The idea has been bouncing around in his head for days. Growing, crystallizing, and finally taking root. Time to do something. Joshua Reich grabs his laptop and heads into the front room of his Brooklyn brownstone. He settles back into his favorite couch, a cat on either side. It's late, and the house is quiet. Perfect-the 31-year-old works best at night. He begins to compose an email:
To: Shamir and Jerry
Subject: Let's start a retail bank
It's a subject born of frustration. A few weeks before, he'd had trouble getting a handle on his cash flow while using an online money-management tool. "I had no $#@&*$ clue what was going on with my money," says Reich, who is no amateur when it comes to money matters. He has an extensive background in math, statistics, and finance, among other pursuits.
As a youngster in Melbourne, Australia, when not kicking back at the beach, Reich had a "very nerdy childhood, interested in computers, electronics, mathematics, and physics." After high school, though, he followed his ophthalmologist father into medicine, which in Australia can begin when a student enters college. His two sisters also opted for medical careers.
After his first semester, Reich realized he missed mathematics. He changed his major while his parents were on vacation. When they returned, he quickly thought better of it and quietly transferred back. Four years later, after his first surgery rotation, Reich, with his parents' blessing, took a year off to study software engineering. When he returned to med school, he found himself "spending more time playing with computers than actually seeing patients."
That sealed it. Reich left medical school for a full-time job at a technology start-up and pursuit of a degree in math and statistics-simultaneously. The start-up was involved in large-scale data mining, performing quantitative analyses of marketing campaigns; it was seemingly vital information, but Reich soon found that traditional marketing managers weren't all that interested. So, after earning his degree, he decided to jump from marketing to finance. To do that, he quit his job and enrolled at the Tepper School of Business.
Reich studied finance, economics, and accounting at Carnegie Mellon and, in the process, landed a "great-fit" summer internship with Root Markets, an online start-up that matched mortgage borrowers and lenders. When the summer ended, the company pressed him to stay. Reich agreed. For the second time, he completed his degree while working full-time, this time in New York.
The year was 2006, and within the following 12 months, the place to be was anywhere but mortgages. Reich moved on to an equity research group. He loved the traditional finance and heavy emphasis on data, but the 40-year-old company was just too set in its ways for Reich. He missed the challenge of a start-up. He left the firm to dabble in independent data-mining consulting while he pondered what to do next. Not long after that began his frustration with monitoring his personal finances.
"I had a house mortgage, a home equity loan; it wasn't that complicated," he says. In a tweet about the online financial management tool he subscribed to, he wrote: Could someone introduce me to the software developer? I want to punch him. Mulling it over the next two days, he realized he'd been a bit hasty. It wasn't the developer's fault. It was the bank's fault for supplying bad data in the first place. More importantly, Reich was realizing something else. "The only way to get better data from the banks is to be a bank. So how do you become a bank?"
It's a question he passes along in his Let's start a retail bank email to Shamir and Jerry. He types, What would it take to start a really boring, simple bank? A few paragraphs later, he signs off. Following advice he received in a Tepper class-if there's anything important that you don't have to send out that day, sleep on it-Reich decides to wait on the email. He sends it the next day at 9:45 a.m.
Shamir Karkal happens to be on the other side of the world. He works for McKinsey & Company, a global management consulting firm, and banks are his clients. So it's clear why Reich emailed the question to him. But actually start a bank? Well, it certainly wasn't impossible, but it was a big question. He'd have to think about this one.
Karkal met Reich during their first year at Tepper. They became good friends despite divergent backgrounds. While Reich was growing up on the beaches of Melbourne, Karkal was in the burgeoning city of Bangalore, India. Karkal also loved science, technology, and physics. Both his parents were bankers, but he had no interest in the family trade. Ironic, because he found out that a grandfather who died before he was born had been the chair of what would become the largest bank in India. He even has clear memories of going to work with his mother and "walking around these stacks and stacks of cash in the bank vaults."
Karkal opted to study computer science in India but "graduated into the worst job market for software engineers in Indian history." He'd always loved the idea of a start-up. In fact, before graduation he had signed on with one, which went "completely bust" by the time he got out. Instead, he took an "interim" position with a small technology firm and, after a few years, moved on to a better opportunity at an IT services company. He was quickly shipped off to Washington, D.C., to work on a project for the World Bank. Apparently, his banking roots were conspiring with his fate.
After a year, looking to round out his more technical education, Karkal enrolled at Tepper. He met Reich early on, and though he can't pinpoint the exact moment, he's sure it was in the school's first-floor, windowed lobby where they always hung out. Still dreaming of start-ups, he became active in the venture capital club. Karkal impressively placed tops in his class each year and became a business-game team leader. And, even though Reich was living in New York their second year, Karkal made sure to pick his friend as his first team member.
After graduation, Reich stayed on in New York, while Karkal postponed his entrepreneurial dreams to take the "offer you don't turn down" from McKinsey. His clients were none other than banks. Small, large, and around the world. He and Reich stayed in touch through emails and drinks squeezed in anytime Karkal was in the States. He was vacationing in India, when Reich's email Let's start a retail bank appears in his inbox. He reads it and, not surprisingly, has "a bunch of questions." But he also takes it seriously, because he knows Reich and has tremendous respect for the intellect and business acumen that he witnessed firsthand during their days together at Tepper.
A second email arrives almost immediately. This one is from the Jerry in To: Shamir and Jerry.
Jerry Neumann is an angel investor and was co-founder of Root Markets, the mortgage business where Reich had spent 18 months. He's also the man who once said, "Josh, if you ever want to start a company, I'll fund it." In fact, Neumann recalls the conversation, sitting with Reich in a coffee shop during Reich's stint with the equity research group, trying to convince him to use his talents to build "something more interesting," a company "with more impact."
His email comment this time is equally pointed. Oy. Regulation. Starting a bank is really hard. I like it.
Two weeks later, when Karkal is in the States on business, he makes certain to stop in New York. The Tepper grads adjourn to Reich's backyard garden, making themselves comfortable at the table and chairs Reich has set up in the 100-square-foot space, spacious by Brooklyn standards. It's in that setting that Karkal decides he's going to go with "a once-in-a-lifetime opportunity. I guess I just hadn't gotten the start-up idea out of my system," he says with a smile.
As fate would have it, within a few weeks, Reich encounters an issue that cements his certainty in their new project. His bank, Chase, the largest in the world, puts through Reich's online bill payments twice. The ensuing "nightmare" weeks are filled with calls, dead ends, and frustration. He's endlessly transferred from group to group, with nothing accomplished. It takes three weeks to solve the problem, concluding with Reich $11 in the hole. He jots it all down in a little book, vowing to make sure his bank will solve these problems.
Neumann lends his support, both emotional and financial. "I'm an early-stage investor. The things I look for are high-risk, high-return things-people that are gonna change the world. Most of the pitches I get are people who are trying to fix small problems. People like Josh and Shamir can fix bigger problems; and, you know, banking is a huge problem."
As the months go on, Reich and Karkal research and refine their idea. They discover that starting a bank, charter and all, is a cumbersome process that could take three to four years and would plunge them into a world of regulation and compliance. They decide that their main goal is to improve customer experience, because, as Reich says, "Banks in America fundamentally make money by keeping customers confused. ... A confused customer is a profitable customer. We've joked that one of the greatest innovations in banking is ever-decreasing font size." They realize the best way to improve customer experience is as a technology company, and it's what they both do best. They're now developing the technology Reich believes is so lacking in current U.S. banks. This technology will be transparent to the average customer but will make their banking easy, hassle-free. Even the product's name will be easy-BankSimple.
BankSimple will be exclusively online. Customers will have one easy-to-access account and one card. They'll have free ATM access to the nation's largest network and free online bill payment. They'll have no overdraft fees, in fact, no hidden fees at all. They'll be able to deposit checks in such innovative ways as using pictures taken with their smartphones. They'll have real-time, useful data and the tools to clearly and easily manage their money.
In the consumer's eyes, BankSimple will function as a bank, but in reality it's purely the front-end experience. Reich and Karkal will work behind the scenes with chartered banks that hold FDIC-insured deposits and make loans. Their company's system will move funds as needed between checking, savings, and credit accounts to make life easy yet yield the most for the customer. The company will make its profits not from myriad fees, but by sharing lending and credit card profits with their partner banks.
In keeping with their simplicity approach, Reich and Karkal also have quite a promotional line: "We make banking not suck." Their fledgling company, called Simple Finance Technology Corporation, has moved out of Reich's basement and into nearby Brooklyn offices. Both can now walk to work, as Karkal has since moved a few blocks away.
Reich and Karkal have taken on another young partner, Alex Payne, the developer of the Twitter platform. They've expanded to nine employees, scattered in New York, Portland, and San Francisco, and have successfully raised nearly $3 million in their first round of financing. Their next step-testing BankSimple with a small group of friends and family, then starting the process of bringing on customers later this year. The waiting list already numbers more than 20,000.
The banking industry has noticed. The company was recently named one of Bank Technology News' Top 20 Innovators, alongside the likes of Citigroup and MasterCard. Amazing when considering that just a year earlier Neumann was smiling as Reich brashly decided they should "start a bank and go up against the biggest frickin' organizations in the world!"
In an era of bank failure and consolidation, BankSimple seems to have seized an opportunity. As one impatient customer wrote: "What a bizarre concept-people on a waiting list for a bank."
Melissa Silmore (TPR'85) is a Pittsburgh-based freelance writer and a regular contributor to this magazine.