Last month Cross River Bank, an FDIC-insured, deposit-taking bank of Bergen County, New Jersey, raised $28 million from Battery Ventures, Andreessen Horowitz and Ribbit.
As was reported, VCs were interested in what looks like a boring bank because a division of Cross River is trying to build the next digital-only “future of consumer banking” play via a project called Almond.
In that light, the deal isn’t shocking. Startups ranging from Affirm to WealthFront have been looking to cleave off some of the most valuable parts of the banking ecosystem. And there has been a lot of chatter lately among the technorati about a tech company getting a banking charter and going after the consumer deposit-taking heart of the banking industry.
That said, I have been wondering why Amazon.com (and to a lesser extent Google and Apple) haven’t launched a consumer bank.
For Amazon, in particular, consumer banking would fit well with the company. It is unfathomable to me that Amazon wouldn’t have considered this option strongly. I wouldn’t be shocked to hear that there has been a team evaluating—if not actively working on—a project like this for some time.
Amazon already commands a big share of my wallet and it has the “trust.” The company already offers various consumer financing programs—I use an Amazon credit card and an Amazon ”bank” card which functions as a debit card against my Bank of America account (which gives me more cash back from them). And banking feels a heck of a lot like a web service that would fit nicely with AWS, not to mention things like the newly announced instant physical world checkout system in Amazon Go.
There are also international precedents for big technology companies wading into banking. Alipay and Tenpay—while not fully fledged consumer banks—show the large Asian technology companies successfully moving in that direction.
In the U.S., eBay’s acquisition of PayPal a generation ago was the ultimate missed attempt to couple a consumer financial engine with a tech marketplace. Isn’t it time to try again?
There are likely three reasons that you haven’t seen a big technology company wade into the banking space.
The first reason is that everyone hates their bank. Banks have historically some of the lowest net promoter scores of any industry among consumers. Banks have to show people when they have spent too much and when they have too little. It is likely that the big tech players have seen analyses showing that attaching a bank to their offering would have a very negative impact on their overall brand among consumers, regardless of how “good” their bank was. Even with great customer service, zero fees, great interfaces and wonderful technology, banks are just not positioned to be something the average person will like.
The second reason is likely regulatory. The last thing that any big technology company needs, now more than ever, is another angle for regulators to come knocking. Banking is, unlike most of tech, heavily regulated and scrutinized. For most big technology companies, it likely isn’t worth the regulatory pain or the risk of getting into the consumer banking game.
The final reason—and possibly the most important—is that traditional depository banking is a pretty bad business. No one makes real money offering consumers deposit accounts, checks and debit cards. All the sophisticated players offer those services as marketing, and loss leaders, to get into the big game of consumer lending, mortgages and more. Especially in a very lower interest rate environment, simply having a lot of deposits doesn’t do you much good.
Technology companies and startups are focusing on just the valuable pieces of the ecosystem, without bothering to deal with the traditional loss leaders that the big banks need to engage in. It is very hard to compete in a business operated by rivals as part of their marketing spending. But, even if that weren’t the case, there just isn’t the profitability in core consumer banking that would make it attractive to big technology companies. And that is before you consider the fact that the investors in big tech companies are looking for margins that are stratospheric compared to what traditional banking provides.
So, what does it all mean for Cross River Bank and Almond? As a kid who grew up in Bergen County, I wish them all the best.
It sounds like they are going after a service and space that many people are very excited about as users and see a real place for in the future. I know that I, for one, would love a truly technology-first personal banking solution.
Like Simple attempted, there is a strategy I could see Almond pursuing where you try to skim the best banking customers away from the large institutions. If your brand and marketing can “select” for you the best customers out of an overall ecosystem—as Apple has done with the iPhone—you likely can avoid many of the NPS limitations of banks at scale. And you can possibly build a very profitable cohort of traditional banking customers. That would be valuable.
But I wouldn’t hold my breath for a big technology company to build—or acquire—anything directly competitive anytime soon.
Almond, and the next cohort of tech-consumer-banking plays, are going to have to be willing to go it alone all the way through to IPO and beyond. Or they’re going to end up being purchased by traditional banks like Bank of America or Chase. The question at acquisition time will then be, are they valued as traditional depository banks, or can they get acquirers to pay tech-like multiples? That will likely make all the difference, and justify (or not) the recent investment of the Valley cohort in good old Bergen County, New Jersey.