Welcome to our guest blogger Jorge Yui. Jorge is a digital media expert, linguist, entrepreneur, and global banking systems specialist. He has over 25 years of strategy, business consulting, and senior program management experience across Europe, Asia and Latin America at Credit Suisse, Deutsche Bank, Julius Baer, Temenos, and IBM. He studied Computer Linguistics at Zurich University. See Jorge’s blog at jorgeyui.wordpress.com or email him at jorge.yui@eurozona.net
Here’s Jorge’s view on the WhatsApp deal and what it means for banking.
Blinded by the mega deal between Facebook and the 50 employee-company WhatsApp for the obscene amount of 19 Billion USD (16 Bn in Stock, and 3 Bn in cash), for many followers of digital gossip, the news about the acquisition of Simple Bank by the Spanish group BBVA went almost unnoticed. It’s true that the value of the deal between the Portland-based company, founded just four years ago, and the Spanish Bank, EUR 100 Mio looks ridiculous in comparison, however I want to highlight in this post, the critical importance of this deal for the future of the Banking Industry.
Firstly the value per user: Facebook paid US40 per user which qualified as scandalous according to dozens of articles from the Financial Times to Forbes and CNBC, while speculating on the real worth of such a price. But I was wondering why nobody commented on how much BBVA paid (per user) for Simple Bank? Well, according to the Financial Times BBVA paid 100 million EUROs for 100,000 clients from Simple Bank: This makes a price per user of 1000 USD. Just imagine the potential value of PayPal or Square? Not to mention the potential and priceless value of Facebook in case they decide to build some kind of Financial Services.
Surprising, isn’t it? It’s true that according to their records, Simple Bank showed that its users log on twice or more times at day into their website or through the nice smart phone APP. So we can conclude that what BBVA is paying for is Customer Engagement.
It’s maybe worthwhile to recall that Simple Bank is rather a technological platform than a Bank, although their clients have credit cards: Simple Bank was born with what the Banking Industry (at the least the American side of it) considers the Nirvana of the operations: no branches, no advisors, almost no paper work. (More on Simple and BBVA below.)
The second point to be highlighted is that BBVA (the second largest Bank in Spain) is not an American Bank but a European and, of course international, Bank with large operations in both parts of America. We’re not talking about a small innovative new Bank, but about the number 18th in the European ranking of the largest Banks and the number 33rd in the world league, with more than 800 Billion in Total Assets: just 100 Billion behind Credit Suisse.
Is this a Defcon 1 alarm for the Banking Industry? Will we soon see Banks buying left and right any imaginable technological startup active in the financial sector? It’s hard to say, regulation and compliance being a heavy straitjacket to remove by the Banking Industry.
However, the signal seems to be clear. The new threat posed to traditional bricks-and-mortar lenders was highlighted by the CEO of BBVA himself in a recent opinion piece for the Financial Times: “Some bankers and analysts think that Google, Facebook, Amazon or the like will not fully enter a highly regulated, low-margin business such as banking,” he wrote. “I disagree. What is more, I think banks that are not prepared for such new competitors face certain death.”
Well. Maybe it’s DEFCON 1, after all.
The not so simple story of Simple Bank: a dream that happened!
Portland, the main city of Oregon, has little to do with the techie Silicon Valley or the greedy and sophisticated city which is home to Wall Street. For the ignorant tourist, Portland’s most striking attraction could be considered a free realm for sex parlors, and other dubious leisure activities. In fact, it’s the only US state where is specifically considered and stated by law that full nudity and lap dances in strip clubs are protected speech. It’s also the city where 15,000 people drive their bikes around naked, fortunately only once a year, celebrating the World Naked Bike Ride.
That’s perhaps the reason nobody could expect that a start-up like Simple Bank would be born in such a city. The mythical side of the story goes like this: In 2009 its founder, Josh Reich, an Australian immigrant, angry about bank over overdraft fees and delayed money transfers wrote an email to Shamir Karkal and one more friend and invited them to create a bank.
They set up a website where potential clients would be able to leave their email address and went on a campaign asking hundreds of disgruntled bank customers what they wanted. Most of them were unhappy with their overdraft fees and the cumbersome ways banks use to display account information.
In doing the research of the industry they wanted to venture into, Josh, a medical school dropout, with a tendency to take apart any electronic gadget falling in his hands, and his partner Shamir, a programmer, soon discovered the sheer complexity and highly politicized world of the Banking business.
They also explored the highly monopolized market of Banking Software, where a small group of core banking vendors hold the U.S. market hostage. In fact, FIS, Fiserv, Jack Henry, and D+H are the companies ruling this world; together they own about 96 percent of market share of a trade worth about US$2.9 billion a year, according to an Industry Analyst. The same analyst firm expects that revenue to grow 3.7 percent per year, reaching more than US$3.3 billion in 2017. Of course there are other players, small, niches and some based in other countries but each holds just a small sliver of that remaining 4 percent, most of them serving foreign banks operating in the USA.
Josh and Shamir confronted the problem by working out an extremely user friendly application, focusing on providing an intimate and personal user experience to its future customers; for example users could upload and attach pictures to account entries, creating a kind of memory album of past expenses. They also focused on creating real value for users by helping them to better manage their cash flow, creating the concept of the “safe to spend” balance. It took them three more years before they were ready to actually start sending debit cards out to members of the public.
The dream was becoming reality: Simple Bank has grown to 100,000 users in couple of years, driven by a lean organization, a no branches approach and in particular the obsession of its management to provide the best possible user experience to its customers. The beautifully designed Apps for the iOS and Android also helped. In order to cope with the heavy Banking regulations, Simple partnered with Bancorp. So in reality rather than a Bank, Simple is a sophisticated Front Application connected to a backend. The deal with BBVA will allow Simple to fulfill its destiny to become a real Bank. After all, they didn’t want to be just a pretty App sitting on top of someone else’s bank.
Banco Bilbao Vizcaya Argentaria (BBVA)
BBVA is probably the most dynamic and internationally minded Bank in Spain. It’s active in over 32 countries worldwide and in recent years has built a strong position in the so called “Sun Belt” of the USA through a series of acquisitions in Texas and later in California. In Miami it also holds a strong position acting as a hub for the growing wealthy population of Latin America.
Without a doubt, BBVA is one of the biggest groups in LatAm with a vast retail operations network in over 12 countries including the biggest markets like Mexico and Brazil. Also with a solid foot in Asia, through an alliance with one of the largest banks in China, BBVA has great ambitions in the international arena, occupying currently the 33rd place among the largest banks of the world.
Will Simple Bank play a strategic role? Probably Simple Bank alone won’t suffice. But BBVA has heavily sponsored startups and startup events in Spain and in other countries, creating a techie community which is developing the next generation of Banking software. In this sense the acquisition of Simple Bank for EUR 100 Mio is one more step forward in this direction. As Felix Salomon, from Reuters, wrote “BBVA is good for Simple.” Simple may also be good for BBVA.
