Simple but uncertain

FRANCISCO GONZÁLEZ, the chairman of Spain’s second-largest bank, BBVA, loves to talk about technology. Even as the financial crisis raged, the former computer programmer has talked up the importance of upgrading the bank’s systems. On February 20th, BBVA bought Simple, an American online-banking platform, for $117m, in a deal that hints at the potential for innovators to shake up retail banking.

BBVA, with €607 billion in assets and 50m customers, believes that traditional banks will soon lose their monopoly on banking. In an opinion piece in the Financial Times last year, Mr González warned that banks faced certain death unless they took on the likes of Amazon or Google. New entrants will not have the legacy costs of banks and can tempt clients with convenient mobile apps. He predicts mobile services could even triple the number of bank customers worldwide in the next decade.

Internet banking has had false starts before and thus far big tech companies have not really ventured into the low-margin, highly regulated and capital-intensive world of retail banking. True, non-banks have had some success in places like Kenya, which lacks an adequate banking network. And niche players like PayPal are thriving in payments. But their impact has been limited. “I am dying to fund a disruptive bank,” Marc Andreessen, a venture capitalist, recently tweeted.

Banks have several lines of defence, says Jason Napier, an analyst at Deutsche Bank. They have millions of customers who tend to stay put. What is more, barriers to replicating technology are relatively low: cool new apps developed in Silicon Valley can be quickly copied by banks.

Still, he says a revolution is afoot, if not perceptible. As consumers do more banking on their mobile phones, visits to branches are falling. Simple says its clients login 2.4 times a day, on average. That compares with the mere handful of interactions most customers have with bank branches in a year. Its app allows users to work out how much it is “safe to spend” instead of simply providing a current balance. And it allows them to extract complex information easily by asking, for instance, how much they had spent on coffee and taxis in New York over the past month. Simple’s base of young customers has grown by 330% in a year to 100,000.

If technology barriers are low, why didn’t BBVA simply develop its own app? Time may be one factor. Another may be culture. Carlos Torres, head of BBVA’s strategy and corporate development, says it is hard for a large organisation to replicate the entrepreneurial talent of an upstart. The Simple deal also suggests new entrants might still need banks. Simple itself is not regulated as a bank. Instead it places customers’ funds with the Bancorp, which provides banking services to other firms. BBVA plans to move these funds to Compass, its American subsidiary.

The challenge for BBVA is to make Simple profitable. It plans to roll out new products, such as mortgages, in addition to the checking account that Simple currently offers. BBVA’s focus will be on America where its retail business is still sub-scale. In time it hopes to introduce Simple in BBVA’s core markets, including Spain and Mexico. It is not clear whether BBVA will eventually adopt Simple’s technology for its own clients, or keep it independent.

For other lenders, upgrading creaky infrastructure to allow zippy functions along the lines of Simple’s may be costly, but savings will come from fewer branches. And they still have the heft to buy pesky upstarts that threaten to disrupt them.