Scoping out the BBVA/Simple deal

It’s not every day when such heavyweight media players as the New York Times, Financial Times, and the New Yorker notice, let alone report on, a relatively minor bank acquisition.

But that’s what happened in February when BBVA, a 150-year-old global banking group based in Spain, with $820 billion in total assets, bought Simple, a 4-year-old Portland, Ore.-based online firm that brands itself as better than a traditional bank, for $117 million.

More important than the popular-press stories, though, may be what such an event means to the inexorable onset of digital banking, either online or mobile. Simple, in its brief existence, positions itself as a safe, convenient, inexpensive, tech-savvy, and ultimately easy place to save and manage expenses. While not an FDIC-insured bank itself, it currently houses its customers’ funds in the FDIC-insured Bancorp (and likely will shift them soon to BBVA). It reportedly boosted its customer base from about 19,000 at the beginning of 2013, to 100,000 at year’s end, while processing $1.7 billion in transactions.

In Simple’s own words: “Simple combines innovative technology, impeccable user experience, and expertise in behavioral economics to help its customers spend smarter and save more.”

What’s grabbed the big media’s attention is the scratchy, in-your-face attitude of Simple—the underdog that’s made good. For example, the New Yorker’s David Wolman notes a snarky sign he saw in Simple’s main office that read: “What do we look like, a bank?”

A lot of the media attention focuses on two issues: whether Simple’s acquisition by a banking giant will snuff out its youthful exuberance; and why would BBVA buy Simple in the first place?

Regarding the first issue, Josh Reich, Simple cofounder and CEO, told the New York Times: “The biggest difference from a consumer perspective is that we’re going to have significantly more resources so we can grow faster.”

In a blog post, Reich expands on this: “The biggest change is that now we will have the support of a global banking group with $820 billion in assets that shares our passion for innovative technology and customer experience.”

Which gets to the second issue. Tobias Buck, writing in the Financial Times, says “The acquisition of Simple exemplifies an important trend in the financial services sector, which has seen retail banks invest heavily in digital services and technology groups pushing into markets such as online payments.”

He reports that BBVA has backed up its talk about innovation with real money. In 2012, it launched BBVA Ventures with a $100 million budget that subsequently bought into other start-ups in Germany and the United States, and invested in U.S.-based technology venture capital funds.

In fact, Francisco Gonzalez, BBVA executive chairman, writing in a Financial Times opinion piece, said: “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.”

Tough words, but, again, backed up by a corporate-funded resolve.

Which gets to the bigger issue of digital banking versus brick-and-mortar banking. Lots of analysts and pundits have been fond of saying the branch isn’t dead, just changing. That’s probably true, but not the whole story.

Ally Bank, another all-digital financial institution, issued survey results in December with the patently self-serving conclusion that “online banking continues to increase in popularity.”

Still, the survey was conducted by a respected polling company, Opinion Research Corp., which surveyed 1,001 adults across the United States. Some specific results: 24% said they bank primarily online via computer or tablet; 31% said visiting a bank branch is their primary method of banking; 62% said they use either an ATM, visit the bank online, or bank through a mobile phone.

“Our survey data indicates a shift over the last several years, as more consumers look online to manage their finances,” says Diane Morais, Ally Bank’s deposits and line of business executive. “Banking with a direct bank offers the same, if not more, opportunities and advantages as traditional banks with physical branches, and consumers appear to be gravitating toward this approach.”

Mercator Advisory Group did its own survey recently and concluded “that while more consumers still prefer to use bank tellers to deposit checks, increasing numbers of U.S. adults prefer to use self-service methods for check deposit, primarily ATMs or their own mobile phones or computers.”

Expanding on this, Karen Augustine, a Mercator analyst, says: “The proliferation of mobile channels appears to stimulate ATM and self-service use, not supplant it.”

Vitex, a bank consultant firm, released a recent white paper, “Branchless Banking: Take the Branch with You,” with the intention of explaining how to capitalize on the decline of bank branches.

“Customers are constantly demanding more personalized products. Therefore, the necessity for new, innovative banking solutions is critical to the success of your financial institution,” says Randy Roth, CEO, Vitex. “The era of customers visiting a branch on a regular basis is nearing an end.”

Getting back to the Simple acquisition, Stephen Greer, a Celent analyst, says in a recent blog post, “The news is surprising, but not unusual for a banking group that has invested in other innovative companies such as Freemonee, SumUp, and Radius The deal also legitimizes a financial start-up that has garnered quite a bit of skepticism among some in the industry, despite a small yet dedicated and growing customer base.”

On the bigger picture, Greer says, “The test will be the following: Will Simple be allowed to continue its own brand with its own products, or will it simply become (pun intended) a funnel to push BBVA’s core business?”

He points out that “there are hundreds of innovative [financial technology] companies out there, and great ideas don’t always have to come from internal development.”

Which leads to the conclusion that the BBVA-Simple acquisition likely will become a closely-watched test case, even as the industry inexorably pushes into the digital frontier.

Sources used in this article include:

Online Banking Continues To Increase In Popularity, According To Annual Ally Bank Survey

What Does the BBVA Acquisition Mean for Simple?

BBVA buys US digital bank Simple to increase online offering

ATM and Self-Service Banking Use Rising, Especially Among Smartphone and Tablet Owners

The Bank and the Anti-Bank

BBVA Buys Banking Start-Up Simple for $117 Million

Simple joins BBVA to transform banking industry

Banking Startup Simple Acquired For $117M, Will Continue To Operate Separately

White Paper Analyzing How to Capitalize on the Decline of Bank Branches Released Today by Vitex Strategic Bank Consulting Firm