I got quite a few comments on Friday’s post about starting a disruptive bank that questioned how such a bank could make money without lending, especially given that many bank accounts advertise that they are “free.” The answer has to do with the fact that there is no such thing as a “free” account, there are just accounts with hidden fees, which come in three guises: first, being grossly overcharged for certain activities (like automatically moving some money between accounts to cover a payment); second, not being offered the best available alternatives for what to do with your money; third, having a sub-optimal user experience.

So the first way to compete would entail having fees but being completely transparent about all fees and radically slashing fees to near cost. Given that the marginal cost of keeping bits around is essentially zero, I believe that having accounts could be free, and fees would only be incurred when there is activity. Basic activity fees would simply work on a cost plus model, e.g. a funds transfer to another bank via ACH should be whatever the ACH fees are that the bank actually has to pay.

The second aspect of competing is truly making the best alternatives available for customers. This is somewhat trickier because we would need to see the simultaneous emergence of more fully digital providers of specific products such as CDs. In the ideal set up the customer of this new bank has different CD providers compete for business and then can move money into a CD at the push of a key. Furthermore, making the best alternatives available may not always mean selling more stuff to customers, but could also involve saving customers money. A truly disruptive bank would discover that I am paying tons of recurring payments and help me get rid of ones I no longer need.  Customers would, I believe, be happy to pay a small fee for being connected to the best product or savings opportunity as long as there is transparency about the fee not influencing what is being recommended.

And the third and possibly most important part to competing with nominally free accounts would be to deliver a superior customer experience. Given what passes for online banking today that seems like a very low hurdle to clear. The UI could be much more attractive and easy to use. There could be much better analytical features. There should also be easy mobile access (to the entire functionality), multi-user capabilities for family members or accountants, unlimited account history, etc. And of maybe most importantly there should be social features, not unlike what Wesabe (portfolio company) and Mint are offering. I would happily pay a small recurring monthly fee for a truly superior experience (or would simply do all my banking there, which with some fees from transactions and recommendations might be all that is necessary).

This last point maybe also answers how marketing might turn out to be very different for a bank like this. At least initially, the bank would be so radically different from anything out there that folks might actually recommend it to others (which is a fairly radical concept — have you ever recommended your bank to someone else?). The social features may in fact provide a certain amount of virality.  This could be further increased by making intrabank transfers of money entirely free. In the end, maybe calling it a bank is a bad idea because of all that connotes…
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