Tell HN: Why startups won't fix banks
I recently did an interview with a bank analyst, and one of the questions I asked had to deal with innovation in banks. We saw a while ago a lot of guys from tech startups saying that kind of energy needed to be directed to the banking system. I thought that these guys were really underestimating the kinds of roadblocks that prevent change from happening. I thought I'd share this part of the interview with you guys:

Q: Are there any banks in particular that stand out in doing new, innovative things? The future of banking will be different than it is today, which banks are going to be ready for that new future?

A: I’m sure people can disagree but I’d argue how innovative can you really get in a borrowing/lending model. The medium is changing. We’re seeing more Internet banking and maybe something happens in mobile. When is the last time you actually stepped into a bank branch? My parents do, but not so much the younger generations. There’s banks that offer iPhone apps, so that’s the type of innovation I see but nothing too big. You wont get credit for innovation when you’re in a banking crisis.

Mostly, innovations are used to get cheap deposits. If there is a bank that can innovate and do it correctly, then it can work well. Commerce is a great example of one that did achieve it. Their efficiency ratio was higher than most peers but that’s because they kept their bank open 7 days a week and they made it so you really wanted to visit their branches. They used nice colors, had super friendly tellers (they weren’t stuck behind bullet proof windows or a mini gate), and they didn’t make branches look like a post office or a jail cell.

Their whole idea was putting more money towards non-interest expense but they were able to charge less for deposits since they were more convenient. It definitely worked. If you could invest in safe assets you could earn a wider NIM than peers.

The thing about Vernon Hill was that he wasn’t in the banking business forever, he owned Burger King franchises so he brought over that customer-driven model to banking. But if you run into the storm like we did now, innovation is not a high priority on bank executives’ minds.

If you look at innovation from other areas, like tech, you’ll see guys in college who are really bright that are making websites trying to innovative banks.

Q: Yeah I wanted to talk about that — I always see guys, especially from valley tech startups saying how we need to take the start up model to banking ad really innovate things on that end. Every time, I think this is a recipe for failure with all the regulatory hurdles and work involved.

A: That’s another good point. It’s a heavily regulated industry. So for someone in college or high school that has a bright idea for starting something in the financial sector, they’re going to go through more capital and regulatory barriers than someone trying to build something like Facebook or Twitter. The roadblocks are just a lot higher.

A lot of times when there’s innovation in financials, it usually comes from within the banking system itself. So it is some guy who has been there for 10 years who sees something and acts on it. But it’s almost never from guys on the outside that think of something one day while sitting in their college classroom.

I would argue that there’s simply a smaller number of brains devoted to thinking about new ideas in banking and it’s mostly limited to people who are already in the financial world because it is within their competence.