[podcast] How to build a bank with no branches with Card.com’s Ben Katz

card.com is an alternative to bank branches

Wall Street has been shedding Main Street bank branches of late and it doesn’t appear like it’s letting up any time soon.

Card.com's Ben Katz
Card.com’s Ben Katz

As more financial transactions occur over the web, the purpose of a bank branch is changing and for many banks, they just can’t make them profitable anymore. Upstarts smell an opportunity and they’re stepping in by creating branch-light banking alternatives.

Ben Katz, founder and CEO of Card.com, joins us on the Tradestreaming Podcast. His firm provides most basic banking functions without any physical branches.

When you talk to Ben, he likes to make a simple analogy that drives home how his firm and others are forming an alternative to a bank branch: Just as Netflix is to Blockbuster, Card.com is to Wells Fargo.

We spend the bulk of our conversation discussing how his debit card solution, tied to an affinity or brand his users love, can compete against the branch footprint of some of the largest U.S. banks.

Listen to the FULL episode

Here’s what we discuss in this episode of the Tradestreaming Podcast

  • How branded financial services resonate with customers differently that incubent offerings
  • How, by partnering with non-financial brands that people love, financial services can tap millions of potential customers on Facebook cost-effectively
  • Why banks struggle with the cost-structure required to service retail clients
  • How customer service is handled for financial services that function without physical branches
  • The evolution away from call-center focused service to self-service solutions that can actually provide better and more accurate service
  • Tying proactive telephone service to a user’s app in an effort to proactively identify a user’s service question before he or she begins dialing the 800 service number
  • Whether bank licensing makes any sense for financial services operating outside of lending

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‘Slack Finance’: The rise of the message-like interfaces in financial services

rise of message like UI in financial services

Could 2016 go down as a tipping point year for chat technologies in the financial industry? Facebook users can already make person-to-person payments via the social network’s Messenger and soon will be able to pay for for services like Uber and Get Taxi directly from the chat function. In Asia, Chinese giant WeChat offers personal loans in minutes, using only a chat function.

The trend towards expanded use of text messengers is apparent even with automated savings apps like Digit, which uses an algorithm to automatically move spare change out of a user’s account and deposit it in a Digit virtual savings account. The app “communicates” with users via an interface that mimics text messages, informing them of weekly or monthly activity and to ask for authorization on some transactions. In the other direction, users have the ability to withdraw money from their accounts with a simple SMS.

Digit's savings app uses text messages
Digit’s SMS-like User Interface

The digitization of financial services

In some ways, the move towards chat functionality represents a reversal for the finance industry. For more than a generation, banking, investing, payments and other facets of the money economy has been moving steadily towards DIY service. Prior to the 1970s, banking, investing and other financial services were typically conducted via close interpersonal interactions – deposits and withdrawals were made by standing in line at your local branch,where your account was overseen by an account manager who knew you well. Stock trades were made with a phone call to your broker, who was typically a middle-aged man you’d developed a relationship with over your adult years and who knew your investment patterns and preferences.

Later came drive-through banking, followed in the 1980s by ATM machines. By the turn of the century, the internet gave individuals the ability to shop online as well to administer their financial lives, essentially rendering human contact in this area irrelevant. Online, bank clients could decide when and how they’d like to interact with their financial provider.

This gave way more recently to more fully set-and-forget type services. These rule-driven technologies give users the ability to automate their banking. But banks found their users had a hard time setting global rules to their banking relationships (like deposit $50 on the 2nd Thursday of every month). Yesterday’s self-service banking website is now being slowly replaced by automation and algorithm-driven banking services employing SMS and internet chat technologies to simulate person-to-person interactions for users. Though they’re prompted by an automated bot, services like Digit require users to lightly participate in decision making.

The move away from 100 percent automation serves two functions: first, to improve mobile financial security by requiring user input.  Second, it caters to banking and savings app users’ need for communication. They use text-based communication tools like Slack at work to communicate with their colleagues and Whatsapp to talk with their friends and families. Today’s banking clients want that same level of interactivity from their banking apps, too.

In addition, the effort required to confirm orders and payments by SMS reduces the chance of mistakes by an inadvertent thumb-click to a “yes” pop-up button.

There are also social/sociological benefits to using chat technology for internet transactions, in addition to tangible reasons for apps to “interact” with users via text messages.

How do your students relate to all of these issues? 

We asked James Berman, founder of JBGlobal and a faculty member in the Finance Department of the NYU School of Professional Studies, how his students relate to technology interactivity.

“I teach traditional in-person classes at NYU, as well as on-line courses,” explained the finance professor. “Many of my 20-something students choose to take my classes in person, even thought they cost more. They say the reason is simple: ‘I can’t learn that way,’ is a common refrain. ‘I need the face-to-face interaction with other people to really learn well.’

“So I’d say something similar here. Of course, the millennial generation wants banking and financial services online to be quick, efficient and easy, and that trend isn’t going anywhere. But they aren’t willing to completely forego the elements of human communication.”

The Panama Papers and our 2 global financial systems

panama papers and the 2 financial systems

In the Superman comics of my youth, there existed a parallel world to Earth. It was called Bizarro (also htraE, which is Earth backwards) and in this cube-shaped Bizzaro world, society was run by an overriding precept to do the opposite of what people on Earth do. If inhabitants of Earth prized beauty, Bizarro society did the opposite. In fact, Superman was once convicted of doing something “perfect” on Bizarro, a capital offense there.

Sometimes, when I read about our financial system, I really feel like we live in dual universes. One, where there are sets of laws, regulatory bodies to enforce them, and a general view that light is preferable to darkness, that more transparency, not less, makes for an overall better system for its participants. And then there’s the Bizarro system. One that is shrouded in secrecy. One that’s sole purpose is to mask the wealth of the world’s truly rich and famous, bypassing the rules and regulations of the financial system back here on Earth. One that exists in exotic places like Panama and the British Virgin Islands. One that doesn’t pay taxes and is not subject to real oversight.

The Panama Papers: terabytes of revealing offshore accounts

That’s the sociological basis for the shock that’s reverberating worldwide surrounding the release of what are now being called the “Panama Papers”. Millions of legal documents from a Panamanian law firm were leaked to the International Consortium of Investigative Journalists, or ICIJ. In turn, this organization, before making the terabytes of emails and contracts generally available to the public here, shared them with the German newspaper, the Süddeutsche Zeitung (SZ), who put together a pretty impressive expose.

At the center of the story is Mossack Fonseca, a Panamanian law firm that has offices in 40 cities worldwide. For as little as $1000, you can create an offshore shell company. Of course, there’s nothing inherently illegal about creating an offshore entity — it’s what you do (or more appropriately, what you don’t do, like paying taxes) with the shell that’s a problem. According to the SZ’s findings, 12 current and former heads of state, 200 other politicians, as well as members of various Mafia organizations, football stars, 350 major banks, and hundreds of thousands of regular citizens were among Mossack Fonseca’s clients.

These leaked papers reveal the offshore business dealings of world leaders and their families, including among many others:

  • Vladimir Putin (family, friends control about $2 billion of offshore assets)
  • Sigmundur David Gunnlaugsson, Icelandic Prime minister (who owned the bonds in the same failed Icelandic banks he was working to save)
  • HRH Prince Salman, King fo Saudi Arabia
  • Petro Poroshenko, president of Ukraine
  • a FIFA ethics committee member

Two financial systems: for the people who make the rules and for the people who obey them

Sure, there may be legitimate reasons for moving assets offshore — though, I think under the lens of scrutiny, they all involve some type of tax evasion (if it’s legal, it’s called tax avoidance) or money laundering. And of course, in any tax regime, you have bad apples who act to avoid playing by the same rules as everyone else. That’s not what’s so shocking about the Panama Papers. Here’s the rub: when you look at all the documents, it turns out it’s precisely the people enacting the laws and taxation policy who aren’t playing by the rules that they themselves have set.

So, essentially, we’ve got 2 financial systems: one that’s onshore and the other that’s offshore. The onshore one is the one most law-abiding citizens choose to transact with. It’s local, it’s cheaper, and it’s playing by the rules. The offshore one requires working in small jurisdictions, thousands of miles away in places like Panama or the British Virgin Islands. That one is really expensive to use, when compared to the onshore one. You have to pay-to-play, assume the ongoing carrying costs or managing complex financial structures, and in return, the world turns a blind eye to what you do there.

To some extent, we all know that this game is going on all the time. But when you see the sheer breadth of the people using the offshore financial system, it’s startling.

The size of the offshore financial system

Vox does a good job covering this story and quotes Gabriel Zucman, an economics professor at UC Berkley, who has completed arguably the most detailed study of the offshore financial system in his book, The Hidden Wealth of Nations. Zucman estimates that assets held in offshore entities total at least $7.6 trillion.

That turns out to be close to 8 percent of all the world’s financial wealth. What’s more is that it’s growing fast — Zucman estimates that offshore wealth has surged about 25 percent over the past five years. According to WorldEconomics, over the whole of the last 5 decades, annual real GDP growth has averaged 3.8%, and 2.2% in per capita terms. So, the offshore system, though it’s about 1/10 the size of the onshore one, is growing significantly faster.

Investors allocated around $12 billion into fintech firms last year. What’s interesting about this push towards new financial technology is that it’s being lead by the customer. Clients of financial institutions are encouraging their financial service providers to offer the same level of service and transparency that they require from their transportation service or from their favorite ecommerce provider. But this money, transparency, and innovation is only happening in the onshore financial system. The offshore one, well, it’s offshore, hidden from the same dynamic.

Gerard Ryle, director of the ICIJ, told the BBC, “I think the leak will prove to be probably the biggest blow the offshore world has ever taken because of the extent of the documents,” he said.

Photo credit: mariamertens123 via Visual hunt / CC BY-SA

How Curve is changing the nature of physical credit cards

curve credit card

The days of thumbing through your wallet, trying to figure out which credit card you want to use are nearing an end. That time is coming quickly if Curve takes off. It’s a new super credit card that’s a lifesaver for people who use many credit cards.

Curve uses its smartphone app to essentially lift the information stored on various credit cards. It then transfers this information to its own single Curve card. The result is a software/hardware hybrid that gives Curve users the choice of which card they’d like to use at the point of purchase without the need to carry multiple cards. Holders of the Curve card just choose which underlying credit card they’d like to use via the app and present their Curve card.

If you carry a card that isn’t accepted as broadly as some other cards, like Amex, Curve improves your acceptance rate. The Curve card is a prepaid MasterCard and consequently, even if your underlying card is Amex, it’s accepted anywhere MasterCard is accepted. The app is designed to help Curve holders track their various purchases and loyalty points across multiple cards.

Curve also boasts that it doesn’t charge any currency conversion fees — card holders only pay the MasterCard wholesale rate + 1%, a relatively low rate according to the LA Times Currency Exchange study.

Curve all-in-one credit card
Curve all-in-one credit card

Curve joins a group of credit and banking offerings that sit on top of existing financial technology infrastructure. It provides a new interface for users to use to connect to their accounts and cards. And with its app tie-in, it provides a user experience that captures much of the traditional interaction between consumers and their financial institutions. Solutions like Curve and all-in-one credit card competitors Coin and Stratos aren’t competing as substitutes to existing financial products — they’re complements that aim to make the existing banking and credit ecosystems easier and more enjoyable to work for today’s demanding consumers who are want their financial apps to be as easy-to-use as the ones they use to travel, order a cab, and go shopping.

“We’re not another new bank or extra service to deal with, we transform your existing fragmented financial world into somewhere crystal clear, designed for the user,” Curve founder, Shachar Bialick told VentureBeat. “Mobile payments have the potential to bring similar benefits, but cards work everywhere and people are used to them. So we’ve created the best of both worlds — all the benefits of mobile payments via a groundbreaking card.”

Bialick believes users will be more likely to adopt his solution versus other options on the market. And it’s precisely because of its old school/new school aspect that users may find it appealing — Curve’s sole product at this point is a physical card. It looks, smells, and feels like the other cards in your wallet. But while competitive offerings look like credit cards, Coin and Stratos are both battery-powered bluetooth devices that tether to mobile phones; Curve is a standalone credit card and can be used without its accompanying app.

London-based Curve first made waves when, in stealth mode, it closed an investment round that included Taavet Hinrikus, co-founder of money transfer startup TransferWise, Ricky Knox of challenger bank Tandem, Ed Wray of Betfair, and former members of the Google Wallet team.

Photo credit: orphanjones via Visual Hunt / CC BY

Monese: Get a banking account in minutes

Tradestreaming's app of the day

[x_promo]Every week at Tradestreaming, we try to identify interesting new technologies we think you, your clients, or your firm may find interesting.[/x_promo]

Monese: 56,000 people on the waiting list can’t be wrong

Monese offers anyone with an address in the European Economic Area (EEA) the opportunity to open a UK bank account. As long as a user is 18 and lives in the EEA, you can apply to open an account, regardless of citizenship or nationality. The EEA has seen a huge number of migrants over the past few years and integrating into the local banking system has proven a challenge. Monese makes opening a bank account (almost) as easy as opening a social media account.

Opening a UK bank account is amazingly easy

The site is building a waiting list, so you’ll need an invite to start the account opening process. Once you have one, everything is automated. The company can verify a user’s identity — just take a picture of your ID card and a picture of yourself and the rest of the signup process is guided.

Once an account is verified by confirming various personal details (the app does not run credit checks and is open to anyone, regardless of creditworthiness) , it operates very much like a regular bank account.

If an account cannot be verified, a user can still use his/her account but on a more limited basis.

  • Hold and make card payments and cash withdrawals for up to £1,750 a year
  • Make card transactions and use your card to shop online for up to £700 a day
  • Withdraw cash up to £300 a day

A user would have to verify his/her identity to exceed the limits mentioned above.

What services come with a Monese account?

Monese users get the benefits of a real financial app with banking services behind it.

  • local and international money transfers
  • debit card
  • mobile app to track personal finances
  • one-click sending money to friends

Most basic banking services are free. Users pay for international money transfers and using the app abroad, as well as for ATM withdrawals.

monese pricing

Overall, the app’s been pretty well received by the media (TheNextWeb, Business Insider). Banking apps are becoming de rigueur in the industry. Finding apps that attempt to service the unbanked is an even bigger challenge. Monese seems to be positioned well to acquire new customers who face challenges for the existing banking infrastructure.

Where to download Monese

You can download Monese here

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Build, Buy, Partner, or Ignore: Banking’s response to online lending

banks competing in online lending

Much attention is given to the startups in the online lending space. Companies like Propser are raising huge rounds. Acquisitions in the online lending space are beginning to become more frequent. With new investments and new companies being formed weekly, we almost never read about how banks are responding to some of the competitive pressures fintech startups are bringing to bear.

online lending and banking competition

There are basically 4 ways banks are addressing fintech competition in online lending:

  1. Build their own offerings:[x_pullquote type=”right”]Lending.com is the latest entrant into an online consumer and small-business loan market that Morgan Stanley MS -0.22% analysts estimate could grow to $122 billion in 2020 from $12 billion in 2014.[/x_pullquote]The Blackstone Group recently announced it would be setting up its own competitive offering to provide loans for consumer purchases of big-ticket items as well as small-businesses loans. Blackstone’s new platform, which will launch as Lending.com, comes shortly after news that Goldman Sachs would be doing something very similar. As lead underwriter for LendingClub’s IPO, the growth potential of online lending wasn’t lost on Goldman. When LendingClub’s founder and CEO appeared on the Tradestreaming podcast, it was clear that LC had its sights on disrupting the credit card business — it may be that online lending its an expansive move for banks and financial services firms like Goldman and Blackstone.
  2. Buy startups in the space: While we’re starting to see some of the startups consolidate and purchase other online lenders to capture market share, there haven’t been a whole lot of examples of incumbents acquiring upstart marketplace lenders. BFS Capital, a firm that’s been in business since 2002 and has leant out over $1 billion to small businesses, did make a recent acquisition as it welcomed Entrust Merchant Solutions to its growing family. As the parent company to the UK’s Boost Capital, BFS doesn’t appear to have a lot peers acquiring growth. Regulation may play a key structural role, preventing traditional banks from getting into the online lending business.[x_pullquote type=”right”]“We do practically no auto loans, no student loans, no unsecured personal loans. So as long as I have my name on those Lending Club mailers, the materials and the loans, that’s key to me.”[/x_pullquote]. Regions Bank recently disclosed a relationship with Fundation Capital
  3. Partner with the online lending startups: LendingClub has found some success in partnering with small, regional banks, with more than 200 of these players on the LendingClub platform. Small banks have, by and large, strayed away from unsecured lending, favoring mortgages instead. Partnering with online lenders enables the banks to quickly relaunch their offerings and provides the online marketplaces with partners that have deep, local roots and great direct mail lists.
  4. Ignore the future: It’s not easy to be a bank today. Regulation limits their decision sets. Competition from the bottom up is happening in fintech, where everyday, new, freshly-minted startups with sometimes hundreds of millions of dollars in backing are taking aim at the banks. Competition is happening laterally, as well as speciality financial service providers are expanding into core banking offerings. For the most part, banks struggle to keep up with the technological requirements today’s digital generation demands. While some banks may decide to “partner with the enemy”, many lack the wherewithal to rebuild their businesses within their regulatory parameters to compete against largely-unregulated competition.

While the future of banking is uncertain, one thing actually is: tomorrow’s banks won’t resemble today’s banks. Regulation will play a key role in determining in which ponds tomorrow’s banks actually fish. Meanwhile, fintech is enjoying a cold glass of white while chowing down at the fish fry.

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Why I wouldn’t want to be a bank in this market

Album_no_respectAs the late Rodney Dangerfield put it so eloquently, banks don’t get no respect in today’s market.

It’s not that they haven’t tried. Post the 2007-2008 credit crisis, many of them have cleaned up their acts.

But, it’s not just the fact that banks are now forces to lay in their own financial beds that has made bankers lives so tough of late.

Banks face (new) tough competition

It’s also about competition. Banks are being assailed on all fronts in a way they’ve never been threatened and I think the writing is one the wall: the core functions of banking are being challenged by a whole new generation of startup financial service providers that may eventually displace them. We’re in the early stages of sprinting a marathon to build the most influential finance companies.

Today’s consumer lending: from the consumer to the consumer

One of retail banking’s bread and butter business lines is a basic form of lending arbitrage. They take deposits from customers (paying out a low interest rate) and then lend it out to other customers (at a higher interest rate).

But many individuals are borrowing outside traditional banking channels. Lending Club, the largest peer to peer lender, just surpassed $4 billion in small personal loans it’s underwritten on its platform. Borrowers on peer to peer lending platforms either couldn’t qualify for loans, got worse rates with banks or just would rather avoid the banking sector all together. Banks see the writing on the wall — Union Bank just announced it would team up with Lending Club to deploy its own capital into loans on Lending Club’s website. You can hear how far the company has come since my 2012 interview with Lending Club founder and CEO.

Business loans: the next domino to fall

Lending Club made it very clear as it gears up for its own multi-billion dollar IPO (expected this year) that it’s interested in getting into business loans. It’s here, in the commercial loan business, that banks are facing their fiercest rivals right now.

  • Long term loans: Newly-minted companies like Funding Circle has already lent out hundreds of millions of dollars to business looking to borrow money for years at a time. The demand for these types of loans from non-banking sources is huge.
  • Short term loans: Businesses looking for shorter term loans and access to working capital are turning more and more to companies like OnDeck. Armed with new credit models, these firms can frequently be more quick and nimble, approving loans in minutes (versus days and weeks at traditional lenders).
  • Specialty loans: Perhaps the most interesting entrants into the online lending market are the specialty ecommerce and payment platforms. Amazon is hiring boatloads of people to staff up its new lending division. Paypal is doing the same with its new Working Capital loans for small businesses that use the payment platform. These companies are perfectly situated in their customers’ business to a) determine creditworthiness and b) to provide them with a loan. And student loans? Forget about it — there are startups like Pave (hear my recent interview with Pave’s co-founder) trying to create more efficient (and cheaper) ways to finance higher education.

Look for more innovative online lending models to proliferate in the next few years like the kind that Zazma employs. A startup that’s received investments from top venture capital firms, Zazma provides trade financing to small businesses. Need to stock up on some inventory before the holiday season? Zazma will pay your supplier for the goods and work with you on payback — all almost instantly online. Low friction like credit cards and quick access to working capital.

Today’s “no respect” for the banking sector is so much more than just the product of the recent credit crisis. Smart, well-funded startups are beginning to chip away at banks’ core value to the economy and consumers (both retail and business) seem to happier with their new-found options.

What do you think about the changes in the lending market? Let’s discuss in the comments below.