Building a new bank [Part 1]

Chris Skinner has a great post over at Finanser named “So how would you build a new bank?”. Read it in details over there but to summarize his starting point is to:

Deliver something that current banks do not.

While I mostly agree with his conclusions on the key aspects of a new bank (mobile, etc.) , I tend to follow a different logic when looking at this problem.

Starting from the customer, what services does a bank provide?

Secure holding of assets. While the branch made sense for this when safe deposit boxes where still offered, in a time of electronic money, a physical location is definitely not of the same importance in creating security. Let’s also assume your customer deposits are insured (FDIC etc.) so this is more a default than a differentiator.

Then, what makes an new online bank feel secure?

From a pure reputation perspective 2 first possibilities: for a newly licensed bank, solid investors with a strong reputation (for example Vernon Hill for Metro Bank), for an “unlicensed” bank, a wholesale banking partner with pedigree at being a financials services partner. But , outside of the big names, an additional factor is to take into consideration: peer review and advocacy. As the web as “given everyone a voice”, making sure that existing customers are advocates of your services has become key and the major factor is delivering on your promises (it sounds cliche, but the song remains the same). Because of this, it may be difficult for financial services startups to manage interest vs reasonable user base (Square is a good example, with the main complaint at the beginning being of people not receiving their dongle, not people having issues with the service). Which links to the second point.

As shown by Mint.com, the trust factor is also created via the core services provided and the fact that those work, all the time ( http://www.quora.com/How-did-Mint-build-trust-with-its-early-users ) .

When building a new bank, uptime of core funtionalities is priority 1. But it does not mean that all aspects of the offer have to follow the same rule (or our new bank would be the same as an old bank, in its incapacity to iterate quickly and propose new functionalities to its clients). Josh Reich’s (of Banksimple) post on the topic is an essential read to understand how the standards set by banks for their systems is responsible for their best and worst.

To quote a fictional Mark Zuckerberg:

Okay, let me tell you the difference between Facebook and everyone else, we don’t crash EVER! If those servers are down for even a day, our entire reputation is irreversibly destroyed! Users are fickle, Friendster has proved that. Even a few people leaving would reverberate through the entire userbase. The users are interconnected, that is the whole point…

Next: Receving and making payments

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