Breaking up the Bank

By Jeremy Caplan

Americans love to hate their banks. Alongside airlines, phone companies, and cable providers, banks rank at the bottom when it comes to pleasing the customer, according to the American Consumer Satisfaction Index.

Some banks generate nearly half their operating revenue from fees — think overdraft fees, minimum balance requirement fees, ATM fees, transfer fees, even fees for requesting paper statements. Add confusing fine print and poor customer service, and the result is that just 37 percent of Americans are satisfied with their primary bank, according to an Ath Power survey.

Banks aren’t alone in generating frustration. Retail investing bewilders consumers. In a country where financial literacy means knowing LeBron James’ salary, concepts like balanced asset allocation and risk diversification confuse consumers who want fewer investing options, not more. The investing public wants clearer guidance on how to meet their goals (saving for retirement, paying for college), not more fees and fine print.

Despite broad dissatisfaction with status quo institutions, Warren Buffett recently deposited a $5 billion vote of confidence into the coffers of Bank of America, the country’s biggest bank. BofA may rank among the 20 most despised U.S. companies, as noted by a recent piece on The Atlantic’s website, but Buffett’s betting on a turnaround.

As the country’s biggest bank, with $2.26 trillion in assets, BOA won’t shrivel away anytime soon. And given that BOA’s peer group includes 107 banks with $10 billion plus in assets, the banking establishment won’t be easy to shake from its comfortable perch atop the financial sector. Not yet, at least.

It may take some time, but the American retail banking industry is primed for a radical shift. A growing pool of financial upstarts are poised to begin challenging the banking status quo. Next week, more than 60 consumer financial start-ups are demoing at FinovateFall 2011. They’ll present new sites, services and products that aim to improve upon — or undercut — traditional financial services. We’re not just talking snazzier ATM receipts. The aim is better service, better rates and better digital tools. Like the postal service, financial services are ripe for disruption.

BankSimple, one of the companies presenting next week, is set to launch by the end of the year. Unlike traditional banks, which tend to pile up fees, cut back on service and throw up byzantine sites, BankSimple promises to be service-focused, easy to navigate, and smart about technology. It won’t charge overdraft or other fees, it’ll help you track your savings and spending goals, and give you one-to-one help from real people via Skype, iChat, email or the phone. The start-up has already amassed more than $13 million in venture capital and a waiting list of more than 50,000 customers eager to switch away from traditional banks.

Betterment, which launched a year ago at the TechCrunch Disrupt conference, focuses on simplifying investing and a streamlined alternative to stagnant, zero-interest savings accounts. Founder and CEO Jon Stein said 8,000 customers have already signed up, and that number is growing by 20 percent each month. The management fee ranges from just 0.3 to 0.9 percent. You can deposit your six-figure retirement savings if you’d like, but many people start with a $1,000 deposit and gradually quintuple that as they grow accustomed to investing sans broker.

It’s a super-simple alternative for those confused by complex mutual funds or retail investment pitches with tiny print and jumbo charges. Rather than paying for the pleasure of having someone take your money and invest it dart-style in a flavor-of-the-month mutual fund, you bank on the broad success of the market with Betterment, reducing the odds of picking individual lemons that sink your portfolio.

Stein cites excessive trading fees and bewildering complexity as evidence that industry giants are out of touch with consumers. “Traditional financial institutions offer a terrible customer experience,” he said. “They’re designed to take advantage of us rather than to help us get more out of our money.”

Building a strong pool of financial industry upstarts will take time because of regulatory hurdles. Establishing a new firm is costly and it takes several years to apply for licenses and meet requirements, Stein said. “The barriers are tremendous. That’s why you don’t see the number of start-ups in this sector as you do building new social networks or photo-sharing applications.”

As newcomers like Betterment and BankSimple gain traction by demonstrating demand for customer-centric financial services companies, we’ll see more start-ups following suit. That’ll lead either to a hastened response from the banking giants, or a long-run reshaping of the industry landscape. Buffett’s $5 billion may be safe in the near term. Beyond that, banking may be in for a blizzard of change.

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This article originally published September 15th, 2011 on The Daily.