Deploying Electrons to Battle "¦ The Biggest and Baddest Banks

Correction: An earlier version of this story incorrectly described Simple's financial results last year. Josh Reich had said in an interview the company "made some money," but he did not mean it was profitable.

When Josh Reich managed growth equities at a small Wall Street investment firm in 2009, he could dip anytime into the portfolio of money he oversaw and grasp its comings and goings. Yet he never found the same clarity in his own bank statements. It was too hard, he said recently, to figure out why his bank charged fees for his checking and savings accounts or for his debit card. Writing checks seemed antiquated, when so much of commerce happened online. "There's a lot of innovation in finance, but not lots of things that help consumers," the 33-year-old Australian native said.

So, in February 2010, Reich and a friend started to envision the type of bank they would prefer to use — a bank built from scratch. It would dispense with unwarranted fees and — thanks to the engineer they lured from Twitter — offer snazzier designs for its Internet and mobile applications.

They called it BankSimple — now, simply Simple. Two years later, according to Reich, Simple serves 1,000 customers, a group small enough to test the company's fledgling systems, and has a waiting list that numbers more than 100,000. The company offers no storefront banking locations; nor does it actually hold any of its depositors' money. Instead, it partners with Bancorp Bank in Delaware to handle federally insured deposits, checking accounts, savings, and money transfers. Simple's 36 employees in Portland, Ore., concentrate on dealing with customers by using an active Twitter feed and service reps who try to engage potential depositors and answer questions promptly.

Simple makes its money the old-fashioned way: by pocketing the difference between what its bank partner pays consumers for deposits and the interest it earns from its bank partner's loans. (Simple splits this "interest margin" with the bank.) According to Reich, Simple brought in revenue last year but didn't turn a profit, although he would not provide figures.

But Reich's ambitions are far grander than that. Ultimately, they include nothing less than to upend the banking industry as a whole. He hopes to obliterate — at least, to weaken — the Goliaths such as Bank of America, Chase, and Citibank by offering financial services that are inexpensive, transparent, and electronically responsive. "Banking has been a race to the bottom," Reich declared. "It will take customers, like ours, demanding that sort of service to show other institutions how to run a profitable and well-liked business."

Rather than requiring customers to put money into either a checking or a savings account, Simple lets them set "goals" of, say, buying a car or furnishing a down payment on a home. Then, Simple automatically deducts money from each deposit and invests it across a series of financial products to yield the highest return. Simple also distinguishes itself from traditional banks by charging no overdraft fees and by making it easier to search accounts online.

Simple isn't the only start-up trying to challenge the mega-banks by offering a savvier online experience. Another is called Square, started by Twitter cofounder Jack Dorsey in late 2009. This is a payment system that turns any mobile device into a terminal, so that small shops or individual entrepreneurs can accept credit cards and conduct business anywhere via tablets or smartphones. Another financial start-up, Dwolla, allows people to send payments to one another or to retailers online, bypassing the credit-card networks. And then there's the behemoth of online payment, PayPal. "That is clearly a niche that was not being served by the big credit-card processors," said Brad Strothkamp, the principal analyst at Forrester Research in Cambridge, Mass.

But, really, will this work? Can a smattering of tech start-ups disrupt the banking and financial sector so much that it changes its business model or consumers' mind-set about how they handle their money?

Maybe, but not for a while — several years at least, financial analysts say. "It's taken more time for financial start-ups to disrupt than many industries, but there has been an impact," said Jim Bruene, founder of the Finovate Group, which puts on conferences about financial technology. "The biggest changes are, likely, yet to come."

One hindrance is the banking industry's concentration. Ten big banks control more than 80 percent of the country's financial assets, according to data from Morningstar, the investment-research firm, and see 80 percent of all U.S. purchases flow through credit cards they issue. As technology start-ups have made inroads by rethinking smartphones as mobile credit-card or banking devices, the big guys, too, are getting hip to the Internet. Wells Fargo offers a Twitter account to monitor its customer relations, and Bank of America redesigned the look of its online banking interface. Visa, MasterCard, Discover Financial, and American Express have launched projects to let consumers pay for purchases using their tablets or smartphones.

Another obstacle is the ubiquity of federal and state regulation, intended to avert fraud and contain risk. If money is stolen or a depositor's account is hacked, a bank is held responsible. Banks need to plan for their customers' long-term financial health by offering loans, CDs, and high-yield savings accounts. "That's a lot to take on," analyst Strothkamp said. "If I were a bank, I'd feel secure that nobody can become a bank unless they take on the baggage."

Simple isn't a bank, at least not yet, but more like a tech start-up that partners with a bank. Still, maybe in 10 years — that's Strothkamp's guess — Simple and other such start-ups will have figured out how to truly compete with the big boys and to attract a substantial market share. Four of the five functions that most consumers rely on banks for, such as paying bills or viewing their statements, can already be done online, Forrester Research reports. Simple's consumer base, so far, is college-educated adults earning between $40,000 and $100,000 a year who don't demand complex financial transactions and who get mad at checking-account fees.

That's a growing demographic. "It's a long game," Reich said. "Fundamentally, the answer lies in the consumers' expectations of the banking markets. Customers just expect that banking will be terrible." That's an assumption he can probably bet the ranch on.

The author is an economics correspondent for National Journal.