Simple's woes bode ill for US neobanks

BI Intelligence

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Even as neobanks proliferate across Europe, the US is producing remarkably few of these players, despite a developed fintech scene. This is largely down to a convoluted regulatory regime that few can afford to navigate, meaning, for most startups looking to launch a neobank, the only option is to leverage an incumbent bank's federal license.

However, such collaborations can have painful tradeoffs, as a blog post by US neobank Simple from this week illustrates. Simple was acquired by BBVA Compass, the Spanish bank's US arm, in 2014, but in Q4 2016, Compass took on a $60 million goodwill impairment charge on the purchase, reflecting poor performance at the neobank. Simple's blog post this week sheds some light on why that might be.

Simple's difficulties seem to stem from fundamental incompatibilities between the two parties. CEO Joshua Reich said that, since being acquired, Simple has been preoccupied with integrating its technology into the bank's infrastructure and focused on growth instead of innovation. The process has been painful, with Simple telling some customers in April they would have to open new accounts due to technical difficulties migrating their existing accounts onto the new, combined platform.

That upset customers and likely contributed to the neobank's struggles. In order to try and turn the situation around, Simple plans to return its focus to innovation, and in the process, will cut 10% of its staff, including high-level executives like its chief marketing officer and vice presidents of operations and engineering. A spokesperson said the company is currently working on a "transition plan" to return the company to its roots.

The company's admission will likely prove negative for the neobank landscape as a whole. Simple's statements about the drawbacks of partnering with an incumbent will likely act as a powerful deterrent for any US players that had been considering trying their luck in an already tough regulatory environment. The fintech is one of the few well-known neobanks in the US, so its difficulties with what has been considered the most viable route to becoming a neobank will likely intimidate hopefuls from trying to break into the market. This dearth of innovative players in the US banking landscape is unlikely to change until regulators take action to make getting independent licenses easier for fintech startups. As such, the industry will continue closely watching the Office of the Comptroller of the currency's (OCC) efforts to push its "fintech charter" through.

BI Intelligence, Business Insider's premium research service, has compiled a detailed report on digital-only challenger banks that:

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