It's Simple: Banks Need to Build Better Apps… Or Buy Them

BBVA’s recent acquisition of Simple is a perfect example of the evolving role of traditional banks in the financial industry. There are lots of different opinions out there on the value that BBVA is going to extract from Simple for their $117 million investment — Simple employees, their customers, their technology, or even just the Simple brand?

It might just be as simple as BBVA understanding where the future of banking is headed, and that the expertise needed to get there lies outside their walls.

A Simple Premise

Let’s start with the underlying philosophy that Simple was founded on. In an email that Joshua Reich (the CEO of Simple) sent to his co-founder back in 2009, he laid out what he thought the four basic functions of bank were. Here they are in Josh Reich’s words:

A place to hold my money so I don’t need an over-sized wallet or mattress
Electronic payment and transfer interfaces
Ability to lend my cash to others in exchange for a risk adjusted return
The opposite of #3 = borrowing

Based on this incredibly succinct view of what a traditional bank does, the co-founders of Simple proceeded to build a beautiful digital banking user interface that traditional banks could hook into to provide those basic functions in a radically simpler way. While Simple was unable to attract as many traditional bank partners as it originally planned, it was eventually able to sign up The Bancorp Bank—a regulated bank that specializes in white-labeling their services—as a partner in 2011. With this partnership, Simple rolled out a digital-only checking account and debit card product that featured an elegant and easy-to-use interface, remote deposit capabilities, and a boatload of other small, but thoughtful features. Within two years, they signed up 100,000 customers.

Read More: Easy Banking: The Simple Strategy

A New Model

The success of Simple and the validation of that success that BBVA provided brings up an interesting question—a question that Josh Reich posed back in 2009—what does it mean to be a bank? To answer this question, think about banks as platforms.

This can be further illustrated by using a simple analogy—the iPhone. At the most basic level, the iPhone is three things:

Platform – This is the iPhone’s core hardware (touchscreen, battery, accelerometer, GPS, Wi-Fi chip, camera, etc.) and the base operating system (iOS).
Capabilities – Enabled by the underlying platform, these are the basic functions that the iPhone is capable of. This includes things like taking pictures, connecting to the internet, and finding your location.
Apps – These are different combinations of the iPhone’s capabilities that provide a specific experience and value to the user. On an iPhone, there’s an app for everything—making movies, measuring if something is level, or smashing pigs with angry birds.

You can apply the same schema to banks:

Platform – A bank’s ‘platform’ is their banking charter, federally insured pool of deposits, expertise at pricing risk and making loans, and physical and technological infrastructure.
Capabilities – A bank’s capabilities come from that underlying platform. They are precisely the functions that Josh Reich outlined in his email—holding deposits, facilitating payments, and extending credit.
Apps – The apps that a bank offers are the end products that consumers interact directly with in their day-to-day lives—checking accounts, CDs, credit cards, installment loans, and investment accounts.

So What…?

What did Simple really accomplish? They didn’t build a new platform or invent any new core banking capabilities — all of that came from their partnership with the Bancorp Bank. They simply built a slightly different, more refined set of banking apps. To use an iPhone app analogy, they replaced Tetris and Bejeweled with Candy Crush.

This is a subtle, but important distinction that may have been missed in some of the initial coverage of the BBVA acquisition. The little things that go into the design of a product, the small touches that consumers might not even consciously notice — those things really matter. In Walter Isaacson’s biography on Steve Jobs, he talks a lot about the idea that consumers ascribe the quality of a product’s appearance or packaging to the quality of the product inside. People do, in fact, judge books by their covers.

So what if Simple didn’t rewrite the book? They gave the book a much better cover, and that’s what BBVA acquired them for.

Now what does this mean for the financial industry overall?

In an American Banker article, Bradley Leimer wrote:

We are moving away from a banking relationship defined by the goal of being a customer’s primary financial institution to one where we focus on becoming their primary financial application.

BBVA has announced that they will eventually be moving Simple customers from their Bancorp Bank deposit accounts over to BBVA deposit accounts. The front-end experience isn’t changing, just the underlying platform. Do you think they will lose any Simple customers because of this switch? Seems unlikely.

Financial institutions are going to find it more difficult to build profitable, long-term customer relationships without great financial services apps as the world evolves further in that direction. BBVA clearly understands this. They understand the threat companies outside the financial industry pose because of their expertise at building beautiful consumer apps. Indeed, in a recent Financial Times editorial, BBVA’s Chairman and CEO Francisco Gonzalez wrote:

“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. I disagree. What is more, I think banks that are not prepared for such new competitors face certain death.”

BBVA’s acquisition of Simple demonstrates their desire to prepare for this new era of app-driven competition. It will be interesting to see if the rest of the industry follows their lead.