James Siminoff

It’s a Great Time to Start a (Disruptive) Bank

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Albert from Union Square Ventures beat me to this post.  In fact I was just telling Josh on Monday that if i had more time one of the things I would start is a bank.

Albert’s reasons why it is a great time to start a bank are all correct (included below) but very different from mine.  My bank would make money off of mortgages… yes, Mortgages.

From what I understand (I am definitely not a banker), when I go to get a mortgage the bank borrows the money from the fed at the set interest rate, which today is almost zero.  Their risk, what creates the interest rate, is that I default.  So for example I just re-financed my mortgage and I am paying 5.25% fixed for 30 years.

The amazing thing is that even in this market my mortgage is only 50% of my appraised house value.  Which means that right now the risk to my bank is that I default and they sell the house for MORE then the mortgage amount.  What makes this so crazy is that if my house was worth only 10% more then the mortgage amount that I would have the same rate, they base the mortgage on my credit and overall size but not based on the collateral.

So, if you are out of work, start an efficient bank (as per Albert’s instructions below) and instead of being in the deposits business offer the first collateral based interest mortgages.  It would be the first bank where you would pray that your customers would default so that you could make some real money on selling their under-leveraged houses.

continuations:

The WSJ recently ran a story titled “It’s a Great Time to Start a Bank” which talked about a couple of recent local banking startups.  It’s definitely true that when the existing players are on their backs it’s a good time for innovators.  But it was disappointing to see the WSJ article focus about bank startups that look pretty much exactly like the banks we have had for the last hundreds of years: you take deposits from some people and make loans to others.

What it is really a good time for is starting a disruptive bank.  I have posted before about how the radical change in cost structure when going digital is driving disaggregation of historically aggregated functions.  For instance, there is no longer a reason why I should be getting my sports news from the same source as my business news.  So does deposit gathering and lending have to be under the same roof?  I can’t think of any obvious reason other than that historically it was a lot harder to move money around.  Today most money just appears as a series of 1s and 0s and the marginal cost of moving it around is essentially zero (not to be confused with the price we are still being charged to do so).

A disruptive bank would be built from day one based on the premise that the marginal cost of delivering a fully digital banking service is zero. I have just started to think through what all the implications of that are, but they are profound and I am fairly convinced involve focusing purely on delivering the best service to depositors possible and leaving lending to someone else entirely.  The net result would be that this would not be a balance sheet business at all but rather a P & L business.

And there’s an important rub (at least for the moment).  While it is currently easier than ever to obtain a federal bank charter (by buying a distressed bank, which you can now do even if you are not already a bank), you will still wind up being regulated like a traditional bank, which means lots of requirements on your balance sheet.  That in turn means you need a lot of equity.  I am thinking the way around this may be to register as a broker dealer instead, but just beginning to look into that.

Will post more on this idea, but would love to meet with anyone thinking about how to really disrupt banking now.