Is BBVA's shutdown of Simple a bad sign for bank-fintech mergers?

When Eric Monacelli first started using the challenger bank Simple in 2013, he really liked the way it helped him automatically put money aside toward certain goals.

The senior director of product development at a large entertainment company was able to pay down his student loans, cover his rent and daily living expenses, and even save a few thousand dollars to buy a painting. He liked the interest rates on his checking and savings accounts as well as the quality of customer service.

But when BBVA USA recently shut down Simple and tried to switch Monacelli to a BBVA account, he compared the two accounts and disliked the interest rates, overdraft fees and ATM fees on the BBVA account.

“I thought, this is horrible, I want to leave BBVA,” he said.

He wasn't alone in his disappointment. Scores of former Simple customers have complained on social media over the past few weeks about the migration of their accounts to BBVA USA, which was officially sold to PNC Financial Service Group in Pittsburgh on Tuesday. The customer reaction highlights the business, technological and public relations challenges that are often presented by bank acquisitions of challenger banks and fintechs.

“Online-only customers like Simple’s are particularly demanding about their products,” said Todd Baker, a senior fellow at the Richman Center for Business, Law & Public Policy at Columbia University and the managing principal of Broadmoor Consulting LLC. “What they're getting instead is just a standard checking app and that's not what they signed up for. So of course they're going to be unhappy.”

When BBVA USA announced in January that it was closing Simple, it said the decision was made after an evaluation of strategic priorities "to ensure that our team remained focused on the initiatives that made the most sense for BBVA’s future — whether as a stand-alone business or potentially combined with PNC."

A BBVA USA spokeswoman said late last week that Simple customers’ accounts were all successfully transitioned to BBVA USA for account servicing. The experiences Simple customers have shared were the result of a technical difficulty in the online and mobile enrollment process caused by a large volume of people attempting enrollment simultaneously, she said.

What went wrong?

Simple, which was founded in 2009 as BankSimple by Josh Reich and Shamir Kharkal, was one of the first neobanks. It offered branch-free and mostly fee-free banking through a mobile app.

When BBVA bought Simple in 2014 for $117 million, BBVA Compass CEO Manolo Sanchez said the bank would keep Simple independent. (Legally, Simple was acquired by the BBVA's Madrid-based parent company, Banco Bilbao Vizcaya Argentaria. But on a practical level, the Simple team worked alongside the U.S. unit, which at the time was called BBVA Compass; a few years ago its name was changed to BBVA USA.)

"We'll let them flourish and create and finalize what they've started to build, then we'll roll out new products and services on this platform," Sanchez said at an American Banker conference in 2014. "We will not mess with them. They'll be on their own."

BBVA intended to keep the Simple brand a separate, digital business, Baker said. But the dynamics of a large bank are such that the lines of business making money receive the most investment, and Simple was not in that category.

“The politics inevitably end up crushing the innovation,” Baker said. “When I did bank acquisitions, I used to call this ‘destroying the village in order to save it.’ You would buy this new thing that was really cool and different, and then you would crush it.”

BBVA did stick with Simple a long time and gave it a lot of autonomy, Baker said.

“But it had to compete for technology resources with the commercial bank,” he said. “Simple was an innovator that essentially stopped innovating when it became part of BBVA largely because it lost control of its technological destiny.”

A fundamental financial obstacle hurt Simple, too, according to Baker.

The business model of challenger banks like Simple is based mainly on the interchange income they glean from debit card transactions. Simple’s original partner, The Bancorp Bank, had fewer than $10 billion in assets (it currently has $7.7 billion) and therefore did not trigger the Durbin amendment’s restriction on interchange fees. But BBVA USA has $103 billion of assets, and PNC has $474 billion of assets. Under the Durbin amendment, these banks can only charge 21 cents per transaction plus 0.05% of the transaction amount.

“When BBVA bought Simple, it cut the main source of its freestanding revenues in half,” Baker said.

There are also vast cultural differences between banks and fintech startups.

When banks buy tech startups, “the actual reality of the asset that gets bought is that it gets consumed and subsumed in the existing bank architecture and risk model and governance,” said Brian Hamilton, who is currently CEO of the challenger bank One. He has founded two challenger banks that were folded into traditional banks. One of them was Azlo, a small-business banking startup funded, acquired and then recently shut down by BBVA.

“Simple essentially died the day BBVA bought it,” Hamilton said. BBVA forced Simple to use its core system and promised to build an application programming interface layer for it. But at the time, the bank didn’t have an API layer, and its core wasn't designed to do this, he said.

“Simple essentially paused all innovation and stopped making progress for two years post-acquisition,” Hamilton said. “And during that time you had players like Chime, Varo, Current and others come to market and just start blowing by them from a customer acquisition and brand recognition perspective. And it's mostly because they were handcuffed.”

When Azlo became part of BBVA Compass, Hamilton stayed for a couple of years then “saw the writing on the wall,” he said.

“There was just not going to be the longer runway or the ability to continue to be creative and innovative and to do things that were truly new and different while being owned by the bank,” he said. “And Simple certainly ran into that in some ways. There's this overhead of bank governance that does not really know what to do with a digital asset that is out there essentially trying to disrupt banking.”

A challenge for Azlo was that in order to underwrite cash flow-based lending for micro businesses, Hamilton would have had to get risk-model-governance and credit committees in Houston and in Madrid to all agree on it.

“And of course that never happened,” Hamilton said.

“Being bought by a mainstream bank is the equivalent of death,” Hamilton said. “There certainly are advantages of a bank charter for direct, system-clearing access at the [Federal Reserve]. And obviously there’s a cost of funds advantage for using customer deposits. But there's a difference between a charter and being bought by a bank with all the legacy infrastructure and legacy business models and legacy risk governance.”

One challenge for any traditional bank that buys a challenger bank is that the fintech already has a bank partner. In the case of Simple, customers had to be migrated from The Bancorp Bank in Wilmington, Delaware, to the Accenture Alnova core system BBVA USA installed about 10 years ago.

“Eventually they're going to want to do a migration from that partner bank to the acquired bank,” said Stephen Greer, senior analyst at Celent. “That is essentially a core migration effort because you're moving customer accounts from one legacy bank to another legacy bank. These tend to be long and arduous and can take years.”

While the acquiring bank is focused on the account migration, competitors are expanding their product offerings.

“You have the likes of Chime and other independent neobanks coming up with early payday lending or credit-builder cards and all of these things that have made them really attractive and lucrative to the types of customers that they're trying to attract,” Greer said. “And then you're just behind at that point.” Also, outages and technical issues are common during core migrations.

“The risk is that if you buy one of these startups, how do you ensure that once you start to merge the technologies, you're still delivering on the product road map, delivering value to consumers and ensuring that it's a consistent experience and that there aren't significant outages?” Greer said.

BBVA USA’s merger with PNC was also a factor in Simple’s fate. When two banks merge, they need to get all accounts converted to whichever system is going to remain “as fast and as cleanly as you can,” Baker said. “That's where all the risk lies.”

If Simple had been sold just before the merger with PNC, that would have required two conversions, either to convert Simple to the new buyer before doing the large bank conversion, or continue running Simple on the old BBVA platform after the main conversion was done so that it could be converted off of it later, Baker noted.

“Both of those are nonstarters,” Baker said. “They would threaten the larger conversion and the cost savings that go along with that.”

Also, PNC has a program called Virtual Wallet that offers some of the same features as Simple, Baker pointed out.

When fintech acquisitions can work

Despite BBVA’s experience with Simple, fintechs can thrive within traditional banks, but only when the bank doesn’t already have a competing business, Baker said. For instance, when Goldman Sachs launched Marcus, it did not have a consumer banking business.

“It's not like you're interfering with anything else or taking resources from an existing cash-flow business,” Baker said.

Bank acquisitions of fintechs can work, he said, if the bank makes an ironclad commitment to allow the fintech to run its own technology stack.

“But banks almost always feel they can't do that for risk management and other reasons,” Baker said. “When you don't control your technology stack, you can't move fast. You can't innovate.”

Some banks have bought tech companies that offer supporting technology, rather than a competing digital banking service with its own customer base. These seem to fare far better.

For instance, TD Bank Group bought the Toronto-based artificial intelligence startup Layer 6 in 2018.

At the time, Layer 6 was a small startup with only 16 people. Today, as a unit of TD Bank Group, it’s got more than 60 people doing AI projects throughout the organization.

“The bank kept the team in place and has significantly grown it,” said Tomi Poutanen, one of the founders of Layer 6 who is now chief AI officer at TD. “It’s been a very quick acceleration of the AI journey at TD Bank.”

Capital One Financial acquired Adaptive Path, a San Francisco-based design and user experience consultancy, in 2014. KeyCorp acquired the Washington-based personal financial management app startup HelloWallet in 2017 from Morningstar. Goldman Sachs bought PFM app provider Clarity Money in New York 2018; in February the unit was shut down and its technology folded into Marcus Insights.

It’s often hard to track how well such tech startups fare after they’re absorbed into a bank. Typically, they stop getting reported on separately and the founders leave a year or two after the acquisition.

Bank-fintech deals likely to continue

Some banks acquire fintechs to bolster or add capabilities that they don’t have today.

“There are other times when they say, this looks like an interesting customer segment or new way of doing business, so let's try that,” said Jacob Jegher, president at Javelin Strategy & Research. BBVA’s acquisition of Simple may be an example of this.

“Simple didn't have a particularly large customer base, but the big question we all had at the time was, were they onto something?” Jegher said. “In other words, was the digital-only banking wave here to stay, and can it be monetized and scaled?”

Hamilton also said banks may need to buy fintechs to stay competitive.

“I think finally with the advent of some scale in some of the challenger banks and other fintechs, the dam is starting to break,” Hamilton said. “And the danger to the traditional banking system feels more like the danger to the taxi system when Uber showed up. It's going to be a more complete overhaul that they have largely escaped to this point, despite the fintechs kind of nibbling around the edges.”

Monacelli and other upset customers of Simple seem to second Hamilton's view.

“Simple, with its Goals, has a mindset of helping you save and create a road map for your future,” Monacelli said. “It gave me autonomy and a passive way to save money.”

He switched to Ally Bank, which offers a tool similar to Goals, but only for savings accounts. He’s still looking for a bank that will let him easily automatically contribute to savings from his checking account and let him know how much he can safely spend at any given time.

“If more banks just copy Simple’s system, I’ll be happy,” he said.