I suppose I don’t understand Silicon Valley hype. I do, however, understand frustrations with the traditional banking system, and one techie start-up and one former start-up engulfed by one of the largest companies in personal finance management are taking the opportunity to see if they can replace some aspects of the financial industry.
SmartyPig started a similar concept a few years ago. The concept was that if people don’t like dealing with banks, perhaps they’d prefer dealing with an intermediary. The third party could negotiate a better rate on deposit accounts, for example, and pass those rates to its customers, with a few restrictions. Where banks focus on fee-driven profits, SmartyPig gave its customers a goal-based system. SmartyPig handles all the banking behind the scenes, and all customers need to see is how quickly they are achieving their savings goals.
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With SmartyPig, the interest rate was high enough to attract a bit of attention, though there were initially a few setbacks. Withdrawing your funds in cash form, just as you had deposited the money, prior to reaching a goal was neither easy nor free. While SmartyPig compared its rates with those of traditional banks’ savings accounts, the lack of liquidity made certificates of deposit a more apt comparison. They worked out some of the bugs, found a new partner bank, and proved that the world was ready for next generation banking.
A start-up called Simple aimed first at creating an experience that allows consumers to analyze budgets and spending activity with rich detail. This is something that other software, like Mint.com, has done with varying levels of success. Mint.com, Yodlee, and a dozen other web or mobile applications aggregate your financial transactions by downloading them directly from your banks and credit cards.
While Simple claims to be different, it isn’t. It, like Mint and other companies offering similar services, is also an intermediary between you and your bank. Simple does not eliminate your need to make use of the traditional banking system, it just hides the relationship and packages it in pretty wrapping.
But Simple has taken this a step further. It is now offering its own debit card, implying that users can now leave traditional banking behind. Only it’s not true. Again, the debit card requires a real, linked bank account to operate. The bank account may be masked behind a Simple account, but it’s there, and it needs to be there. Simple can’t take consumers’ money directly and hold it on deposit — that would make it a bank, competing among other banks, bound by the same regulations that affect the entire banking industry.
So there is always a bank behind the scenes, and in Simple’s case, the bank is The Bancorp Bank, based in Delaware. Deposits held at The Bancorp Bank are FDIC insured, so while you can be sure you won’t lose money on deposit through Simple, the company you deal with has no responsibility. I would be wary of these types of relationships. Bank that package mortgages to sell to investors seem to get off the hook for their responsibilities; I am concerned that a problem might arise some day and you’d have an intermediary blaming the bank, the bank blaming the intermediary, and resulting headaches.
Now Simple is offering a debit card, further confusing the relationship between consumer and bank. Banks have offered branded cards for a long time, so there’s nothing strange about that. What’s strange is that it’s marketed as something new. Your favorite techies and friends of Simple are celebrating the delivery of these debit cards with “unboxings.” Rather than receiving the new debit card in a plain, nondescript envelope — probably safer from a fraud prevention perspective — the debit card arrives in a fancy package, making the recipient feel special. (In fact, these cards are available by invitation only, further heightening the false sense of being special.)
Mint, Simple’s competitor from a budget-analysis-lite angle, is planning to launch its own debit card, TechCrunch revealed. Its goal, like Simple’s debit card, is just to help consumers better analyze, track, and adjust spending. It’s a worthy goal, and I certainly applaud both Simple’s and Mint’s attempts at heightening awareness to the fact that households often spend more than they need to and often don’t realize that they’re spending more than necessary unless the information is presented to them constantly in with immediate feedback. This is a good thing.
Let me make this clear, as marketing seems to have confused some consumers. Nothing proposed by these companies reduces consumers’ reliance on the banking industry. Banks are still there, just lurking in the background. This is not a banking revolution. This is merely the emperor wearing new clothes. Pretty clothes, with charts and graphs — bells and whistles with limited relevance and accuracy, but with nice colors and patterns. Don’t get me wrong. Visualization is very important to helping consumers understand data, and allowing online software to handle the visualization is much easier than aggregating your financial accounts, categorizing your spending, and building your own charts yourself. But it’s not revolutionary. You’re still relying on the same old Wall Street industry.
Usually, adding layers between the consumer and the ultimate servicer is a bad thing. Mint.com has the benefit of aggregation, bringing many accounts together in one view. Simple gives an incomplete picture and criticizes other companies for being middle-men while serves the same function. With both of these companies offering debit cards where your spending is analyzed before going to the bank rather than relying on pulling the information later, there’s a possibility of improving the analysis — of activity in that one account, anyway. At the same time, the companies put distance between consumers and banks, and while it might feel good to not need to log into your bank account online, walk into a branch, or maintain your transaction records in Quicken or other reconciliation software, the bank is still an integral piece.
Updated September 24, 2015 and originally published August 30, 2012.