8 ms·

Starting a Bank

144 points by ionfish 17y ago

sharpn 17y ago
There are a whole bunch of reasons why this would be nearly impossible, but it's an interesting thought experiment nonetheless.
- stse 17y ago
  I don't like this comment. At least give me a hint why it would be "nearly impossible". You won't be able to do it with three guys in a basement, but I can't see how it would be "more impossible" than any other large corporation. If there hasn't been some recent change in regulation, it is probably a lot easier now then 10 years ago.
  - sharpn 17y ago
    It's harder than many other large corporations because banking laws vary from state to state, and there are federal laws restricting banks operating universally across several states. Also, as a 'startup bank' you are initially reliant on your incumbent rivals for clearing and interbank transactions (unless you do literally leave cash in a vault at 0%). I agree technology has made it much easier recently though.
    - stse 17y ago
      Fair enough. That PayPal isn't a bank in the US supports your point.
  - jakarta 17y ago
    It's possible to start small community banks and there are programs for it. Difficult, but not impossible. But about his bank. It seems like he wont make loans to local businesses and instead choose what he deems to be the least risky financial instruments. So the interest earned on deposits will be low. And then as for safety, we all know that deposits in FDIC backed banks are good up to a certain limit. So he's not going to do much better for the customer on that end. Plus, I don't know why he's complaining about bank bonuses. I believe he's mixing up investment banks with your usual commercial/community banks. As long as incentives are aligned to be towards loan quality rather than quantity, you will get good loans.
kiba 17y ago
This will probably not happen when there are too much regulatory barrier to start and too many rules to comply with. The more improtant something is, the more likely it will be highly regulated, or monopolized.
- m_eiman 17y ago
  That just means that there's less competition. And when you start getting successful, your competitors will need to spend a few years implementing their system before they can start actually competing with you. And I wouldn't worry about the big banks catching on to the "do what you can to help your customer" concept, it's not in their culture.
  - cookiecaper 17y ago
    It also means that unless you're starting out with at least $xx million dollars, you have no hope. It can take _years_ to get a business started if you're unlucky enough to choose a field under heavy regulation (something with it's own Cabinent-level bureau, like the FCC, EPA, or Fed). The paperwork takes a long, long time to process, the processes are laden with significant fees, you have to pay staff (usually lawyers, not cheap) independently to prepare all of the forms and offer guidance through the process, and you have to be able to afford to wait for everything to go through, and that assumes a completely clean process with no need to contest, appeal, or resubmit anything. The megacorps already initiated to the oligopolies hope that this is enough to prevent any significant or innovative new competition, and it usually is. Sadly, those with the most innovative ideas are usually not those with the most $xx millions of dollars.
    - ig1 17y ago
      If only there was some sort of fund that would provide capital for ventures for people with ideas and the experience to execute.
    - fatdog789 17y ago
      You seem to be confusing state law with federal law, and how preemption applies. Banks are governed first and foremost by state law. State banking laws are very easy to adhere to. State/local banks do not have to be FDIC insured. HOWEVER, once the state tries to offer services over state lines (to out-of-state customers, or out-of-state locations), then federal laws kick in. (Federal laws automatically kick in if a bank reaches a certain size.) Federal laws also apply to transactions between banks, where either bank is subject to federal laws (or if one bank is in a different state from another). Finally, you vastly overestimate the lobbying prowess of national banks. Local/state banks have significantly more influence with politicians b/c they are in-state institutions (i.e., profits get taxed by that state; their executives are local businessmen instead of New Yorkers).
gwern 17y ago
Sounds like he wants to start a full-reserve bank: https://secure.wikimedia.org/wikipedia/en/wiki/Full-reserve_banking https://secure.wikimedia.org/wikipedia/en/wiki/Full-reserve_... Not impossible - after all, banks were not always fractional-reserve, and it admittedly is a very secure form of banking.
- tdoggette 17y ago
  Not full, just a higher fraction.
  - mseebach 17y ago
    Since he wants to keep accounts below the FDIC limit, there's really no incentive for him not the hit the markets aggressively, trying to make a nice interest for his customers.
Tichy 17y ago
"We take your money and put it in a vault" That's not actually the job of a bank, is it? The job is to mediate lending and borrowing of money. By identifying the right people to lend money to, banks can offer the people whose money the take an interest rate. I still agree that there is a market for a better bank. I remember an example from the book "Why not?" where a bank (or something like that) offered to automatically adapt their customers to the best current interest rate and making a killing with it. No more "if you open an account now, you get 2%" and one month later "if you open an account now you get 4%" and two months later "if you open an account now, you get only 1%".
- steveplace 17y ago
  Well why not differentiate the product by allowing the bank customers choose where the money is getting invested, kiva-style. And yes, there is a ton of risk there but it's unique.
  - Tichy 17y ago
    That seems counterproductive. I give my money to the bank precisely because I don't want to bother with estimating borrower credibility myself. Also, as an individual I can not hedge my risk well enough, because I don't have enough money to spread it out effectively.
  - losvedir 17y ago
    Not a "bank", per se, but exactly what you're talking about: http://www.lendingclub.com/ http://www.lendingclub.com/
- ewjordan 17y ago
  "That's not actually the job of a bank, is it?" (re: money -> vault) Well, from a customer point of view, it is, more or less. Most people are not picking a bank because of the interest rate it offers, they're picking it because they need to be able to write checks, use a debit card, make payments, etc. Anyone that's serious about growing their money is not opening a Bank of America savings account, they're using a real brokerage of some sort. Am I wrong here? I tend to keep money far away from my bank account unless I intend to use it fairly soon, because I can do more with it elsewhere, but maybe I'm abnormal in that respect? Personally, I'd guess that the single most important factor in choosing a bank is simply which one happens to be closer to your house so that you can make deposits and use the damn ATM without getting charged a fee. Mixed in with a little bit of hatred for banks that have screwed you over in the past, perhaps. Unfortunately it's real difficult to compete on location until you're huge, so I don't know if something like this could ever gain much traction, especially as a startup without some serious cash invested up-front. I don't know if good web services could really close that gap; you feel the sting of a $3 ATM fee every time you get money, and making deposits is a lot easier if you don't have to send something through the mail, and I don't think a great website is going to lessen either pain point one bit.
steveplace 17y ago
The 3-6-3 model of banking has been thrown off to the wayside in pursuit of faster, quicker gains; but the original model still holds: savings at 3%, loans at 6%, golf course by 3pm.
- deleted 17y ago
  [deleted]
- known 17y ago
  I got an idea. Take loan from a bank to buy a bank.
trader 17y ago
Obviously "matt" has not worked in the finance industry and clearly does not understand how banking works. Sounds decent in theory but in reality the bank would have no investors and would lose any talent when they didnt pay them. They would probably be the cause of the financial crisis by only employing stupid people who gave poor, risky loans.
- jonknee 17y ago
  "Stupid" people couldn't have done any worse than the "smart" "talent" that got us into our current mess.
knightinblue 17y ago
Goldman Sachs just paid out 16 billion dollars in bonuses to their employees. If we had an extra 16 billion dollars lying around, we’d put it in the bank for a rainy day. (If Goldman had never paid out bonuses they never would have needed government intervention.) A flawed comparison. Goldman is an investment bank that needs to pull in incredible returns percentage wise. Safebank is a watchman guarding a vault. Basically, Goldman needs to pay out bonuses to attract top-shelf talent, while Safebank doesn't.
biohacker42 17y ago
SafeBank couldn’t raise VC or anything like that... It also couldn't be a public corporation because share holders could make a very good case that management is failing its fiduciary duty by being hyper conservative. And that's what I find most interesting about that article. It opens the discussion about public vs privately owned enterprise. Privately owned business can forgo addition revenue by as much as the ownership feels like. The reasons for that don't have to be altruistic, it could be about longevity, not 20 or 50 years longevity but hundreds of years of longevity. But we only live once, and our lives are short, so most of us like to maximize profits. Thus most often the risk vs. reward calculation doesn't look at time spans much longer then one human life time.
- eru 17y ago
  Interestingly public companies should be able to deal with long-term horizons much better than private companies. In theory a share's worth is equal to all future dividends discounted to the present day.
mdasen 17y ago
The problem is that his proposals ignore the economics behind banking. If you take someone's money and put it in a vault, how can you provide interest on that money? You can't. You'd, in fact, have to levy fees to cover the costs of staffing, buildings, security, etc. Yes, even an internet bank has to have physical infrastructure somewhere. Heck, why am I going to spend $3 for a SafeBank iPhone app when I can access my online banking from many banks for free? He rails against ATM fees. How is he going to get rid of them for me? I don't notice that any of the large banks require the use of Internet Explorer. BofA, Wells Fargo, Citi all work with non-IE browsers. I'm sure one can find a bank (out of the many thousands in this country) that has a site that doesn't work with Firefox, but it isn't an easy thing to find - which is why he hasn't specified any particular bank! He doesn't know of any! While ad blocking might be cool, it has nothing to do with my bank. It would be like WalMart telling me that acupuncture was good - it has nothing to do with their business. People might hate banks, but they hate people mining them for data potentially more. "We noticed that you spend a lot at pornoshop.com. Did you know cheapporn.com usually has better prices?" -- And he hasn't satisfied the most important question: how would this be better than a member-owned credit union? A corporation has to try for profits. A member-owned credit union gives those profits back to its members as dividends. Their rules are set up for the benefit of their owners - who are the people depositing money with them. The problem is that people want a host of expensive things. They want tellers. They want ATMs everywhere - and that means cash physically everywhere or you refunding the ATM fees. They want free checks. They want online banking. While one can argue that the banking industry got a little out of control, you can't just put money in a safe and expect to be able to offer people all that. You need to lend it out and that incurs risk and even more overhead - you have to deal with all the payments, the legal stuff when something bad happens, foreclosures (because, yes, some people won't end up paying you back). And if you want to be "safe" and only lend to the most credit-worthy people, your margins go down because they're the people who can get money anywhere at really good rates. I mean, if you lend me money at 4.83% (the overnight average for a 15 year fixed mortgage at bankrate.com) and give your depositors 2% interest on their money, you have a 2.83% margin to operate on. But then you want to refund people's ATM fees of, let's say, $10/mo. On $5,000 (more than the average depositor has), that means you have an effective 3% rate on deposits. If the depositor only has $1,000 deposited, you've given them an effective over 10% rate and you're now way into the red. And that doesn't even take into consideration the around 30% reserve you want to hold earning nothing. And you'd want to give them free checks and not charge overage fees and do all sorts of nice things. And if you're a "nice" bank, you'll want to provide lower mortgage rates than the average, right? -- The fact is that there are already "nice" banks. They're called credit unions. They're owned and controlled by their members (customers). How will you do better than a credit union that's a not-for-profit institution? By being more efficient? That's the only way. And he's vastly over-estimated the money that rolls in when you play it "safe" and "nice". Banks make a lot of money. They make that money through a combination of managed risk and fees. If you get rid of both of those, you don't make money, you lose it.
jdminhbg 17y ago
The problem with the "Bank Safe" slogan is that the FDIC exists.
- Dilpil 17y ago
  This. No one lost money by depositing their money with goldman sachs (they were not a deposit accepting institution). People lost their money speculating on stock and real estate. Having their money in a slightly safer bank would not have helped.
  - randallsquared 17y ago
    It's marketing. That's all.
- cookiecaper 17y ago
  Except that there've been rumors swirling regarding the FDIC's solvency for a while now. People no longer confident in the government's bailout ability would be comforted to hear there's an option where much more of their money will be physically retained. Not that the government will let the FDIC fail. They'll just inject new money endlessly to prevent it.
  - amkimian 17y ago
    Remember that the FDIC is not funded by the government - it is funded by premiums that banks pay to get their "insurance". In this model SafeBank would have to pay a premium to the FDIC to get that insurance and as many small banks have found recently (when the premiums went up) those premiums are not insignificant. That's not to say that the government would not bail out the FDIC but to date there has been no reason to do so as they are completely funded by their clients...
randomtask 17y ago
His idea is ridiculous. If I were to put money in a bank like this it would cost me, because I'm not getting the interest another bank would pay me and inflation would devalue my balance every day it sits there. That's not "safe" for the customer at all.
jacoblyles 17y ago
People don't care about the safety of their bank because of the FDIC, but they do care about interest rates. Rival banks will be able to offer higher returns because they will be earning higher, riskier investment returns. Moreover, with a lower return on equity modeled in than every other bank in the industry, nobody is going to give you money to start with. Lastly, there are severe limits to how innovative you can be with a bank, again because of the FDIC. The only way I see this gaining any traction is as a niche bank for people with deposits over the FDIC insured limit who might want a little more safety. However, there are two problems with this. 1) He proposes to turn away deposits of this size at first and 2) people with that much money usually have better options.
bonsaitree 17y ago
This reminds me of the wonderful theoretical country discussions we had in my economics classes at college. Forget a new kind of bank. Go total bluesky. What IF, we could design our own set of sovereign laws and principles. What would the "modern" country look like?
- randallsquared 17y ago
  http://seasteading.org/mission/intro http://seasteading.org/mission/intro ;)
- Perceval 17y ago
  It would separate two forms of money: the common form of money used as means of exchange and a store of value; and, the debt/credit money created out of thin air through a contract and collateral. The two currencies would float against one another. People would be paid in common currency, but could borrow in the debt currency.
hamidp 17y ago
The whole point of Safebank seems to be to have it be safe. How safe a is a week-old bank started by some guy with a blog who doesn't know the difference between retail and investment banking? People don't love their banks? I do. Bank of America gives me ATMs everywhere and pretty awesome online banking, and the credit union gives me unbelievable customer service and great interest rates. On a sidenote, do compare the HN comments with those on the site.
rgr23 17y ago
The problem with his reasoning is that the big banks are evidently quite safe. No matter how bad their investments are, the government will bail them out with taxpayer's money to prevent them from collapsing. I doubt the same would apply to a bank ran out of somebody's basement.
lamby 17y ago
Pretty much all of the points I was going to raise have been covered - I just wanted to add my facepalm at the people in the comments who clearly don't understand a hypothetical scenario.
djahng 17y ago
"'Bank of America spent $40,000,000 dollars on airplanes last year. We spent $40,000 to develop an iPhone application so you can check your balance from anywhere.' (Hmm, the iPhone app should cost like $2.99.)" I think he's misunderstanding something...the iPhone app may cost $2.99, but it doesn't cost $2.99 to develop.
- alaskamiller 17y ago
  He's saying he wants to charge the bank app at $2.99 as a way of generating revenue.
- va_coder 17y ago
  If you were going around selling a business model of a new bank, as soon as you mentioned a 2.99 iphone app you would be shown the door.
losvedir 17y ago
The part that's interesting to me is his idea that it will be essentially a "vault" and super safe. The problem is he'd be targeting people under the FDIC limit, so that safety wouldn't be desirable. But what if he targeted people OVER 100k. (For that matter, let's say he didn't offer loans at all so he really was a "vault") Sure you couldn't offer interest, and maybe you'd even have to charge a very tiny fee, but are there places that do that? What do people do if they have a lot of money -- put in Treasurys? If I had millions of dollars, I'd pay someone to just deposit it with the Fed. I think the Fed even pays interest now.
nathanwdavis 17y ago
This just would not work. The reality of banking is that people want a relationship with their bank that they don't have to maintain - meaning they would only go to their bank or bank website when they absolutely have to. Not to go check out the latest blog post. Invite only? With the much larger startup cost of a bank this is ridiculous. What is really amazing is that this guy is actually ... "one of PC World’s Top 50 People on the Web, Inc.com’s 30 under 30, and Business Week’s 25 Most Influential People on the Web"
deleted 17y ago
[deleted]

144 points by ionfish 17y ago

There are a whole bunch of reasons why this would be nearly impossible, but it's an interesting thought experiment nonetheless.

stse 17y ago
I don't like this comment. At least give me a hint why it would be "nearly impossible". You won't be able to do it with three guys in a basement, but I can't see how it would be "more impossible" than any other large corporation. If there hasn't been some recent change in regulation, it is probably a lot easier now then 10 years ago.
- sharpn 17y ago
  It's harder than many other large corporations because banking laws vary from state to state, and there are federal laws restricting banks operating universally across several states. Also, as a 'startup bank' you are initially reliant on your incumbent rivals for clearing and interbank transactions (unless you do literally leave cash in a vault at 0%). I agree technology has made it much easier recently though.
  - stse 17y ago
    Fair enough. That PayPal isn't a bank in the US supports your point.
- jakarta 17y ago
  It's possible to start small community banks and there are programs for it. Difficult, but not impossible. But about his bank. It seems like he wont make loans to local businesses and instead choose what he deems to be the least risky financial instruments. So the interest earned on deposits will be low. And then as for safety, we all know that deposits in FDIC backed banks are good up to a certain limit. So he's not going to do much better for the customer on that end. Plus, I don't know why he's complaining about bank bonuses. I believe he's mixing up investment banks with your usual commercial/community banks. As long as incentives are aligned to be towards loan quality rather than quantity, you will get good loans.

kiba 17y ago

This will probably not happen when there are too much regulatory barrier to start and too many rules to comply with. The more improtant something is, the more likely it will be highly regulated, or monopolized.

m_eiman 17y ago
That just means that there's less competition. And when you start getting successful, your competitors will need to spend a few years implementing their system before they can start actually competing with you. And I wouldn't worry about the big banks catching on to the "do what you can to help your customer" concept, it's not in their culture.
- cookiecaper 17y ago
  It also means that unless you're starting out with at least $xx million dollars, you have no hope. It can take _years_ to get a business started if you're unlucky enough to choose a field under heavy regulation (something with it's own Cabinent-level bureau, like the FCC, EPA, or Fed). The paperwork takes a long, long time to process, the processes are laden with significant fees, you have to pay staff (usually lawyers, not cheap) independently to prepare all of the forms and offer guidance through the process, and you have to be able to afford to wait for everything to go through, and that assumes a completely clean process with no need to contest, appeal, or resubmit anything. The megacorps already initiated to the oligopolies hope that this is enough to prevent any significant or innovative new competition, and it usually is. Sadly, those with the most innovative ideas are usually not those with the most $xx millions of dollars.
  - ig1 17y ago
    If only there was some sort of fund that would provide capital for ventures for people with ideas and the experience to execute.
  - fatdog789 17y ago
    You seem to be confusing state law with federal law, and how preemption applies. Banks are governed first and foremost by state law. State banking laws are very easy to adhere to. State/local banks do not have to be FDIC insured. HOWEVER, once the state tries to offer services over state lines (to out-of-state customers, or out-of-state locations), then federal laws kick in. (Federal laws automatically kick in if a bank reaches a certain size.) Federal laws also apply to transactions between banks, where either bank is subject to federal laws (or if one bank is in a different state from another). Finally, you vastly overestimate the lobbying prowess of national banks. Local/state banks have significantly more influence with politicians b/c they are in-state institutions (i.e., profits get taxed by that state; their executives are local businessmen instead of New Yorkers).

gwern 17y ago

Sounds like he wants to start a full-reserve bank: https://secure.wikimedia.org/wikipedia/en/wiki/Full-reserve_banking https://secure.wikimedia.org/wikipedia/en/wiki/Full-reserve_... Not impossible - after all, banks were not always fractional-reserve, and it admittedly is a very secure form of banking.

tdoggette 17y ago
Not full, just a higher fraction.
- mseebach 17y ago
  Since he wants to keep accounts below the FDIC limit, there's really no incentive for him not the hit the markets aggressively, trying to make a nice interest for his customers.

Tichy 17y ago

"We take your money and put it in a vault" That's not actually the job of a bank, is it? The job is to mediate lending and borrowing of money. By identifying the right people to lend money to, banks can offer the people whose money the take an interest rate. I still agree that there is a market for a better bank. I remember an example from the book "Why not?" where a bank (or something like that) offered to automatically adapt their customers to the best current interest rate and making a killing with it. No more "if you open an account now, you get 2%" and one month later "if you open an account now you get 4%" and two months later "if you open an account now, you get only 1%".

steveplace 17y ago
Well why not differentiate the product by allowing the bank customers choose where the money is getting invested, kiva-style. And yes, there is a ton of risk there but it's unique.
- Tichy 17y ago
  That seems counterproductive. I give my money to the bank precisely because I don't want to bother with estimating borrower credibility myself. Also, as an individual I can not hedge my risk well enough, because I don't have enough money to spread it out effectively.
- losvedir 17y ago
  Not a "bank", per se, but exactly what you're talking about: http://www.lendingclub.com/ http://www.lendingclub.com/
ewjordan 17y ago
"That's not actually the job of a bank, is it?" (re: money -> vault) Well, from a customer point of view, it is, more or less. Most people are not picking a bank because of the interest rate it offers, they're picking it because they need to be able to write checks, use a debit card, make payments, etc. Anyone that's serious about growing their money is not opening a Bank of America savings account, they're using a real brokerage of some sort. Am I wrong here? I tend to keep money far away from my bank account unless I intend to use it fairly soon, because I can do more with it elsewhere, but maybe I'm abnormal in that respect? Personally, I'd guess that the single most important factor in choosing a bank is simply which one happens to be closer to your house so that you can make deposits and use the damn ATM without getting charged a fee. Mixed in with a little bit of hatred for banks that have screwed you over in the past, perhaps. Unfortunately it's real difficult to compete on location until you're huge, so I don't know if something like this could ever gain much traction, especially as a startup without some serious cash invested up-front. I don't know if good web services could really close that gap; you feel the sting of a $3 ATM fee every time you get money, and making deposits is a lot easier if you don't have to send something through the mail, and I don't think a great website is going to lessen either pain point one bit.

steveplace 17y ago

The 3-6-3 model of banking has been thrown off to the wayside in pursuit of faster, quicker gains; but the original model still holds: savings at 3%, loans at 6%, golf course by 3pm.

deleted 17y ago
[deleted]
known 17y ago
I got an idea. Take loan from a bank to buy a bank.

trader 17y ago

Obviously "matt" has not worked in the finance industry and clearly does not understand how banking works. Sounds decent in theory but in reality the bank would have no investors and would lose any talent when they didnt pay them. They would probably be the cause of the financial crisis by only employing stupid people who gave poor, risky loans.

jonknee 17y ago
"Stupid" people couldn't have done any worse than the "smart" "talent" that got us into our current mess.

knightinblue 17y ago

Goldman Sachs just paid out 16 billion dollars in bonuses to their employees. If we had an extra 16 billion dollars lying around, we’d put it in the bank for a rainy day. (If Goldman had never paid out bonuses they never would have needed government intervention.) A flawed comparison. Goldman is an investment bank that needs to pull in incredible returns percentage wise. Safebank is a watchman guarding a vault. Basically, Goldman needs to pay out bonuses to attract top-shelf talent, while Safebank doesn't.

biohacker42 17y ago

SafeBank couldn’t raise VC or anything like that... It also couldn't be a public corporation because share holders could make a very good case that management is failing its fiduciary duty by being hyper conservative. And that's what I find most interesting about that article. It opens the discussion about public vs privately owned enterprise. Privately owned business can forgo addition revenue by as much as the ownership feels like. The reasons for that don't have to be altruistic, it could be about longevity, not 20 or 50 years longevity but hundreds of years of longevity. But we only live once, and our lives are short, so most of us like to maximize profits. Thus most often the risk vs. reward calculation doesn't look at time spans much longer then one human life time.

eru 17y ago
Interestingly public companies should be able to deal with long-term horizons much better than private companies. In theory a share's worth is equal to all future dividends discounted to the present day.

mdasen 17y ago

The problem is that his proposals ignore the economics behind banking. If you take someone's money and put it in a vault, how can you provide interest on that money? You can't. You'd, in fact, have to levy fees to cover the costs of staffing, buildings, security, etc. Yes, even an internet bank has to have physical infrastructure somewhere. Heck, why am I going to spend $3 for a SafeBank iPhone app when I can access my online banking from many banks for free? He rails against ATM fees. How is he going to get rid of them for me? I don't notice that any of the large banks require the use of Internet Explorer. BofA, Wells Fargo, Citi all work with non-IE browsers. I'm sure one can find a bank (out of the many thousands in this country) that has a site that doesn't work with Firefox, but it isn't an easy thing to find - which is why he hasn't specified any particular bank! He doesn't know of any! While ad blocking might be cool, it has nothing to do with my bank. It would be like WalMart telling me that acupuncture was good - it has nothing to do with their business. People might hate banks, but they hate people mining them for data potentially more. "We noticed that you spend a lot at pornoshop.com. Did you know cheapporn.com usually has better prices?" -- And he hasn't satisfied the most important question: how would this be better than a member-owned credit union? A corporation has to try for profits. A member-owned credit union gives those profits back to its members as dividends. Their rules are set up for the benefit of their owners - who are the people depositing money with them. The problem is that people want a host of expensive things. They want tellers. They want ATMs everywhere - and that means cash physically everywhere or you refunding the ATM fees. They want free checks. They want online banking. While one can argue that the banking industry got a little out of control, you can't just put money in a safe and expect to be able to offer people all that. You need to lend it out and that incurs risk and even more overhead - you have to deal with all the payments, the legal stuff when something bad happens, foreclosures (because, yes, some people won't end up paying you back). And if you want to be "safe" and only lend to the most credit-worthy people, your margins go down because they're the people who can get money anywhere at really good rates. I mean, if you lend me money at 4.83% (the overnight average for a 15 year fixed mortgage at bankrate.com) and give your depositors 2% interest on their money, you have a 2.83% margin to operate on. But then you want to refund people's ATM fees of, let's say, $10/mo. On $5,000 (more than the average depositor has), that means you have an effective 3% rate on deposits. If the depositor only has $1,000 deposited, you've given them an effective over 10% rate and you're now way into the red. And that doesn't even take into consideration the around 30% reserve you want to hold earning nothing. And you'd want to give them free checks and not charge overage fees and do all sorts of nice things. And if you're a "nice" bank, you'll want to provide lower mortgage rates than the average, right? -- The fact is that there are already "nice" banks. They're called credit unions. They're owned and controlled by their members (customers). How will you do better than a credit union that's a not-for-profit institution? By being more efficient? That's the only way. And he's vastly over-estimated the money that rolls in when you play it "safe" and "nice". Banks make a lot of money. They make that money through a combination of managed risk and fees. If you get rid of both of those, you don't make money, you lose it.

jdminhbg 17y ago

The problem with the "Bank Safe" slogan is that the FDIC exists.

Dilpil 17y ago
This. No one lost money by depositing their money with goldman sachs (they were not a deposit accepting institution). People lost their money speculating on stock and real estate. Having their money in a slightly safer bank would not have helped.
- randallsquared 17y ago
  It's marketing. That's all.
cookiecaper 17y ago
Except that there've been rumors swirling regarding the FDIC's solvency for a while now. People no longer confident in the government's bailout ability would be comforted to hear there's an option where much more of their money will be physically retained. Not that the government will let the FDIC fail. They'll just inject new money endlessly to prevent it.
- amkimian 17y ago
  Remember that the FDIC is not funded by the government - it is funded by premiums that banks pay to get their "insurance". In this model SafeBank would have to pay a premium to the FDIC to get that insurance and as many small banks have found recently (when the premiums went up) those premiums are not insignificant. That's not to say that the government would not bail out the FDIC but to date there has been no reason to do so as they are completely funded by their clients...

randomtask 17y ago

His idea is ridiculous. If I were to put money in a bank like this it would cost me, because I'm not getting the interest another bank would pay me and inflation would devalue my balance every day it sits there. That's not "safe" for the customer at all.

jacoblyles 17y ago

People don't care about the safety of their bank because of the FDIC, but they do care about interest rates. Rival banks will be able to offer higher returns because they will be earning higher, riskier investment returns. Moreover, with a lower return on equity modeled in than every other bank in the industry, nobody is going to give you money to start with. Lastly, there are severe limits to how innovative you can be with a bank, again because of the FDIC. The only way I see this gaining any traction is as a niche bank for people with deposits over the FDIC insured limit who might want a little more safety. However, there are two problems with this. 1) He proposes to turn away deposits of this size at first and 2) people with that much money usually have better options.

bonsaitree 17y ago

This reminds me of the wonderful theoretical country discussions we had in my economics classes at college. Forget a new kind of bank. Go total bluesky. What IF, we could design our own set of sovereign laws and principles. What would the "modern" country look like?

randallsquared 17y ago
http://seasteading.org/mission/intro http://seasteading.org/mission/intro ;)
Perceval 17y ago
It would separate two forms of money: the common form of money used as means of exchange and a store of value; and, the debt/credit money created out of thin air through a contract and collateral. The two currencies would float against one another. People would be paid in common currency, but could borrow in the debt currency.

hamidp 17y ago

The whole point of Safebank seems to be to have it be safe. How safe a is a week-old bank started by some guy with a blog who doesn't know the difference between retail and investment banking? People don't love their banks? I do. Bank of America gives me ATMs everywhere and pretty awesome online banking, and the credit union gives me unbelievable customer service and great interest rates. On a sidenote, do compare the HN comments with those on the site.

rgr23 17y ago

The problem with his reasoning is that the big banks are evidently quite safe. No matter how bad their investments are, the government will bail them out with taxpayer's money to prevent them from collapsing. I doubt the same would apply to a bank ran out of somebody's basement.

lamby 17y ago

Pretty much all of the points I was going to raise have been covered - I just wanted to add my facepalm at the people in the comments who clearly don't understand a hypothetical scenario.

djahng 17y ago

"'Bank of America spent $40,000,000 dollars on airplanes last year. We spent $40,000 to develop an iPhone application so you can check your balance from anywhere.' (Hmm, the iPhone app should cost like $2.99.)" I think he's misunderstanding something...the iPhone app may cost $2.99, but it doesn't cost $2.99 to develop.

alaskamiller 17y ago
He's saying he wants to charge the bank app at $2.99 as a way of generating revenue.
va_coder 17y ago
If you were going around selling a business model of a new bank, as soon as you mentioned a 2.99 iphone app you would be shown the door.

losvedir 17y ago

The part that's interesting to me is his idea that it will be essentially a "vault" and super safe. The problem is he'd be targeting people under the FDIC limit, so that safety wouldn't be desirable. But what if he targeted people OVER 100k. (For that matter, let's say he didn't offer loans at all so he really was a "vault") Sure you couldn't offer interest, and maybe you'd even have to charge a very tiny fee, but are there places that do that? What do people do if they have a lot of money -- put in Treasurys? If I had millions of dollars, I'd pay someone to just deposit it with the Fed. I think the Fed even pays interest now.

nathanwdavis 17y ago

This just would not work. The reality of banking is that people want a relationship with their bank that they don't have to maintain - meaning they would only go to their bank or bank website when they absolutely have to. Not to go check out the latest blog post. Invite only? With the much larger startup cost of a bank this is ridiculous. What is really amazing is that this guy is actually ... "one of PC World’s Top 50 People on the Web, Inc.com’s 30 under 30, and Business Week’s 25 Most Influential People on the Web"

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