" that does bank-like things without being subject to the full force of OCC oversight.
This 100%. I work at a fintech that's not a bank. Instead, we integrate with people who integrate with banks--we've basically got one middleman per continent (except a few).
It's awful. Rather than having to figure out the regulatory details of each jurisdiction so that we can be compliant, we instead have to figure out the regulatory details of each jurisdiction so that we can trick whichever middleman into being compliant on our behalf.
The waste is incredible. It's all promises of "we'll handle that" but never any actual contact with somebody who can code and you know... handle it. I'm beginning to think it's just parasites all the way down. And if that's how it's gonna be, why not cut out the middlemen and be the only parasite in the loop?
I talk to several Fintech startups a month complaining about this sort of thing. Forgive me if I can't quite gin up any sympathy. It's a business with centuries of baggage, massive inertia, vast resources, but what I typically hear is "I'm gonna Uber/Tesla/Bird this financial industry thing in 6/12/18/24 months, ignore the rules because 'disruption' and find someone else to push all the risk, compliance and governance issues off onto. I'm going to pretend it's not a cost of doing business and hope no one catches on before we find an exit and get rich". And now you're finding those 'others' aren't the suckers you wanted them to be, and that complying with regulations, especially across the world, actually costs money. Tons of it.
And most of all...real disruption is incredibly hard, no matter the SV mythmaking. The Fintechs that are going to be unicorns aren't complaining that the people they tried to outsource the hard parts of the business to aren't making all the hard problems magically disappear.
Thank you. Finally a succinct, true statement regarding financial regulation.
I work in finanance and a huge chunk of my work is generating reports for regulators. Specifically in derivatives (swaps and such), which was fairly wild west before the financial crisis.
There's a lot of catching up and a lot of interest into the trades by regulators, which were basically off-exchange and which are a big part of structured products. Those are financial products, which Warren Buffet deigned "Financial Products of Mass Destruction"
And you know what? I agree with those regulations despite the fact that it can be a real pain.
And if anybody really believes such regulation is crap and just there to support entrenched market players. Well; essentially banks self regulated before the financial crisis.
I don’t know if it is specific to banks but there is a common pattern I have seen among internal developers: not only a complete lack of curiosity to understand finance, the underlying business, but an active resistance to any attempt to explain them. They want the numbers to be data, and don’t want to have to know anything about this data, and be told exactly what to do with it and they will code it up.
I am sure there are exceptions, but my point is if you talk to someone who understand what is going on in a bank, you would be extremely lucky that this person also can code.
This is slowly changing as I see an increasing number of junior bankers who are also interested in picking up coding skills. They won’t be developers per se but will certainly become technically literate interlocutors. But it will take some time.
That is profoundly untrue in my experience (13 years of working as a Dev manager at UBS and BofAML). The knowledge of how the business really works sits largely with the long-served IT and Operations staff. This is certainly the case in the back office (clearing and settlement) and in the regulatory space. I can't speak so much for the front office, but it seemed that the developers with successful careers were those who understood the business and therefore could talk to traders and desk heads in their own language (far more successful than the developers who were actually any good at producing maintainable software, but that's a different rant).
There are lots of things wrong with technology in large banks but the business knowledge of developers is pretty low on the list.
I left banking a few months ago, so I am no apologist for the sector.
As a counter, I've contracted for a bank and big business generally, and they are activly resistent to allowing you to interface with the business in any meaningful way.
There's several reasons for this, but at the end of the day people don't take kindly for your making them redundent and there's a lot of fiefdoms going around.
Why would any developer who wants a deeper look stick around?
I've seen that pattern too, and perhaps I'm a little guilty of it.
But if you say:
> we want to encrypt this field with your public key before sending it to you
and they respond:
> yeah, we can handle that
and then contracts with deadlines and penalties are signed... Wouldn't you expect there to be somebody on the other end that is willing/capable to generate a GPG keypair?
At what point is it worth holding their hand through the technical bits, and at which point would it be better to replace them?
We spend a lot of time trying to achieve consensus with our neighbor parasites about the status of a transaction (slice the pie n ways, perhaps your database says that m of those n got paid, but mine says that m-1 got paid...), but if it were on a public blockchain there would be nothing to dispute.
But the biggest actors in crypto are the exchanges, literally the middlemen between buyers and sellers. The volume of trade with crypto as a medium of exchange is dwarfed by the amounts changing hands via the exchanges.
You may need an exchange once to acquire crypto (and even then, not really, you could buy crypto from an individual, or mine it, or just take a payment in crypto...) but once you're "in the system" so to speak, you can pay and receive crypto without ever having to deal with exchanges anymore.
Miners don't have middlemen powers. They can't censor your transactions like a true middleman could. Even if 9 out of 10 miners colluded to censor you, all you need is 1 out of the 10 to be honest, and your transactions would still go through.
> They can terminate your account suddenly for opaque reasons.
I generally am 'ok' with modern (US) banks and global, partly because I know their rules and set my expectations accordingly, but unlike what one of the sub-commenters said: "Chase" completely fucked up my world with no recompense for a while. No rhyme. No reason. Ultimately it was because I had connections to executives of the bank at the CEO level that I was able to get it sorted out, but until then, I was literally "without any money" for about 60 days. That, to put it mildly, if you don't have a reason or a recovery time-line (hard to tell your friends: trust me - I'll pay you in 15 days) if you literally don't know.
EDIT: It was /u/callmeed below. I can't say 'no' to his/her experience - but while I still work with Chase - I feel "on edge" all the time because I never know what they are going to do to me without notice.
Same thing happened to my wife earlier this year. She deposited a check (from an insurance company), Chase apparently deemed it fraudulent (it was not) and with absolutely zero notice simply closed her account. She pulled open the app one day and noticed that the account was just missing, with all the money that was in it.
Hours on the phone with no resolution. They told us we had to get the insurance company to contact them and verify that the check was valid. Like wtf is that. That’s not how checks work. And we’re not talking about a large sum of money. I think it was around $4k. Not particularly abnormal.
We finally walked into a branch with our 4 month old daughter, plopped ourselves in the manager’s office and told him we weren’t leaving until it was resolved. A few hours later we were told that the account was permanently closed and could not be reopened. But that we would receive a check in the mail for the funds that they quite literally stole from us.
As soon as that check cleared we closed all our accounts with Chase. Fuck them.
Even worse scenario here. I had 4 accounts (a personal checking, savings, a joint checking, and a business account) at Chase. I transferred money from my savings to my checking one day to buy a car. Did a wire transfer from the checking to the dealership. The next day transferred excess funds back to my savings. To me a completely normal set of banking transactions. To some Chase fraud algorithm though it was a red flag and my primary checking was closed. But instead of notifying me there was an issue or that they were closing the account they opted to just lock me out of online banking entirely on ALL my accounts since they were all linked together with one user id.
When I called to figure out what was going on I was advised the account was closed and that a check would be mailed with remaining funds within 60-90 days. I asked about the other accounts and they are all fine and open. BUT, because the fraud closure was related to an online banking transaction I would no longer have access to online banking. Pretty much rendered the remaining accounts useless at this point. So while they didn't close all my accounts themselves, they pretty much forced my hand to close my remaining accounts.
Sure, don't do business with Chase. But this points to why people use banks, you take for granted that your money won't disappear permanently with no recourse. So you go ballistic when it seems like it might happen. Nobody in their right mind wants to use anything where it really does happen.
If Google had money that belonged to me, I have no idea where to even begin trying to get it back. Do they have offices that you can stage a sit-in in?
Google is not a bank. If they start to offer banking services it will be through a partnership with an actual bank. Your money will not be “with Google”, unless they enter the multi year, very expensive process of applying for a banking license which they’re not doing.
Not that I don’t disagree with your point, in general. But google can’t just take your money like that. At least not in the US
And where might that bank be? I live in a relatively small city (~100k people) and each of the three banks I have accounts with has at least 3 branches within 30 minutes walking distance. Even if all of them tell me to fuck off, I can hop in a car and be at their headquarters in 2 hours or at the ministry of finance to file a formal complaint in even less.
Best case scenario for me with Google's bank would be an 8-hour drive to Germany, just to run into not only a language barrier, but a buerocratic one as my ID would not mean shit to them and their regulatory bodies would not even consider hearing me out without going through the EU first (== more buerocracy). All of this I would of course have to accomplish while not having access to my bank account.
Banks are one of the few decentralized services that have survived the modern economy and while I would switch banks immediately to have access to even something as simple as a balance check API, I would rather continue to fight the reverse-engineering arms race with my current bank than hand over my finances to a faceless, poorly regulated, foreign corporation and risk any one of a million possible small mistakes leave me penniless.
It’s a huge undertaking to do. You have to prove to the US government that you’re capable of handling people’s money safely and that you’re providing a benefit to your customers. Years of internal systems audits with nebulous requirements. How do you do that without handling people’s money? You partner with a bank. It’s easy and relatively cheap.
But regardless of your ignorance on the subject, the original point still stands that Google is not gonna just “take your money”. Your money will always be in the custody of an actual bank.
The problem is that thing will be regulated like a bank, there will be a lot more scrutiny. And unlike Uber's "but we're just a tech company so we can disrupt by going around the regulation" tactic, doing this with banking would be a tad more challenging. Not necessarily unprofitable but it feels antithetical to the way Google usually works.
To their defence you should see the eye watering piles of regulations they have to comply with. A large international bank will typically have a whole team dedicated to just reading all the draft and final regulations that are coming every week.
Regulators state that they want more competition but in reality they don’t. Those regulations create massive barriers to entry. And regulators are wary about smaller players who will not have the scale to be financially robust, will be more likely to be a dodgy operation, and not to have all the established procedures of a large player.
If someone sent you money via an ACH push, they shouldn't hold money for 90 days. If you have pulled the money in via ACH pull. The bank you have pulled from has 90 days to contest that money transfer. Fintech banks will also do holds and have low amount thresholds to mitigate risk. One of the large fintech banks actively advertises $1 million in FDIC insurance but you can only move $50k a day with no way to remove the fraud controls for your account.
Also none of these fintechs are actually banks. They just partnered with a small bank(s) and are still beholden to these banks compliance team. There are strict rules about monitoring bank transfers and reporting suspicious transfers. If your funneling cash through your fintech bank, you'll probably get shutdown with no explanation.
Paypal is generally considered to be worse than banks. They will "freeze" your funds for months. You have very weak rights there. With real banks, if that happens, you raise hell with the bank regulators and something happens.
I wanted to build a product based on moving money around, and it seemed like it would be easier to start my own than to get what I wanted at a reasonable price. The financial industry is needlessly complicated and I don't know why it's so hard to just move money around.
I can write checks easily and even manually set up recurring ACH transfers, so why can't I automate that with an API? There are a couple companies that do it, but it's too expensive for doing lots of small transactions, yet it's free through ACH and writing checks...
The financial industry is difficult because of money laundering.
Any illegal activity requires a financial crime at some point to launder the spoils. Therefore, financial institutions are the perfect place for law enforcement to hook into to try to crack down on the more widespread and organized forms of crime. The financial system is so much of a force multiplier for criminal activity that LE can't really ignore it.
To hook in, they need you to do KYC, they need you to check with OFAC, they need you to do you to do SAR's and report any attempts to structure financial activity. Basically, actors in the financial services industry, as a prereq to being able to do so, have to agree to act as a modern day Stasi.
Thank the criminals and reactionary Congressfolk of the last fifty or so years.
> The financial industry is needlessly complicated and I don't know why it's so hard to just move money around.
I guess regulation and the technology being fairly hard to iterate on since a lot of systems are running the same software as they were 20-30 years ago when everything was moved over.
ACH / writing checks is free through your bank because if it wasn't, you'd bank somewhere else. But there's 0 incentive to give you API access, your usage could skyrocket and it wouldn't be profitable anymore.
Honestly, I wouldn't trust Google (or any other tech giant) to be my bank.
My bank doesn't have a history of locking people's accounts when they post "the wrong" political opinions online.
My bank doesn't have a plan to monetize access to my account, or to limit use of the account to only those activities of which the bank's army of woke employees approve.
That, though, is mostly about risk management -- and even if they close your account, you get the money back.
(I also would never do business with Bank of America, because they're awful and they hate their customers even more than Wells does)
But even BofA doesn't do things like read your Twitter posts and YouTube comments so they can blackhole your account if you have have the wrong politics.
The tech giants, on the other hand, will seize your stuff in a heartbeat if you step out of Silicon Valley's definition of acceptable beliefs and opinions.
My credit card works at any merchant -- and the fees are the same. I don't get hit with a temporary ban if I buy a Chick-fil-A sandwich, for example.
> But even BofA doesn't do things like read your Twitter posts and YouTube comments so they can blackhole your account if you have have the wrong politics.
Marijuana, one of these recreational drugs, is not legal in the United States.. and banks are beholden to federal regulators. The “legality” of marijuana is in dispute because it’s still a federal crime. The Supremacy Clause overrides thèse state “legalizations.”
I am vastly in favor of states rights and the 10th Amendment, however states seem to only care about those things when it supports what they want to do.
Ultimately, I came to the conclusion that in order to solve these problems I would have to start my own bank.
Unfortunately, not much has changed since then. At least I now use this useful tool for converting CSV exports of my account statements to MT940 files: https://github.com/msc01/soacsv2mt940
It’s still a semi-automatic and somewhat error-prone process, though.
I bank with a shitty national bank (long story, need access to Zelle/P2P transfers). My emergency fund is 6 months expenses, low 5 figures. 150-200 basis points of interest annually is trivial when 1 or 2 wire fees ($20) to get access to those funds same day blows away all of interest gains over 6-12 months.
If interest rate mattered to folks, more would move to providers offering higher rates (you see this sprouting up with Credit Karma, Personal Capital, and other fintech startups offering cash management accounts because they're making a fee for getting deposits to underlying banks hungry for them). But that doesn't seem to be the case. Which is unfortunate, because it should be not too difficult to offer a checking account with check access, ATM access, unlimited transactions, P2P payments, mobile deposits, and interest bearing (brokerages do it living off the float [1]).
Sidenote: This focuses on personal accounts. Brex's Cash Management account seems to be a great biz banking option for those who qualify. No affiliation. Banking infra in the US sucks, which is why everyone has to be a bank.
If you have 6 months expenses saved, you don't need same day access. You keep 1 month in an immediate access account and 5 in the high yield savings account.
I have had to come up with a dollar amount worth several months of expenses on very short notice (same day, life is unpredictable). YMMV, but there's no reason I shouldn't be able to get those funds within seconds (if I'm adequately authenticated). With a wire, I can get it same day (if executed by ~3pm eastern). I shouldn't need to pay for a wire, or talk to a human unless a fraud signal was detected. I'm not a hedge fund seeking tens of millions of dollars of liquidity of a cash equivalent in a moment. These dollar amounts are trivial (<$100k).
Financial services users should be able to have access to and be able to move their funds through financial plumbing inexpensively and rapidly. Fix the plumbing, raise the bar with regulations on financial services providers to commodify the offerings.
You should see how easy it is to do these things in the Netherlands. No charge to wire money to an individual or business. No transaction cost for paying by card. Pay online with ideal for 0%, just scan qr code with bank app. Simple and easy.
All of Europe, afaict. It's often so baffling to read about finance/payments in North America, ahead in other ways of course somehow that sector has just completely stagnated, from a consumer perspective anyway.
If France is part of Europe, then no f’ing way. It’s a nightmare: arbitrary limits on debit cards, large transfers have to be done in person at your specific branch. The security requirements are Byzantine. For example, to get a new pin code, they actually mail you paper, you can do it in a branch. International money transfers require permission (only obtained at your specific branch.) They charge a monthly fee to have a Visa debit card and to get a “Gold” version with higher limits, you have to pay them more. Paper checks are still vastly preferred in France (for paying school fees, etc.) Banking in France is just one step above banking in Korea or China. French bank fees make American fees look positively discount by comparison.
That you have to go into your specific physical branch to do certain things is ridiculous. I can go into any Chase in the US and do anything I could do at my normal “home” branch.
N26 (a German bank) was vastly superior but even that had limitations, especially with moving money around internationally.
I'm from France and I'm using an online bank. Almost none of these apply to me - yes the pin code and the card come by mail but I can transfer arbitrary amounts online, I have a free gold card, there are basically no fees at all: the account is free, the card is free, transfers are free, I don't think this account cost me anything at all. I had to open the account with a significant amount to get the gold card but you can open it with a much lower amount or by receiving your salary there, and the only difference is that you get a regular card instead.
The only downside is that you don't have a physical branch you can go into but you can do basically anything online without ever interacting with anyone, or at worst you can always call them. Those are real banks btw, not pseudo-bank fintech companies.
YMMV I guess.
I'm in France too and none of those points apply to my experience (except the monthly fee for the debit card and the snail mail for the new PIN).
I have not set foot in my physical branch in 10 years, and have not written a paper check since 2011.
I think what you are looking for is a direct bank. It's weird to complain about having to go to a branch when you sign up for a bank account at a bank whose primary selling point is the availability of a local branch.
For individual mass market the big driver is loan margins, both for home mortgages and various short-term loans.
But the improvement in payments was mostly driven by legislation (e.g. the Payment Services Directive from 2007 with most of implementation at 2012) without which banks were quite happy to offer payments as slow and expensive as they could as it was too profitable for the industry to voluntarily agree to disrupt this, especially since most payments are cross-bank and so a single "defecting" institution can't simply offer cheap&fast payments if others don't want to play ball.
So I don't think that there's any way how USA financial industry might get to a similar point if gov't doesn't decide to force them (which might be taboo for many USA politicians) - I'm certainly convinced that European financial institutions would not have reached this point currently if they weren't forced to do so despite all the lobbying.
I don't know anything particular about the Dutch market, but some rough estimates:
Current 3m euribor is -0.4% so 1.6% interest rate means 2% margin. Assuming that your initial costs of selling/assessing/processing the mortgage are covered with fees, something like 0.5% would be enough to cover the main (non-systemic) risks and expenses for decent quality mortgages, so you get 1.5% of pure profit; for every billion in your portfolio you'd get 15 million profit each year; Dutch banks have 500B of housing loans so that's a capacity of something like 7-8 billion of profit per year from housing loans alone.
And various short-term loans have lower volumes, but much higher interest rates and room for profitability.
Banks usually add a flat percentage fee on top of the current interest rate. Lower interest rates mean people are willing to borrow more so low interest rates are beneficial to banks.
I'm sure they do in North America too, and make orders of magnitude more from it than for charging monthly or transaction fees. But if everyone else charges those, why not make that bit extra too?
It just needs some 'disruptor' to do it for free and drive the rest of them down, as is happening both there and here in Europe with trading accounts (where most money is made from order flow, but traditionally, why not make a bit extra from commission too?).
There is no transaction cost to pay with a card in the US either. ACS transfers are free and, if you have the right account, wires can be free as well. I bet at that Netherlands bank a non-SEPA wire isn’t free. There are plenty of options for “good” bank accounts in the US, they just aren’t always obvious.
> I have had to come up with a dollar amount worth several months of expenses on very short notice (same day, life is unpredictable).
That seems like a perfect use case for using a credit card to cover the expense and then pay yourself back when your money moves out of the savings account.
I have trouble imagining a case outside of a hostage situation where you would need access to your emergency fund same day.
Two examples: Auto purchase where there was an issue with the banking partner of the vehicle manufacturer. Another is a real estate transaction. Bailing friends out of jail is always cheap (~$500), but not everyone takes credit cards (no chance for the first two scenarios).
Fundamentally, I should not have to explain why I would desire immediate access to my own cash reserves at a moment's notice to excuse broken financial infrastructure.
Your examples seem like cases that can easily be handled by a checking account.
> Fundamentally, I should not have to explain why I would desire immediate access to my own cash reserves at a moment's notice to excuse broken financial infrastructure.
Yes, if you are investing in less-liquid assets to get a better RoI then you absolutely do. If you don't like the terms then you are free to keep your cash in your checking account.
Personal and certified checks aren’t immediate or same day settlement, only wires or Zelle transfers are (Zelle transfers can take more than a day depending on the sending and receiving bank).
If the settlement isn’t rapid, you can’t guarantee the funds will actually settle (checks). Lots of situations where someone wants the same guarantee as cash or a wire.
Most people are reluctant to accept large personal checks for one-shot transactions. Most people selling cars on Craigslist won't just take a personal check, for instance. It depends a bit on how reputable you look. You can't write one as bail, or to get your car out of the impound lot.
They’ll generally accept a cashier’s check. Ours would also accept a personal one as long as you didn’t mind them delaying mailing the title for a few weeks.
I made a down payment on a car with a money order and the dealer yelled at me that the agreement said they weren't allowed. Eventually they relented, because they wanted to complete the deal.
Back in the 90s, I tried to pay for a computer with a certified check and CompUSA treated it as a likely counterfeit.
Yes, was attempting to pay full amount. Couldn't remember my PIN to unfreeze my credit, and just seemed like it would be easier since I was in a position to pay in full.
That makes somewhat more sense. Trading a signed title without a lien for a check places a lot of risk on the dealer. Although there are ways to mitigate this, maybe the dealer in your case didn’t feel like bothering or it didn’t occur to them.
I don't think the question is so much asking "why", but rather "what" does "access to my own ... reserves at a moment's notice" even mean in a debt-based financial system?
Writing a check is instantaneous, but you obviously don't mean that.
If you're talking about wires and the like, then what you're really paying for is the sending institution taking on liability if there turns out to be a cascading problem.
I wouldn't expect Shelby, Mercedes, and their sisters to be held for cash every day myself, but if you really want to bring them home one of the most worthwhile options is cashthedayofthesaleasiswhereisnowarrantiesofany kind.
If you're buying a classic car with funds directly from your emergency fund, then more power to you I guess but maybe you should be less impulsive with money set aside for emergencies.
Personally, if I'm expecting to make a large cash purchase I have more than a few days notice.
Many people plan poorly and have to sell collectibles quickly for immediate cash. I know people who buy and sell cars purchased from folks who need money quickly (matter of hours) and will get crazy deals simply because they have cash on hand on eg a Sunday evening.
If you have a checking account with the same bank you keep your emergency fund in then you can access the funds at any time with an online transfer and a check. (Discover & Ally offer checking accounts) It doesn't have to be your main checking account.
I thought wealthfront and the like aren't exactly the same type of insurance. They don't put your money in a single account, and if you ever needed the insurance you have to go through a third party that made a deal with the actual banks.
With Robinhood, I understand cash is SIPC insured once it hits their systems, and then it is a couple of days until it is deposited in underlying accounts at their program banks, where it is FDIC insured. So it's something to consider when moving large amounts of money.
Another thing is that these neobanks have withdrawal amount limits and ATM limits, and so they aren't a great choice for storing emergency funds.
> Another thing is that these neobanks have withdrawal amount limits and ATM limits
Every French bank has these limits. I once had a French bank account that limited my debit card to €2500 in purchases in a month — for no good reason other than trying to limit access to my own money. Cash purchases over €1000 are also illegal in France. For the most ridiculous banking rules and limits, France is the place. My chase account in the other hand, I could withdrawal $100k in cash if I wanted. Still have a (high) debit card limit, but I can call them and immediately get it lifted for a specific transaction (such as buying a car.)
I once had a bank account closed for "suspicious behavior." The suspicious behavior was making too many transfers to one of my other bank accounts.
If you open a new bank account and deposit a lot of money, say over $10,000, then they almost certainly will freeze your account and you'll have to call up to unfreeze it. Sometimes you even have to go to a branch to unfreeze it.
Chase, specifically, is really bad when you're trying to transfer to/from new accounts
I open (and close) a lot of bank accounts to collect those signup bonuses. If you read forums dedicated to this then you hear stories of people getting their bank accounts terminated suddenly for opaque reasons all the time.
> If you open a new bank account and deposit a lot of money, say over $10,000, then they almost certainly will freeze your account
I have done this multiple times with zero issues whatsoever. With larger sums than $10k, and with global-sized banks. Sorry to hear about your issues but you're over-extrapolating.
> I open (and close) a lot of bank accounts to collect those signup bonuses
This, I think, may be your issue. For one thing, as the recent NYT piece on customer scores shows, these companies do exchange information on their customers- you may come up flagged or even blacklisted specifically because of this
On the contrary, doing this is practically a requirement for being a bank.
US law requires banks to file a suspicious activity report if they see unusual activity in your account that may be associated with money laundering or criminal activity. What qualifies as suspicious activity is not well-defined, but can be as simple as large unexpected transfers into or out of the account.
The law also requires banks not to tell you about it. They don't necessarily have to close your account, but most will, especially after several reports, because of the risk of failing to comply in the future. And since they're not allowed to tell you why they closed the account, you end up with opaque reasons.
Don't agree and I love Chase bank. I have multiple Chase accounts and transfers between them are instant. Transfers to/from external places like my TDA brokerage account, Venmo, etc. are there the next day. They also have Zelle/QuickPay (though I don't use it). My paycheck is direct deposited the day its supposed to be or earlier.
I've had my debit card skimmed at gas stations twice and my wife has been defrauded by shady online merchants a couple times. Chase always handles it well and reverses the charges.
I have Private Client status which (granted requires a certain level of deposits) gets you a real human on the phone instantly.
I couldn't imagine getting that from Google or Robinhood.
I have absolutely no interest in using any of these online start-up banks, but Dutch banks tend to be pretty decent. They're well regulated and try to be aware of their social responsibility. Most of the banks I've worked for appear to the taking this fairly seriously, and try to run their software departments as real tech companies. They try to make accessing your money as easy, convenient and cheap as possible without compromising security. They're by no means perfect, but they're a lot better than most American banks sound.
Yes, the American banking system is just ridiculously bad. I remember studying abroad in New Zealand (in 2004!) and marveling at how EFTPOS was universal, everything was chip & pin, and funds transfers could easily be done online (and often clear the same day!). The cashiers would look at me strangely with my American credit card, and they would always check the signature. (Which, it may astound foreigners to learn, most American cashiers do not. How do we prevent credit card fraud? We don't, in general. Fraud losses over $50 are reimbursed by the credit card company, if you report them, which makes it up out of exorbitant interest rates that they charge people dumb enough to carry a balance.) The U.S. finally got some of the security measures the rest of the world has (chip & PIN, for example) around 2017, and in many regards is still behind.
America has the downsides of being the first-mover and of being dominant. A lot of our system was built before modern computerization and then retrofitted for the bank's convenience (not the customer's), and because the U.S. economy & military is so dominant, the rest of the world has to deal with the U.S. financial system as it exists now. That means that there's very little pressure on existing U.S. retail financial institutions to improve, and a lot of regulations and institutional inertia keeping out new entrants.
It's much the same situation with Internet access (where our consumer Internet speeds are often 2 orders of magnitude slower than in much of the rest of the world) and in health care (where we spend the most but have one of the worst life expectancies of developed nations).
I think the biggest tragedy is that most American consumers have no idea how bad American banks are compared to banks in other countries.
Moving to the US is like stepping back into the 70's, and then discovering that everyone around you think that everything is fine, their banks are fine, that US banks are somehow modern and cool.
Anecdote: I wired some money from my Chase bank account to my Swedish bank account, in USD. I made the transfer through the internet bank, but since it was "after hours" New York time, it was scheduled to transfer the next morning.
Early next morning I checked my Swedish bank account, they had received the money, exchanged it to SEK at a decent rate, and the money was immediately available for me to spend there.
A couple of hours later I receive an email from Chase, where they're telling me that they've now sent the money, and that I should expect to see the money in my Swedish bank account about three days later.
That may just be Chase. A person I know uses a credit union for federal staff in Washington, DC and their wire transfers can be done in the currency of your choice, completely online. She recently did an international transfer in a non-USD currency and the email confirmation was immediate. The money was available in the foreign acct within 48 hours.
My European credit card works around the world but is blocked by default in the US for security reasons.
I need to call my bank to temporarily unlock it if I ever go to the US. Payments with PIN code are allowed by default though even in the US. So the problems seem to be with the swipe system.
Def, you are right. Everyone is building on top of legacy banks but you hope that slowly the customer orientation will change to positive largely by better tech and more competition! Thanks for reading and appreciate the comment!
Another asnswer: Because the people making the business decisions in these companies is the only thing they can do.
When you have no vision as a company or no visionary in your team, you get served by the countless consultants and ex-bankers who went to big-tech because of its the new Wallstreet. Of course, they have no idea what Tech does and is and of course no clue how to provide something of significant value. Instead, they steer the companies into direction where is familiar to them through their finance classes and/or their Private Equity, Venture Capital backgrounds.
The fact that everyone wants to become a bank is not engagement, is not profits. Its a sign of a failing economy where capital decided that the best thing it can do is to invest in itself.
Also: Debt is cheap these days, and regular people are in desperate need of cash - so it's a sellers market.
Where I'm from (Norway), we've seen an explosion in these offshoot banks - i.e consumer loans / credit card providers. Airlines, big box electronic stores, etc.
Ans surprise, surprise, many of these banks are raking in cash. And triple surprise, defaults in credit cards / consumer loans have also exploded.
It should also be mentioned we have some of the most creditor-friendly laws / system in the world. It's almost impossible to get rid of debt, because there's an automated pipeline from banks to debt-collectors to government instances that will do the final debt collection via wage and welfare garnishments.
These banks will foreclose your house, repo your car, and whatnot on defaulted / outstanding debt as little as equivalent to $10 (but of course, by the time many have noticed this, that measly $10 has grown in to thousands, through a battery of fees and compounding interest of said fees).
I've been calling it for some time now: Our next global recession will come from consumer debt and credit cards. Banks are handing out credit to anyone with a pulse
Yeah the whole credit thing is nice, but I wonder how many people are pay check to paycheck with less than 1K in savings driving brand new cars, living in a large house with a brand new iPhone and flat screen. Then when people are closed to paying off their mortgage, they refinance or take out a second mortgage.
However there is someone who says if you need a new car, only pay cash so if you only have 500 bucks, get one off of Craigslist to get to point A to point B but in a way I feel like that's bad advice as wouldn't be reliable and you'd end up spending a bunch on repairs.
So I feel like credit is good, but in a way people use it for too much instead of saving. My favorite idea is to just use credit cards no differently than a debit card, don't spend anything you know you won't be able to pay off. Then instead of paying banks, they pay you! Sounds like cashback is worthless with interest. So I guess a different mindset than the majority of people, but the credit card companies are probably hoping you slip up at some point.
Then as for credit in business, I feel like the best way to use credit is to scale up something that is already working out for you... Maybe you need more inventory because you are selling fast but still waiting on your supplies to pay you, so throwing in a bit of credit you know you can for sure pay back would help keep up with the demand.
I know some people hate credit, but having a good score might help you when you get a job, auto insurance premiums, apartment but laws vary by states too in what companies can use your score for. For example I know California doesn't allow them to use it for auto insurance, and I think credit checks for job applicants is limited too but Ohio doesn't care really what companies use your credit score for.
So if you are 18, get a credit card just to treat yourself to some McDonalds once a month, then pay it off fully when you get your statement you'd be better off credit wise than someone who didn't have any credit at all. A lot of stuff they don't teach in school, you can get a better financial education on YouTube.
I think this is true. Since mobile every company has been praying for and betting on the next paradigm (voice, watch, glasses, VR, AR) but nothing has moved the needle in a major way. I think there is a lot of visionless drift right now, and banking is another most likely fruitless direction tech will drift into. Lots of media hype, mediocre traction (as with all the alternative paradigms listed above).
Hats off to FB though, I think their perspective is the only innovative one out there.
> It also happens to be an incredibly sticky product. Think of the last time you saw an overdraft charge on your statement and swore to yourself that this was the last straw — you are taking your business elsewhere only to be confronted with the downstream effects of moving your “financial address” — telling HR where to send the next paycheck, calling up each utility company, changing autopay for each credit card bill and so forth!
Here's the thing. The stickiness of a bank is only a mental illusion. If you actually rationally calculate the time it takes to switch a bank, it's not that bad. Changing where the next paycheck is deposited takes five minutes. Changing where each credit card autopay draws money from takes five minutes. Once you have resolved to leave a bank, it probably takes about an hour to actually do it. (And for typical Americans that one overdraft fee is well more than an hour's worth of salary.)
I find this interesting because it illustrates the difference between the mental workload and the actual workload can be great. Coming up with a checklist of a dozen places to change the routing and account number seems overwhelming. It is actually not.
In the UK we have the "Switch Guarantee"[1]. It was setup when there was stickiness in current accounts (English term for checking accounts). Now when you sign up for a current account you can opt-in to this service and they do payment redirection. So if someone tries to transfer your old account money, it'll get forwarded onto your new bank. That's on top of them organising the migration of payments.
I switched from Chase to SoFi a few months back (kept my Chase CCs). Totally worth it. Didn't take that much time, although still more than an hour, plus had to be careful not to pull money out of Chase just before a payment was processed. But it's been great. SoFi Money currently yields 1.6% (not the best, but still better than any CDs or savings accounts Chase could give me). Having a high interest yielding checking account has allowed me to better optimize my investing/saving habits. Plus, when I traveled to Europe recently, SoFi was giving me the spot exchange rate at ATMs.
Yes, but it’s an hour of painfully boring work that demands care and correctness. And at the end of it, you’re just with another bank that may or may not be better.
Related: In Denmark (where I live), we have an officially designated "NemKonto" (translates to "EasyAccount"), which is where most employers, public institutions, etc. put paychecks, payouts, etc. automatically. So if you change banks, you can simply designate the new account your official NemKonto, and the money will automatically be routed there - no need to contact anyone.
This, in addition to how easy our PBS (DK version of ACH) is to use means switching banks is something that can be done easily. I know of people who will regularly contact 5-10 banks with their current mortgage details and ask for a better deal, and then go back to their current bank and tell them "match this offer or I'm switching".
We also have a simple interest on overdraft (usually 8-15% annually on any amount over draft), though excessive overdraft will get your account locked. But beyond that, no fees for hitting negative $0.05. Is there any US bank that offer a similar fee structure? I imagine people would migrate in droves if that was already the case.
> I know of people who will regularly contact 5-10 banks with their current mortgage details and ask for a better deal, and then go back to their current bank and tell them "match this offer or I'm switching".
That's common in the US and has nothing to do with ACH in any way. That's a transaction where you likely would not use ACH at all and would use a wire transfer.
> Is there any US bank that offer a similar fee structure?
Yes, there are many. One of my banks, Capital One, calls this "Overdraft Line of Credit" and the current interest rate is 12.75%. They also offer "Next Day Grace" where you have a day to cover the overdraft and "Free Savings Transfer" where they just transfer money from your savings account as options as well to avoid overdraft fees.
Is this going to be the sort of phenomenon that we will eventually look back as a signifier of the dumb money economic bubble we're in, similar to past trends like the wild access to credit in the Roaring Twenties, the run up to the S&L crisis in the '80s, the worthless tech IPOs of the Dot-Com Bubble, the liar's loans of the 2000s, and another examples of rampant finacialization?
If the environment is one in which non-financial institutions can easily create banks, easily find customers for their banks, and not invite regulator scrutiny, does that mean behind the scenes something is going horribly wrong?
The tech companies aren't even underwriting the accounts. They are just resellers of accounts from actual banks, throwing on a fancy web interface and then data mining your transactions.
I'm not exactly claiming that Robinhood checking accounts or the Apple Card will blow up Goldman Sachs and kick off the next recession, but it does feel like that if we're at the point where companies unrelated to finance are jumping into it just because it's easy to, we're in a time of irrational exuberance. Extravagantly so.
I'm not sure why you consider Robinhood to be a boutique brokerage or what having an app (as opposed to... physical locations?) has to do with anything.
They have over 6 million accounts, which is more than E*TRADE and within a factor of 2 of Charles Schwab or TD Ameritrade. And these brokerages apparently felt enough of a competitive threat that they all adopted Robinhood's commission-free model.
Regardless, even if you don't consider Robinhood to be a major brokerage, they clearly aspire to be one, so offering banking services makes perfect sense.
Guess I underestimated them based on their youth and company size. Didn’t know they had disrupted the market so quickly. If jumping into banking services is an industry convention, I suppose that goes to show that even a brokerage of Robinhood’s age and size must have the stability and temperament to provide reliable banking services that customers can trust despite their breakneck Silicon Valley startup ethos and lack of prior experience in checking.
Not all fintechs though. I currently work at one that has an actual banking license, does its own risk models, customer support, and so on - it's essentially a bank, just invests a lot on technology. "Fintech" is a big umbrella term, I believe it won't last much longer - the same way everybody used "DotCom" in the past.
Looking at the situation in Sweden, I would say the cause is the bank themselves. Banks here are currently trying to remove every aspect of the banking industry that is not a digital service. Offices are a cost center. Physical money are a cost center. Talking with customers is a cost center. By shedding all those cost centers the bank can focus on the parts that make most money and raise stock value.
Google, Apple are likely looking on and discovering that digital products is something which they too can do, and their size allow them to jump into the same market. All the parts of the banking industry that would prevent them is exactly the same parts which the banking industry is removing.
I'm genuinely curious to see how they could possibly make money given this FAQ question [0]:
> What is the safety net? What does it cover?
> Our community safety net is an in-built accident insurance policy that will provide upto $5000 directly in your betterbank account in case of an accident or medical emergency.
According to their site, they make the necessary money for that safety net by splitting the profit from the interchange fee they get from big banks. That statement reminds me of Martin Shkreli telling the media he was profiting by overcharging insurance companies. There's no way loudly telling the world how you're screwing over the big players doesn't result in you getting squished at some point. Sure, now I understand their business model. But if they ever get traction these big banks will put an end to their medical bill subsidy real quick.
We make money off interchange--its protected by regulation for small banks and we partner with those small banks in return for them getting to keep our deposits. No one is getting squished---there are regulations protecting banking from being monopolizes. Big banks win because of branch networks and that doesn't matter for online banks
No, it does not make your points less valid, if they are valid. But it is reasonable to assume that the arguments of this piece form the foundational assumptions of the product you are selling. People will want to take this into account when considering your arguments.
It's easy (and fun) to complain about the bad (or just weird) product experiences that banks regularly churn out. Believe it or not, most banks are trying their best. But as other commenters have noted, banks aren't staffed by technologists, so their choices for how to solve these problems begin and end with buying one of the available off-the-shelf software products. Spoiler alert, these products generally are both expensive and not very good.
If you want to understand the toolkit bankers have at their disposal, take a look at FIS, Fiserv, and Jack Henry. These three companies represent approximately $170 billion in market cap. Your interactions with your bank, whether it's a click in an app or a conversation with an actual banker, almost certainly bottom out with a call into one of these company's software systems. These systems are (almost) all mainframe software originally designed in the 1980s. Every product the bank delivers is built on this shaky foundation, which results in all sorts of workarounds and weirdness at every layer of the stack.
That all worked fine back in the '80s, but in the decades since, not only have our expectations changed (most bankers don't know what "API" stands for, by the way), but also banks' regulatory reporting requirements have expanded dramatically. Governments wants to know (very reasonably) that a terrorist or money launderer won't be able to make payments. But when you mix in the inertia of old enterprise software and the relative dearth of good alternatives, the result is a broken product experience (like the random velocity controls like @tlb cited above).
Being a bank is big and complex. And since deregulation and the Internet happened, being a bank is no longer about geography (remember branches?), it's about software and product. This seems like a pretty natural fit for a startup: break off a desirable chunk of the bank's customers and deliver a modern, specialized solution that's 10x better. There's ~$12 trillion of bank deposits in the U.S., that's a lot of market to go after.
* * *
Full disclosure, my company, Treasury Prime (https://treasuryprime.com/) sells software to banks so that we can expose developer APIs for banking. If you have a fintech startup and you need a bank partner with good, modern APIs, email me: jimbru@treasuryprime.com.
I have to imagine that you get used a bunch in the backends of FinTech products, but any chance better IT starts to reach consumers? My inability to know exactly what's going on with my money on my own terms is endless frustrating. The aggregators help, but are still quite limited.
I don't think the new breed of fintech startups is going to help here much. The reason you can't see what's going on with your money on your own terms is because banks want you to use their software in order to upsell you financial products. The articles point out that the new fintech companies are also interested in exploiting the stickiness and eyball-attracting aspects of banking, if not for direct upselling then for something else.
I think there's progress happening, banks just tend to move slowly. Competition from fintechs may end up providing the banks some incentive to upgrade. The other problem is, as a consumer, you're probably last in line for new stuff. Businesses can demand new software or better economic terms and back that up with their (large) deposits loan book. Consumer deposit accounts, on the other hand, are often money-losers for banks; they only offer it as a cross-sell into mortgages or some other lending.
Fintech only provides better UX on the same old system of banking.
The real issue with banks is the staggering amount of regulation which acts both as an innovation killer and as a high barrier to entry, which in turn stifles innovation even more.
It's the golden cage dilemma banks find themselves into.
Fintech looks cool until it stops working, then you discover it's the same system, only run by a startup.
Everyone is a bank today for the same reason everyone was a social network in the 00's.
A few startups started encroaching into financial services territory, took all the risk (including regulatory), and now that it's clear it's something worth pursuing Big Tech is following, expecting to leverage their existing products/services/ecosystem to lock you in by yet another aspect your life.
As the engineer and writer Alex Payne put it, these startups represent “the field offices of a large distributed workforce assembled by venture capitalists and their associate institutions,” doing low-overhead, low-risk R&D for five corporate giants. In such a system, the real disillusionment isn’t the discovery that you’re unlikely to become a billionaire; it’s the realization that your feeling of autonomy is a fantasy, and that the vast majority of you have been set up to fail by design.
- No Exit: Struggling to Survive a Modern Gold Rush (2014)
That’s an interesting perspective. Related to it, I often feel like entrepreneurs in tech don’t realise how much their innovation is restricted by capital markets.
OP’s startup is actually a great example of this. Medical debt is indeed a troubling problem in the USA, but OP’s solution is yet another financial product, something that can get funded. VCs can’t fund single-payer healthcare policy entrepreneurship even if that’s actually what would solve the medical debt problem.
I dread the raise of the tech company banks. I think we need EU level regulation to ensure you are not orphaned by companies that decide they don't want you legal business because you offended some third party that is applying political pressure to the bank. A digital and financial rights charter.
Because they don't want to. Why would you want your members to be a part of it, just sticks with the super low interest rates, fractional reserve, rampant speculation and all of the profits
There are only two uses cases left for money center banks.
(1) You might be able to get a branch safe deposit box.
(2) Same day payment on credit cards, that bank.
Fidelity, and perhaps other zero fee brokerage accounts handle everything else.
"Integrated cash management" (a debit card, etc) is abundantly available from discount brokerages, and is systemically important to their businesses. Fidelity legally can't call it a checking account so they call it a Cash Management Account; brokerages that own banks (Schwab, etc) just call it checking.
You did not answer my question. As far as I can see, the Fidelity CMA allows you to withdraw cash using their debit card, but I see no way to deposit cash. Nor does it provide features like cashier's check.
I'm with you. You're contributing a thought piece and unobtrusively include a link to your bank at the bottom. It's not overtly biased, and it's neat you're getting attention for your banking app by, instead of describing it, simply saying you're doing something "interesting."
I think, by focusing on the $5000 emergency cash proposition, your customer segment will generate more costs and hassles than their debit card fees and whatever interest spread you eek out in today's world. You'need a way for your customers to generate more value-- what have you thought of? Ads?
thanks perspective1! I find overt self-promotion to be distasteful, so glad it came across well. We are using the interchange fees to pay for the $5000 emergency fund, they have to move their direct deposit over to switch "ON" the safety net. We do break even based on our current estimates of annual spend and claims, but looking at a few different ways, upselling insurance is the big one! Will write about it and make sure to post on this comment thread!
I think the article more or less nailed it, but the topic probably deserves journalistic attention of the kind journalists complain no longer exists.
The basic "fintech" startup theory is fairly reasonable:
(1) financial services have a lot of fat and/or profit.
(2) financial services is/should be a tech subsector. Debit/credit cards, current accounts & such are nearly commodities, one is as good as another. Apart from customer service, UX is all that differentiates them^, from a meaningful subset of customers. That's software.
(3) The competition is soft. Many banks have terrible consumer facing software, for example. Many have costly legacy structures.
Because it looks easy. And in an age where VC money doesn't care about profits its easy to create a bank. When the fraud, regulatory compliance and low interest rate horsemen come knocking most of these efforts wont last.
Is the overwhelming debit spending vs credit spending an emotionally charged and risk averse rationale decision by the general populace or just unfortunate financial illiteracy?
Access is the big one, risk-averse because of being burned in the past. Even missing a single payment means 25% APR+late fees, so likely to not put everyday expenses on credit. Use it more for planned stuff, like travel etc. The biggest irony is credit card rewards are a tax on the poor for the rich---merchants jack up prices for all but the rich spend and benefit!
Anecdotal reasoning: every middle-class and lower-class person in america probably knows someone with a tragic financial story that ends with piles of credit card debt.
The problem is that no direct to consumer fintech company has found a legal way to make money other than 1) processing transactions 2) holding savings. The examples of struggling companies in the article underscores this point.
Is that a trick question? it's because banks get to make money without doing any work. It's a wonderful position to be in, the middle-man who just takes a cut of everybody else's transactions.
In 2009 the Fed tore down the wall between retail and investment banks. Which allowed the Fed to pump the latter full of cash. Stands to reason that every other large non-finance corporation wants to get in on that.
It has never, at any point since the introduction of electronic transfers, made the slightest bit of sense for 'payment processing' services to charge a fee which scales based upon the amount being transacted. Yet, every means of transferring money has always come with a percentage-based fee. This isn't just a simple matter of rent-seeking on the part of the financial class. It's outright dangerous, and really shouldn't be tolerated by any government. The cost to transfer money does not scale based upon the size of the numbers involved. And as the vast majority of transactions overall in our economy are now electronic, this puts payment processors essentially in the role of taxing authorities. They have the power to counteract the monetary policies of the government should they feel like doing so. Imagine if the Federal Reserve decided to print more money in order to encourage lending or something like that, but the CEOs of the largest payment processors disagreed. They could simply raise their processing fees, making it more expensive for money to be used, compensating and making the actions of the Fed ineffective. There is no law preventing them from doing this, as far as I know, and it would have immediate monumental impact on the economy.
That's a juicy target. Any company willing to clear those regulatory hurdle gets to become not just a company, but effectively a taxing authority.
Hmm... it seems to me that the service is exposed to more risk for higher transaction amounts (say, something is crooked, or just goes wrong and the service winds up holding the bag).
That's not to say that the current fees are necessarily fair, but it does make sense to me that larger transaction amounts should be charged more.
The thing you tend to hear about banking services is that everyone is dissatisfied with them. This is probably why a lot of startups think they can jump in and disrupt.
People should lend directly to each other, or have sensibly priced investments, or people should have simple bank accounts that don't surprise you with charges, or be able to change FX cheaply. Those kinds of ideas are pretty easy to suggest for outsiders, and the answer is always "I'm gonna make a website that's better than the incumbent".
To be fair, startup FS sites have tended to be easier to navigate, and focusing on an area like FX does create a simpler user experience.
The question is whether any money can be made. For instance we now have a load of challenger banks that have a slick app for sending money to people. But how much is the customer actually worth? Do they stick around or open a whole bunch due to it being so easy? Also what are you gonna upsell them on other than the metal card?
What about the lending markets? How come Lending Club has issues making money as the premier business in the direct lending category?
What about the investment businesss? Competing on price is generally something they tell you not to do in business school, but that seems to be the main value proposition as far as I can tell. I reckon Google could jump in here though. They have credibility among the general populace as being pretty smart with ML, and I bet they could morph their bank into a super hedge fund.
The FX niche, I don't know how TransferWise are doing, but it's fairly easily encroached on by the challenger banks. The backend is fully commoditized, it's a question if getting customers. Which is probably why TW are offering bank account like services.
When you're a bank you get rent from many economic transactions without providing anything of value except being rich to start. And even better, if you're a real bank, then you can create money out of thin air as debt on your balance sheet via fractional reserve banking. There's effectively a universal basic income for banks. What company wouldn't want to get in on that?
> And even better, if you're a real bank, then you can create money out of thin air as debt on your balance sheet via fractional reserve banking. There's effectively a universal basic income for banks.
No. UBI is income (increases assets), while money creation in banks is balance-neutral (increases both assets and liabilities).
While technically during lending banks create both loans (assets) and deposits (liabilities), it is more complicated:
When a loan is taken, it is usually not taken just to sit in a bank account, it is to be spent. When that happens (by cash withdraw or transfer to a different bank), a bank must release/transfer base money, which it can get from cash deposits, incoming transfers or in exchange for some other assets.
Therefore, although banks create M1 money by lending, they are limited in practice by necessity to keep balance of base money. So it is more a distributed/emergent behavior, where each bank ability to create M1 money is limited by its market share and the rate of money production by other banks.
They do a lot! But it's not part of where the money comes from.
Imagine a normal grocery store. Then imagine it suddenly gets a button that makes more stock magically appear on the loading docks. Almost as much as they've sold since the last button press. It's great for profit margins, but the employees still have to do their jobs, and their jobs are basically unrelated to the magic button.
Yup, thin air. When people borrow money, the bank just creates the money out of nowhere. That money doesn't actually exist until the debt is paid. Banks are ultimately responsible for the extreme inflation of virtually all currencies currently in use.
If you're interested in this space, we're building a fully-regulated platform bank to essentially power all of these consumer/business facing banking applications.
Some cryptocurrency communities push the idea of "Be your own bank", especially with hardware wallets specifically because of this problem of having to trust / rely on custodians.
My sister-in-law had her accounts frozen for a year for something a business partner did. If she had all her money in her own hardware wallet, she wouldn't have lost access to her funds.
Obviously, being your own bank is hard from a security perspective, which is why most people are happy to outsource their banking to a custodian. Heck, even crypto people outsource to custodial accounts like Coinbase.
Hardware wallets can protect your assets, but they can't protect you from bad rep. People won't make transactions with you if transactions are monitored or at risk (every business with someone having problems with the law are hinerently risky)
Just like sanctions against states they could not freeze your accounts, but they could prevent you from spending your money or collecting payments or making regular business.
I've encountered several startups that have founded banks through American Indian Reservations, instantly creating an international money laundering vehicle, which they use as a tax haven for wealthy people while also being able to create money directly by loaning it to separate corporate shells. This may be "smart" but I steer away from anyone with this type of "strategic thinking" because they are playing with fire.
> Think of the last time you saw an overdraft charge on your statement and swore to yourself that this was the last straw — you are taking your business elsewhere only to be confronted with the downstream effects of moving your “financial address” — telling HR where to send the next paycheck, calling up each utility company, changing autopay for each credit card bill and so forth
Isn't this what CASS is for? Is there really no US equivalent?
Sounds crazy --- I don't want to start a billion (trillion $$$) bank. What happens if "my bank" has never more than $10,000 in total assets. Our loans never go above $100. Do want to offer ATM cards, just we're nano-sized.
Do I somehow slip under all the banking laws? Just as an "experiment?" Is this something that I could do? OR is it just a crazy idea?
Traditional banks have a consumer tech problem. This has led to the rise of Robinhood, Venmo, etc. Partnering with tech players like Apple and Google allows them access to their customers.
Big tech wants access to financial services for a few reasons laid out in the article in addition to FOMO and bypassing regulation.
But they aren't banks, they are just partnering with banks and putting a smooth veneer on top of old/greedy banks. The current trend seems very similar to when retailers all launched their "own" credit cards.
Seems to me that sensible ones would have more capital than they really need, and it would be so poorly-performing that they can loan it out for better returns than they would get using it for their own growth purposes.
Existing banks' customer service totally sucks. These tech-focused banks have an enormous opportunity to just provided better customer service. Insightful article, I never thought about interchange as a business model.
Isn’t it just data mining? I assume the big credit card companies aggregate spending by vendor for their customer base and make projections about each vendor’s quarterly revenues then sell metrics to hedge funds.
Not "everyone" is a bank. Some big companies can afford to be a bank.
Becoming a bank (or an insurance company) while it is actually not that hard (information mgmt wise) is really expensive due to regulatory bumps. Thus only big money can afford to start up banks (or insure'ers). These rules ensure that you always have capitalists running these shows. Thus making the world even more unfair. I guess the rules that make it so artificially hard to start up in those sectors are prolly lobbied into existence.
The article doesn't touch this, US-centric, but I feel worth mentioning is the EU's PSD2 (Payment Services Directive 2) which is driving a lot of consumer banking Fintech/Regtech.
An article from 2016 which I think gives the best tl;dr especially highlighting the roles of ccount Information Service Providers (from roboadvisors to replacements of traditional 3rd party transaction layers such as Visa) and Payment Initiation Service Providers (which essentially turn any traditional bank into a whitelabel product) https://www.finextra.com/blogposting/12668/psd2---what-chang...
Because in capitalism there are really only two things that make money: real estate and finance. Everything else is just combining real estate and finance in interesting ways.
McDonalds is a real estate company that happens to make burgers.
The traditional car manufacturers are banks that happen to build cars.
So if you're doing something involving moving a lot of money around, you may need to be your own bank to make the whole system work well.