It starts out saying that he wants to make a bank because it makes lots of money and then lists a bunch of idea that don't earn money.
"We would only give out credit cards to those who are qualified to receive one" The people who are not qualified are the ones you earn your margin on.
"Oh yeah, our vehicle loans would only be for hybrid vehicles. We would never give out an auto loan for an SUV like a Hummer because of our values." Not even for a 30% loan?
"Yes, we would have a 0% profit margin but the warm fuzzy feeling of doing good is priceless."
The only idea that does make sense is to have a good website, that is the only reason I still have an ING account.
I want to start a bank and be the trading house for all US to CA and Euro currency converting. Take 1cent from every trade and do it a billion times a day. Who wants to join me?
Totally agree with your critique, and your point on needing a good website (I bank with Smile Bank in the UK, who have not changed their site design in 11 years - and it is still (IMO) the best bank website design out there).
But what aspect of the existing currency exchange markets makes you think that doing a "billion" (or any other extremely high number) trades per day allows you to break-even only taking 1c per trade?
True, 1cent might not be enough, but the basic idea of just sitting in the middle of a large number of trades and skimming a tiny bit off the top is what a number of banks already do.
here in lies the problem. Being good doesn't make money. Making no money means you have no power. Power gives the advantage to make more money and more power and the good get squashed.
Well you can be good and make money, just not insane money.
Gives out loans to the local community and not sell the loans so you would be forced to take solid loans. Require anyone who is getting a housing mortgage to take a free finance class. Work with city hall to help with zoning laws, construction projects, and projects such as solar panel incentives. In other words be a force of good in the community.
He doesn't seem to have any understanding of how large banks actually make money. The customer/individual client facing side of it is just the tip of the iceberg of how the finance industry works.
"This SafeBank article from Matt Mullenweg about how he would start a bank is the most brilliant piece I’ve ever read and I agree with everything he says too (Matt – want to start a bank with me?)."
I have to say I lost a tremendous amount of respect for Mullenweg after reading his SafeBank post. He enthusiastically posts his ideas to make the bank stand out (Recommend Firefox to customers! Build an iPhone app and sell it for $2.99!) while demonstrating a clear lack of even basic business principles.
Warren Buffet on Gates: "If Bill had started a hot dog stand, he would have become the hot dog king of the world."
Mullenweg on the other hand would go bankrupt selling umbrellas on a rainy day...
What's the paperwork that we need? What are the restrictions and requirements?
Forget about how you're going to make it awesome -- do you even know what the barriers to entry are, so that you can start thinking about how you'll overcome them?
This guy wants to Start a Bank like I want to Fly Spaceship One -- I think it could possibly be fun, but I don't even care enough to install a flight simulator on my computer.
I'd be much more interested to read a blog post that summarized what your average HN reader would need to do to (legally) start a bank. That seems fascinating.
Thanks for all the comments. Like all entrepreneurs, I believe that the team will overcome any obstacles that get thrown in it's way. Also, I obviously do not come from the finance/banking world which is why I would fill those weak areas with a strong management team.
While doing further research, there are banks out there already applying similar models. My post was a "blue sky" piece. It was never meant to cover every logistical detail. It was an article on how I would start a bank if I had to start one from scratch. I agree that it's an insanely difficult to tackle but what isn't?
A similar bank Kasasa just won Best of Show at the 2009 Finovate Conference. Last year, it was Mint.com. Check it out -- https://www.kasasa.com/explore
>> we would allow all of our account-holders to withdraw funds from any ATM at NO CHARGE (woo-hoo!).
So he would just eat the interchange fees that the owners of the other ATMs/networks charge him? That would add up pretty quick. There's also the issue of the service fees that non-bank ATMs charge directly to the consumer - would his bank cover those as well?
>> We would only give out credit cards to those who are qualified to receive one.
How do you define this? And what happens when someone goes from "qualified" to "unqualified" (like when they lose their jobs) - a normal bank would just jack up the rate to cover the increased risk. Would he pull the card?
More broadly, this guy has no idea how banks make money, or even what it is that banks do (hint: what they do with individuals is only a small part of it). It's also not one of those businesses you can just buy into - there's all sorts of issues about chartering, insurance, etc.
Anyways, this seems like more an idea for a credit union as opposed to an actual bank. They're easier to start, have an existing legal framework for some of the more unorthodox ideas he's got, and are designed to appeal to a specific group of people with a common goal - which is exactly what he's talking about.
>> So he would just eat the interchange fees that the owners of the other ATMs/networks charge him? That would add up pretty quick. There's also the issue of the service fees that non-bank ATMs charge directly to the consumer - would his bank cover those as well?
This is not unprecedented - where I live there's a bank that offers free ATMs worldwide:
Very interesting subject, makes me wonder what it would take to start a bank. But I wouldn't follow this authors advice. I don't know a lot about banking, but this guy sounds like he's deciding to be unsuccessful.
Part of being a successful business is parsing what people actually want vs what they "say" they want. It's amazing how many people shop at wal-mart even though they "hate" it.
There are "good" banks that have high credit standards and simple businesses - mutual thrifts (they go back to pre-Colonial America in England when communities would band together, pool capital, and one by one write mortgages so that everyone would end up with a home). If you find one that's operated well, they wont be engaging in sub-prime mortgages of extending to credit to those who shouldn't receive it.
The problem with mutual thrifts is that they're constrained by how much they can grow. They are owned by depositors. Usually, when one grows a bit, they're acquired by a larger player who wants a foothold in your geographic area / wants to take advantage of your excess capitalization (let's say Bank of America is capitalized at 4%, I've seen some thrifts at 13%)... you end up having that excess capitalization because of the high loan standards.
I agree with most everyone else here. Michael talks a lot about the features he wants, but not about a plan for revenue.
But, it did spark my interest. Now instead of doing homework, I've got about a dozen books in front of me (I was at the school library). Also, I read "Hate your bank? Here's how to start your own." at SmartMoney. Not a terribly great read, but I was reading this paragraph:
"Under one common model, about 20 entrepreneurs each chip in about $100,000--enough to retain an executive team, outfit a branch, buy a technology package and print a bunch of fancy posters."
When I came upon "technology package", that light bulb 'o mine bursted with light. I don't think I'll spend pretty much any time thinking about how to start my own bank, but I'm definitely going to start thinking about what a "technology package" might entail and where the state of things are now.
I don't know, but I met someone who makes her living setting up banks. Since she was a captive audience and the same lightbulb went off in my head....
I found out that there are a couple of pieces of technology that you need. For each of them, there's a dominant vendor that makes it easy to get approval and some second tiers that make it possible. If your goal is to set up a real bank, you can't save money by rolling your own.
I spent quite a bit of time last night researching financial services (eventually segued to COBOL/mainframes) and one company, Fiserv, kept popping up for a lot of services.
Do you mind sharing some examples of what some of those dominant vendors might be?
> Do you mind sharing some examples of what some of those dominant vendors might be?
Sorry - that stuff isn't intrinsically interesting to me so I stopped paying attention when I figured out that there wasn't any way for me to make money in the area.
I think that Mike's objectives are laudable and when thinking of how to re-invent an industry one sometimes has to think "blue sky" and the back into what can be achieved in reality.
So I prefer not to focus on the problems.
One could always raise the finance to buy an existing bank, which is what many private equity firms are doing.
And remember, Andy Beal - the poker banker who I have written about - ran his bank using principles so counter-intuitive to conventional wisdom that the regulators were harassing him to find out why. And it has done pretty well for Beal Bank.
Keep up the good work Mike.
John (aka The Masked Financier)
The costs are far higher than people realize to start a regulated finance business. While the author mentions making money from the "get-go", one cannot do that in the banking industry.
First off, you need a very large capital deposit to start a new bank (millions), depending upon charter type and domicile. That money is necessary just to meet the absolute and relative (eg Risk-Based Capital) capital ratios. You don't get to spend it.
Second, plan on spending $100,000 or more just on the application process. Oh, and plan on the application review taking at least 6 months.
Third, you have to invest in the appropriate infrastructure (software, systems, office, etc) before you even open for business.
Fourth, you have to market/advertise to attract deposits.
All of these items (and probably more) most occur PRIOR TO the opportunity to make any revenue. And even if you are successful on the revenue side, banking is a game of narrow margins.
This "ideal bank" sounds exactly like ING Direct. High interest, free bill pay / transfer money, no fees ever, etc. They have a nice website, too (except for the new bill pay stuff that is a third-party app with their own CSS; the layout is totally broken in conkeror and firefox).
oversimplification is the word that comes to my mind when reading this.
the complexities of the operations of financial markets, not to mention the regulatory requirements, are simply enormous. to fool yourself into thinking that you can create a bank on a whim is just foolish.
"We would only give out credit cards to those who are qualified to receive one" The people who are not qualified are the ones you earn your margin on.
"Oh yeah, our vehicle loans would only be for hybrid vehicles. We would never give out an auto loan for an SUV like a Hummer because of our values." Not even for a 30% loan?
"Yes, we would have a 0% profit margin but the warm fuzzy feeling of doing good is priceless."
The only idea that does make sense is to have a good website, that is the only reason I still have an ING account.
I want to start a bank and be the trading house for all US to CA and Euro currency converting. Take 1cent from every trade and do it a billion times a day. Who wants to join me?