It’s no secret that Brett King doesn’t like branches. In the past few years, the business author and consultant has appeared at numerous industry conferences to proclaim that the branch is dead (or dying) and will be replaced with electronic delivery, specifically mobile.
He may soon get a chance to put his theories into practice.
King is founder and chairman/CEO of a venture called Movenbank that will seek to provide customers with an entirely digital banking experience, one that not only lacks branches but also ATMs – no physical interfaces at all. Instead, as King explains in the interview below, customers will interact with his institution via their mobile phones and computing devices to deposit money, withdraw funds and access credit.
It will be particularly interesting to see how the regulators deal with the country's first mobile bank, given that the regulatory environment around mobile financial transactions remains so ill-defined. Movenbank itself is technically not a bank – The Bancorp Bank out of Wilmington, Del., will provide the basic bank account utility. But King says Movenbank does fall under the purview of the Consumer Financial Protection Bureau and has been in discussions with the Federal Reserve and New York Department of Financial Services, which have oversight of Bancorp Bank.
"Needless to say, we're talking to many regulators," King says.
Q: What’s the current status of Movenbank? When are you going live?
King: We will have an initial release to a limited group of customers, probably in the summer, and then we’ll ramp it up from there. We’ve got the proof of concept in place.
Q: How is your venture capitalized? How much money have you raised and where?
King: We are privately funded. This started with investment from the core founding team, and has recently expanded to include seed capital from private investors and institutions. More details on this will be announced shortly.
Q: Could you explain, in a nutshell, how Movenbank will work? Since you won’t have a banking license, how will you operate in the banking space?
King: We’re working with bank partners behind the scenes, such as Bancorp Bank, which will provide the basic bank account utility. In other words, we’ll have an underlying partner who provides the FDIC-insured bank account but all of the customer interface, all of the front-end branding will be through Movenbank.
Q: So it’s similar to something like Quicken Loans, which connects mortgage applicants with a provider behind the scenes?
King: We’re going one step further. We will manage and service the day-to-day relationships. The underlying bank obviously secures the deposit and holds the deposit and carries out our instructions, but they don’t have or need a direct relationship with the customer.
Q: Since you won’t have any branches or ATMs or even cards, how will customers place those deposits into Movenbank and then withdraw from their accounts?
King: We’re looking at two primary mechanisms for putting cash in. The first will be transferring money from another bank and the second will be through remote deposit capture (RDC), which we’ll probably bring in later this year.
For taking cash out, you can go to a contactless-enabled retailer or a contactless-ATM, using your phone. One of the reasons we’re launching in New York is that there are already plenty of contact-less ATMs where you can withdraw cash without using a physical card. This type of basic phone withdrawal from ATM functionality has been around in places like Kenya and China for many years; this is not new technology. The U.S. has been a bit behind on integrating the phone into the ATM.
In terms of cash deposit, this is only really a consideration for small businesses and isn’t a requirement for the vast majority of retail banking customers today.
Q: Doesn’t that make Movenbank’s ability to grow dependent on consumers getting Near Field Communications (NFC)-enabled phones and retailers having that capability in their shops?
King: First of all, obviously over the next few years, retailers are going to move quite quickly to NFC, primarily because Visa and MasterCard both require it and all of the new POS terminals are, of course, NFC-enabled. Beyond that, we think there’s a strong consumer demand for this, although we will provide a bridging strategy for customers who don’t have an NFC-enabled phone. We’ll supply them with a sticker or contactless form that they can put on the back of their phone that gives them exactly the same functionality as an NFC-enabled phone.
Q: Now the other part of your technology that’s excited a lot of people and attracted a lot of comment is “CRED,” your credit scoring system. You haven’t divulged much about the analytics behind this, the “secret sauce,” but can you tell us generally how it works?
King: First of all, CRED is sort of an engagement model. It goes beyond just pure risk assessment. We realized there’s a whole lot of friction around Know Your Customer (KYC) and around credit risk assessment that’s pretty painful for customers today. First of all, the paperwork for KYC processes is very extensive and uneconomical. And, if you’re applying for a credit card in the U.S. through a bank like Citibank or Regions Bank, you’ve got about a 70% chance of being rejected based on your credit risk rating with them.
So, we think this process of application – assessing the risk of a customer and then rejecting them – is not a great way to start a relationship or build a relationship with that customer. We wanted to create a totally transparent measure that says to customers, this is how you behave financially, this is your financial health and when you do good things, the CRED score goes up, and when you do questionable things, then the CRED score goes down. We measure risk or the value of the relationship over time so that if you reduce risk or behave in a more financially sound manner, then we will give you access to better credit. The CRED score is a transparent mechanism between the consumer and institution, in terms of how we value the relationship.
We obviously use the existing financial metrics that are out there, like a credit score, and we put that into the matrix. Then we also look at behavior. We look at spending behavior, savings behavior. One of the problems with the existing credit score is that it’s a lagging indicator. Credit agencies generally only learn about a default sixty to ninety days after it has occurred. We prefer to look at customer behavior and the likelihood of default, by looking at your spending behavior, whether you’re paying your bills on time and how much money you have left at the end of each month. We believe that’s far less risky than existing banks, which primarily rely upon a lagging indicator.
Secondly, in respect to identity verification and marketing, there’s a lot of value in other data that’s out there, like social media. Consider the problem of someone using a false or synthetic identity to apply for an account. They might have a very convincing fake license, they might have even been able to print out some bank statements or fake utility bills on their laser printer and take them down to the bank, so they look quite convincing from a KYC perspective. But we’ll look at that same customer’s social media activity, like Facebook and Twitter, and we’ll be able to assess whether they’re real, based on their communication with their friends and their network.
Q: What would you do with a customer who is not on Facebook or Twitter?
King: We’d have to use traditional mechanisms and, in terms of behavior, we’d look at aggregated financial data that we’d be allowed to see. And as you start to use Movenbank, we’d see more of your day-to-day financial behavior and get a more accurate lens on that. Obviously, if the social media data is there, we’ll use it but if it’s not, we’ll rely on data that’s available through the way you interact with the financial system.
Q: You’ve said before that optimal behavior from a customer would lead to concessionary pricing. Is this correct?
King: Right. We want to encourage people to behave well, to be financially sound and to save more, or in industry speak reduce their risk footprint. The more your CRED score goes up, then the better interest rates you get, the lower fees you pay with Movenbank, etc. In addition, if you use social media and your social media connections to recommend friends to join Movenbank, and that’s successful, we’ll also use that mechanism to improve your access to limited credit lines. So, in effect what we’re doing there is we’re trading off the value of an acquisition of a new customer with the cost of upgrading the existing customer’s account.
Q: Online-only or direct banks have been very successful in raising deposits, but typically struggle to generate assets, or loans, which harms their ability to earn spread income. How will you deal with this issue at Movenbank?
King: Our credit facility will start off fairly simply initially; we’ll just offer an overdraft facility, akin to a basic credit card function. We see that as a natural extension of watching customers’ day-to-day behavior. As people become more sophisticated in their banking behavior, they may need to have a line of credit available and we’ll turn that on as they qualify. There’s no application process – you’ll know based on CRED whether you have access to credit or not. You can’t apply and get rejected.
We’re focused not on lending, or selling products at the core, but on enabling day-to-day banking behavior.
Q: But in the initial years at least, you clearly won’t have many loans to be funded by your deposits. How will you become profitable?
King: We won’t have any of the distribution costs that traditional banks have. With 50,000 customers doing a few transactions a week, just off the basis of interchange and our basic fee structures, we’ll be very profitable.
Q: So, your model then, is heavily focused on fee income as opposed to spread income?
King: To some extent yes. Obviously, we will make money off the spread down the track and we’ll be deploying deposits for credit facilities later, and that will bring even greater revenue. The core difference for us is that our cost-of-distribution is so much lower than a traditional retail bank, even considering basic activity and low fee structures. We’re talking about fees that are in the low end range of the prepaid debit card market and our wire fees and ACH fees will also be significantly lower than traditional prices. But even with the lower fee structure, our distribution cost is still so low that we’ll still be making plenty of margin.
Mr. Cline is managing editor with BAI Banking Strategies. He can be reached at firstname.lastname@example.org.
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