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As I understand it, banks make a large amount of revenues from fees and such. How will BankSimple succeed if it doesn't use that? How will overdrafts work? Will the check just not go through?

I love that they are trying to revolutionize the banking industry, and I wish them well. But I'm afraid that they'll succumb to adverse selection to the greatest degree. The reality is that most of a bank's customers are not profitable (without the fees), which is why they institute these ridiculous fees to either drive them off or make them profitable. If BankSimple can make these previously-unprofitable people profitable again without surprise fees, they'll be a great success.

Let's hope that happens.

"Odd as it might sound, we tell startups that they should try to make as little money as possible. If you can figure out a way to turn a billion dollar industry into a fifty million dollar industry, so much the better, if all fifty million go to you. Though indeed, making things cheaper often turns out to generate more money in the end, just as automating things often turns out to generate more jobs." - Paul Graham


As I've posted below, it's going to be a bit tough for them.

However, while traditional banks make a lot of revenue from fees and such, traditional banks also have a lot of costs. Traditional banks have very large staffs that BankSimple won't have, traditional banks have lots of real-estate that BankSimple won't have, etc.

So, there is the potential that BankSimple is cutting out the fee revenue, but they're also cutting out a lot of the costs and that they'll offset (or it'll be enough that they can succeed, even if succeed with lower than average profit margins for the banking industry).

I'm also guessing that online banks get a higher percentage of their clients from the no-fee club. There are already e-banking divisions of many banks that offer higher rates, ATM reimbursements, etc. So, there's some wiggle room there.

It will be difficult, but they're going for it. Again, I'm skeptical. There are a number of e-banks that offer better terms than physical banks, but haven't quite gone all the way on no-fee. It isn't a sector where there aren't competitors already. So, BankSimple is going to have its work cut out for it.

The 1.5% they get from every single credit (and debit) card transaction as the issuing bank. I also understand that they'll have no branch locations. My local credit union has no fee checking and savings accounts, and in the years of using them they have only given me fees for the occasional coverdraft and absolutely nothing else. Just like how netflix is usurping cable companies $100 bills for a $10 + Internet bill, they'll do just fine.

It's actually closer to 1.1% of card transactions (our cards are debit cards). We also earn income as we pay out interest to our customers. We'll do fine.

Interchange revenue is going to drastically decrease this year anyways, thanks to the Durbin amendment. Depending on it as a core portion of non-interest revenue would be folly.

Interchange fees have been in the news a lot lately, but they're notoriously difficult to put an exact figure on because PIN-based debit incurs a flat per-transaction fee, while signature debit is generally percentage based, and varies with the merchant in question. (eg, Gas stations will pay less interchange than Best Buy or online merchants.)

When you see figures in news stories, there are a lot of assumptions going on behind the scenes; eg, they'll typically assume a $40 transaction, aggregate PIN and signature based debit, are based on broad-industry studies, &c.

There is also variation depending on what debit networks are being used. If you look at the back of your debit card (especially if it's from a smaller regional bank or CU), you'll see many more logos than just Mastercard or Visa.

Do debit cards typically incur the same fees as credit cards?

I thought many places here (Canada) accepted debit but not credit because it was a fixed fee per transaction not a %

In the US (and the UK I believe), debit card transactions are done through mastercard/visa and can incur similar fees. You can also type your debit card number on online purchases and it will work correctly, vs. interac where that doesn't work. Interac is very nice for retailers in canada since it's just one flat .25 fee for any transaction, just limited by your daily card limit.

I thought that fees and such were only incurred when you ran your debit card as a credit card transaction, with signing your name and such - I was under the impression that using your PIN number and using it as debit didn't incur those costs.

From memory, I am quite sure that here in Australia standard bank cards, which are generally referred to as debit cards, use an entirely different fee structure to credit cards. These bank cards always require a PIN and work on the EFTPOS network. Important, as you can't use them online. The rate is a flat one if I'm correct.

Debit cards issued by Visa or Mastercard and operating over those networks incur a lower fee than credit cards but follow the same interchange fee structure. Australian Visa interchange fees are here: http://bit.ly/visainterchangefees. Just incase anyone was interested. Whether or not these cards require a PIN or signature depends on whether they use the Chip-and-PIN system, which all new cards issued in Australia should.

No. Running as debit (w/ PIN) still incurs fees, though they are usually less than the credit card fees. If you gave a merchant a debit card and gave them the choice of running it 'as a debit' or 'as a credit' card, they would choose debit.

> How will overdrafts work? Will the check just not go through?

That's how it used to work, so sure, it's an option. A second option would be automatically taking the money out of your savings account, if available. A third option is, if you have a credit card with them, putting the overage on you your credit card. A fourth option would be to generate an automatic overage loan at a reasonable interest rate, without assessing a ridiculous fee.

In Brazil it is standard practice for banks to attach a credit line to every checkings account, and if you overdraw it counts as a loan against that credit. Some even include a grace period (10 days or so) where you don't pay anything if you bring your balance back to black.

However, you definitely don't want to keep using that credit line. Interest rates are on the order of 120%/year.

Hell, an automatic loan with an _unreasonable_ interest rate would be better than a $30 charge on a $5 overdraft.

Ask your current bank about an "overdraft line of credit". I have a US bank account with a boring, not-cutting-edge-in-any-way bank, and I specifically asked for this (and got it) for both my personal & business accounts. So I suspect it's an option that's available at most banks if you have a decent credit history.

I have a 2500 or 3K credit line attached to each account; if I overdraw my balance -- with a bill payment, ATM withdrawal, whatever -- the extra comes from the overdraft line of credit, and there aren't any fees. I even used to be able to transfer money from the overdraft credit line into my checking account using their online interface, but they've turned that off now.

I've never overdrawn for more than a few days (due to poor planning, generally), so it's a perfect safety net... I always hated those fees!

It's not quite the same as a normal credit card line, I suppose -- where if I pay off the balance at the next statement, I pay no interest -- but the interest has never been more than pocket change, so I haven't even bothered looking it up.

[edit: sorry; I intended to post this in response to a post replying to you, not your post]

Banks make ridiculous amounts of money. I'm sure missing out on a few fees in favor of new customers that add to their reserves won't be a big deal.

Making money in banking is trivially easy. The big banks need to assess all sorts of fees to sustain their humongous and humongously unnecessary cost structures.

Pretty much every claim/assumption in this is wrong. Traditional banks make more money by adding fees, but they make plenty of money before fees, too. Interest and interchange revenue -- they are things.

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