There’s a sea of sameness out there in digital offerings. Challenger banks seem to provide, more or less, the same services and products. They’re essentially debit cards attached to a personal finance manager.
HMBradley launched last week with an investment from PayPal and Affirm founder, Max Levchin. It bills itself as a bank for people serious about savings and it has an incentive mechanism that pays the highest interest rates to those doing the best job saving.
Co-founder and CEO Zach Bruhnke joins us on the podcast to talk about why he’s dreamt of launching a bank and where he plans to take his new challenger in the future.
Building a bank for savers
For me, this is personal. I grew up pretty lower middle class in Louisiana with two parents with high school educations. They are incredibly good savers. When I started working at 14, my mom took half my paychecks away. I thought she was mean. I turned 18 and she took the other half of those paychecks and gave them to me. She said this is why you save money. You can do whatever you want with this.
It was a powerful life lesson. I’ve also realized it’s not a life lesson that everyone gets to learn. We started building HMBradley with the idea of teaching Americans to save. That’s really our focus. Can we teach people what my parents were able to teach me?
Teaching good financial habits
Banking is a fundamentally sound model. The bank takes deposits, pays you for them, and then lends it out. We haven’t really changed anything fundamentally in banking in a really long time. Banks have been paying all their customers the same rate no matter what. There are no incentives to align paying the customer doing the best thing — helping the bank grow deposits — the most money, so that they’ll stay.
That’s what our product is designed to do. If you’re saving more of what comes in, we’re paying you more interest. End of story. If you’re a saver, there isn’t a better bank for you.
Moving into credit
We actually have credit card BINs and will start shipping some this month. We did this in parallel on purpose. Fundamentally, we believe you can’t go into banking without being able to lend. It’s what your customers expect.
We’re different than other challengers that rely on debit card swiping for revenue. Our customers — and our team — don’t really use debit cards. We use Chase Sapphire Reserve or Amex. We’re using those and getting rewards. Debit cards pretty much sit idle in our wallets unless we’re taking cash out at an ATM. That creates a conundrum for challenger banks that has forced them to go completely down market and focus on building products for the underbanked.
Unfortunately, for the mass market, who would love to bank with something different that looks like Chime or N26, the reality is that the model doesn’t work for them. They don’t swipe debit cards and don’t need to get paid two days early — those aren’t the incentives they care about. They do care about if you can help them buy a car or a house. Those are the things they are thinking about that they can’t get from the incumbent challenger market today.
Our market is broader than we thought. We are really targeting W2 employees consciously trying to save. There was a survey published by Facebook in 2016 that said 1 in 6 Millennials has saved $100,000. At the beginning of 2020, that number had risen to 1 in 4.
It’s a pretty wild world. These people saw their parents lose money in the stock market. They’re making money and holding on to it, unsure of what to do. I think we’re starting off with a safer product to incentivize savings. We’re definitely moving more into advice longer term.
Choosing a partner bank
We talked to a lot of partner banks. It feels like we know every bank CEO out there. We met Jared and Derrick at Hatch. What they’re building with the Green Family really resonated with us. Jared was early at Bank of the Internet and was one of the people who turned down the Simple deal because he didn’t think they could make money when they started.
At first, we intended to buy our own bank. We believe you need to be able to leverage deposits to lend. Hatch loves our model and we found a way to lend off the balance sheet — a unique part of our proposition. As we grow deposits, we have access to lend part of them off the bank’s balance sheet. That’s unique among challenger banks.
Moving into CEO role
I’ve spent most of my career as the technical guy. I’ve enjoyed the role of building things. Along the way, I’ve picked up a lot of operating skills that I wanted to use here. When we started the company, one of the first things I told Max Levchin, our first investor, was that I have a chip on my shoulder. I want to prove I can do it. I’ve known Max for years. He tried to buy my last company and we’ve kept in touch since.
I don’t get to blame anyone else. At the end of the day, I have to own whatever happens here. For me, that’s a really fun experience.