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May 18, 2016
by Josh Reich

Innovation Shouldn’t Happen at the Expense of the Customer

From Portland, Oregon to the Capitol Building, momentum is building to make banking better, and we’re proud to be part of the conversation. But to understand the potential impact of banking innovation done right, you have to first reflect on what happens when it’s done wrong.
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Last month, U.S. Senator Ron Wyden dropped by our homebase to meet our team and hear first-hand how we’re pairing technology with Simple’s customer-centric mission to help our customers feel confident with their money. In the broader sense, this translates to driving financial innovation that’s actually good for the world.

From Portland, Oregon to the Capitol Building, momentum is building to make banking better, and we’re proud to be part of the conversation. But to understand the potential impact of banking innovation done right, you have to first reflect on what happens when it’s done wrong.

I recently listened to a fascinating conversation on the Slate Money podcast. Felix Salmon and his co-hosts were discussing the following chart that illustrates global income growth across each percentile. What this chart shows us is that, for the most part, the world saw significant real income growth from 1998 to 2008, though it was far from evenly distributed.

Branko Milanovic Source: Branko Milanovic

The poorest global citizens have seen their income grow by ~40-70%. Meanwhile, the highest earners, the top 1%, have seen their incomes grow by 60%. But, for those in the 80-90th percentile globally—aka the U.S. working class—incomes have only grown by just 10%.

There is a strong consensus among economists that trade is good for the world. But it isn’t good for everyone equally. One way to interpret this chart is that trade has lifted the majority of the world out of poverty. Over the same time period, the percent of the world living on under $1.90 per day has dropped from 37% to 19%.

But this isn’t a simple transfer of wealth from the rich to the poor. In fact, the richest are getting even richer. Not only are the rich more likely to be owners of the companies who are exporting jobs (and wealth) to foreign countries, the American tax code benefits those who make money from money rather than from work.

Our current version of capitalism is very good for capitalists. It’s not great for the working class.

One way to look at the housing bubble that devastated our economy in 2008 is that it was the first phase of innovation in financial technology. New financial instruments were engineered and sold to enrich the very few who were in the know. These first ‘innovative’ products led to even more convoluted innovations that further bet the livelihoods of regular folk to enrich financial engineers. No wonder regulators frown on innovation.

Prior to Simple, my co-founder Shamir and I both spent time working in and around the mortgage industry as the foundations of the crisis were being laid. Then I worked at an investment fund when the market fell apart. We both watched as these newly engineered products like ‘collateralized debt obligations’ led to a further separation from the role that banks are supposed to play and the profits generated for bankers and some of their wealthy customers. While these forms of financial “innovation” were majorly flawed, I don’t believe that innovation is intrinsically bad. Financial engineering isn’t intrinsically bad.

Mobile phone penetration has been positively linked to a reduction in price volatility for farmers. When they’re able to access deeper, broader market prices on a real-time basis, they’re able to trade more efficiently. Likewise, at Simple we believe Safe-to-Spend offers our customers a better way to make real-time decisions about how to spend their money. And Goals is a mechanism to smooth the ups and downs in people’s financial lives. Together these features result in our customers having more predictable, less volatile spending patterns, helping them feel confident with their money.

What separates Simple’s innovation from those which have fueled crises is our North Star, a deep commitment to aligning our business incentives with those of our customers. Rather than generating revenue from punitive fees, Simple earns money from interest and interchange, or rather, when our customers use their accounts.

If we can do good for our customers and do well as a business then we prove that innovation in banking doesn’t have to happen at the expense of others. It isn’t a crazy idea. Most businesses spend time trying to make their customers happy. But sometimes they’re simply forced to strike a balance between customer experience and profits. For example, 61% of bank revenue from consumer checking in the United States is generated by Overdraft and Insufficient Funds fees. Simple’s business model is fundamentally different—we don’t charge fees. Banking for real people is what drives us—we’re working to reshape all the tools and advantages that have empowered the growth of the financial services industry for the benefit of everyday people rather than to solely enrich the 1%.

Wyden Web

During his visit, Senator Wyden addressed our team’s questions about what Simple can do to improve income inequality. He responded that while the problem is far too big for Simple to solve, we’re already part of the solution. If we can prove that financial services can be a force for good we will not only be the change that we want to see in this world, we just might inspire it in others. My deepest thanks to each of you who have joined us in our efforts to make banking, and maybe even the world, better.

Josh

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