Start-ups, including Simple and Moven, are battling it out with traditional banks for tech-savvy customers. They offer all of the basic services of a bank account — deposits, bill pay, savings — without overdraft and maintenance fees.
The catch? You have to have a smartphone to get an account.
Smartphones have become the center of financial services as companies latch onto technology that could help them reach the millions of people at the margins of the system at a fraction of the cost of traditional banking.
Researchers at CEB Tower Group estimate that banks spend roughly $1.34 for tellers to process a transaction in a branch, while the same transaction on a smartphone costs one-tenth of that amount.
“Basic retail banking products — checking, savings and credit — have low value and are extremely expensive to sell,” said Alex Sion, president of Moven, which has thousands of users. “To make money, banks either try to sell retail customers on loans or hit them with punitive fees.”
All of the major banks offer mobile apps, but the technology is still tied to an old-guard operation with high overhead costs that make it difficult to provide accounts with little to no fees. Without a physical presence, mobile-only providers say they can keep costs to a minimum.
Companies like Moven and Simple partner with FDIC-insured banks that handle the banking functions of their mobile apps, house customers deposits and issue debit cards. (CBW Bank in Kansas works with Moven, while Bancorp Bank backs Simple.)
The start-ups make money off of interchange, the fee merchants pay when people purchase goods with plastic, and by splitting the interest the partner banks earn off of deposits.
The firms say their mobile platforms offer a easy way for users to instantly track their spending. Moven gives users financial feedback each time they make a purchase. After swiping their debit card at the grocery store, for instance, customers may receive an alert that they have surpassed their allotted money for food that month.
Simple, meanwhile, alerts its over 100,000 customers to their “safe to spend” balance — the amount of money left over once upcoming bills and pending transactions are taken into account. Simple customers typically set aside 30 percent of their money toward future purchases, a savings rate that easily eclipses the national average of 5 percent, said Josh Reich, chief executive and co-founder of the start-up.
“We’re students of the world of behavioral finance,” he said. “There is a lot of research that shows that if you want people to save, there are a lot of user-experience tricks you can use. We’ve built that in, so by default people fall into the trap of saving money.”
Low fees is what attracted Ozzy Urrutia, a 24-year-old visual branding designer in San Francisco, to Simple when it launched two years ago. He had closed his account at JPMorgan Chase because he was fed up with being “nickel and dimed” on transactions.
“Banks get you into their so-called free checking accounts, with all of these requirements: you need to have a minimum balance of this or you need to write X amount of checks a month. If you fail to comply, they start charging you like $20 or $30 a month for maintenance fees,” he said.
Urrutia called the savings tools at Simple “powerful.” He said, “They are trying to actively help you save, versus banks who say here’s an account, that’s it.”
The designer is not a fan of the restrictions on depositing multiple checks at one time. And he realizes that he may eventually have to head back to a bank when he needs a mortgage or a car loan.
These mobile apps are “not a one-stop shop yet in a way a traditional bank could be,” said Jennifer Tescher, chief executive of the Center for Financial Services Innovation.
That may change. Simple, which was recently purchased by Spanish banking giant BBVA, is weighing an expansion into credit products now that it has the backing of an institution with scale and resources.
But it’s unlikely that Moven will branch out into home or auto loans anytime soon, if ever.
“As soon as you move down the credit path, all of a sudden the core deposit product becomes a means to an end,” said Moven’s Sion, who once worked at Citigroup. He said at some point the company may offer its customer data to lenders for use in underwriting loans.
A big hurdle for these companies in scaling up their business is the general distrust that some consumers have of conducting financial transactions through their smartphones. Security experts say the information transmitted between servers and mobile devices is encrypted, much like in online banking, meaning the breach risks are about the same.