GE 120: How Simple Used Technology To Innovate In The Banking Industry (Eventually Selling For $117M!) [Podcast] With Josh Reich

josh reich photoHey everyone, today’s interview is with Josh Reich, the CEO of Simple, a new bank that provides automated banking, budgeting, and savings for their customers.

Simple is growing faster than any other bank, has eliminated all the fees typically associated with traditional banking, and sold to BBVA for $117 million.

I’m a customer of Simple, and absolutely love they way they do things. Throughout the interview, Josh and I talk about what it was like for him to disrupt such a highly regulated industry, how they achieved their massive growth, and the basics of how they do business.

Traditional Banking Gets a Kick in the Pants

Josh started Simple a little over six years ago out of his own frustration with the banking system.

He isn’t a banker by background, but he felt like he had a negative relationship with his bank, because no matter how much work he put into it, he’d constantly be getting hit by overdraft fees, and he didn’t feel like it was a fair relationship to be in.

He talked with one of his friends from grad school, and they came to the realization that ultimately, banks make money by keeping people confused. In fact, the majority of their revenues come from fees and charges.

Josh pointed out that when you’re in a business where you profit from your customers being ineffective, you set up really weird incentives where you don’t actually want your customers to be good customers…. which is pretty bizarre.

Josh and his friend thought this was horribly unfair… especially since people need to have access to their own money to be able to achieve their financial goals, so they quit their jobs and started working on their new concept.

With Simple, they focus on using technology to do two things:

  1. Eliminate the need for a lot of the fees that exist in banking by creating a lower-cost infrastructure
  2. Connect to consumers in a more meaningful way, by providing more engagement and understanding with what’s going on with their money

How Simple Makes Things Simpler

For example, when you log into your account with most traditional banks, you see an “available balance” or a “ledger balance.”

Simple, instead, shows you a “Safe to Spend” amount. This calculates your upcoming payments, your bills, your financial goals, and how much money you have available to you right now.

So with Simple, you know how much you can spend without hurting yourself.

With a traditional bank’s available balance, on the other hand, you’re responsible for doing loads of mental math on the money you see, your savings balance, how much of a balance you’ve got on your credit card right now, etc.

On top of that, a lot of banks purposefully don’t include the transactions that have happened in the last three days, even though we live in a world with real-time technology.

They’d much rather you do fuzzy math and have fuzzy thinking about your numbers so you’ll overdraft and have to pay a fee, which isn’t fair.

How Fast Simple is Scaling

Since they’ve been acquired by BBVA, their employee headcount has grown 3x.

On top of that, they’re adding customers at a rate, that if they were a typical bank, they’d need 850 to 900 branches to accommodate everyone.

What’s more, a typical bank would need 6,000 employees to onboard the sheer amount of customers they’re onboarding, but their entire company is just under 300 people.

“If you think about designing a user experience based on how people think rather than how banks work,” says Josh, “you can stand heads and shoulders above the other banks because they’re really undifferentiated.”

And with a differentiated approach, you’ve got a much lower customer acquisition cost, more efficient background operations (hopefully), and can grow much quicker than a typical business in your industry.

Innovation Under Heavy Regulations

Because banking is such a heavily regulated industry, even though Josh started working on Simple six years ago, it wasn’t until three years ago that they had their first customer.

In their first year alone, they were trying to solve two major problems:

  1. What did their customers want?
  2. How to do it?

For the first part, they had the high-level idea that they needed to use technology to be aligned with their customers, modern, and transparent. But since consumers aren’t really used to having open conversations with banks, they launched a website that allowed them to have personal conversations with 20,000 potential customers to uncover what pain points they needed to solve.

For the second part, it took them a long time to figure out what customers wanted, what the country’s banking regulations said they were allowed to do, and how to navigate those regulations to create an experience that didn’t compromise on their vision.

For example, one challenge in particular was creating terms and conditions that were readable, and not in 9-point legalese.

That one challenge alone took them 18 months of work to solve because no one had ever before gone to lawyers to figure out how to put everything into plain English.

Hiring Innovative Compliance Workers

Josh admits that he used to think that banks were full of people who spent their days coming up with ways to plot against their customers.

And while some of those people do exist, he says that most banks are just full of well-intended people working in really bad organizations.

Typically, compliance is all about a culture of saying no to everything that’s innovative and different. But when you provide people with a great environment and a culture free of a lot of the cultural attitudes that exist within banking, you can really get some phenomenal work done.

According to Josh, their compliance team has some of their best new product ideas… because not only do they understand the system, but they’ve been thinking about this stuff for a long time. It’s just that they’ve never been in an environment where they’re encouraged to be creative.

Narrowing Your Focus Areas as the Company Grows

When the company had around 50 to 80 employees, Josh had his main focus areas narrowed down to five things:

  1. Strategy
  2. Hiring
  3. Investor Relations
  4. Product
  5. Culture

But now that they’re close to 300 employees, he only focuses on two:

  1. Vision
  2. Culture

To focus on these two things, he has executive team meetings twice per week: one focusing on short-term strategy, and one focusing on long-term.

He also does one-on-one meetings with random people across the company to be able to connect with everyone and get a sense of what’s going on.

One Productivity Hack

Other than keeping his inbox under 50 messages, Josh says it’s really important for him to keep a to-do list to keep himself and those around him accountable to what they say they are going to do.

Bargaining for the Domain

Originally, Simple had “BankSimple” as their url, but they realized they wanted to drop the “Bank”.

But since was parked, they had to go through a lot.

And when it comes to buying domains, Josh says, you’ve really got no leverage in those conversations, so you just have to wait it out and be prepared to deal with a lot of puffery.

For example, the day the domain deal closed, they agreed on a price, but then the owner came back and said he’d just received an offer for twice as much. (A total lie.)

When that happened, Josh just told the guy that he was going to walk away from the deal, and withdrew his offer, telling him it didn’t feel like a full-faith negotiation.

Thirty minutes later, he received a call offering the domain for their pre-decided price.

Must-Read Books

Josh recommends Feynman’s autobiographies, even if you’re not a huge physics nerd like he is.

He says the books are about understanding first principles, trying to be rational in decision-making, and the value of having passion.

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