A Q&A with Bee

The Obama Administration recently launched a push to boost access to basic banking services for millions of Americans who lack them. As Treasury Secretary Jack Lew noted, an inability to access high-quality, low-cost transactional services drives millions of low and middle-income individuals and families to high-fee options like check-cashing outlets.

One Financial Holdings (OFH), a New York-based startup with roughly ten employees, bills itself as “a venture-backed laboratory for innovation in retail financial services,” with a focus on the financial services needs of American families, particularly those who are currently underserved.

OFH launched Bee in June of 2015. Bee is billed as a replacement for the traditional checking account. Customers receive a Visa prepaid card issued by Community Federal Savings Bank and a mobile app which can be used to deposit funds, manage the account, and make payments. Depositing funds can be done via direct deposit or mobile check photo, and users can also deposit cash into their accounts at a wide variety of retailers including CVS, 7-11, and Walgreens.

Bee charges its users $5.95 each month. The first two ATM withdrawals are free each month (ATM owner and operator fees are also rebated on these first two monthly withdrawals); Bee charges $2 each after that. Instant availability of funds deposited by photographing a check check costs 1% – otherwise checks deposited are made available within five business days at no charge – and international transactions cost 3%. Beyond that, Bee charges no other fees. Bee also retains a portion of the interchange fee that merchants pay Visa each time customers use their cards.

OFH has quietly raised $4.6 million in two rounds of seed funding – one in August 2014 and one in September 2015 – from Blumberg Capital, AXA Strategic Ventures, T5 Capital, Fenway Summer Ventures, FundersGuild, and Blue {Seed} Capital.

Asked about the decision to invest in Bee, Bruce Taragin of Blumberg Capital had this to say:

“Vinay and the founding Bee team are brilliant, high energy entrepreneurs that have built a mobile first and online banking solution that crushes the traditional costs of retail banking branches. Bee’s innovative product and unique customer acquisition strategy enables the company to acquire customers for an order of magnitude less than traditional retail branches and for a fraction of the leading online players.  That, combined with a capital efficient model to address the 70 million Americans that represent a $90 billion market made the decision to partner with the Bee team a no brainer.”

Vinay Patel is a Co-Founder and CEO of OFH. Trained as an attorney, he is also a former management consultant and university lecturer. He was kind enough to answer these questions about Bee.

JS:   Vinay, you’ve been very quiet about Bee.

VP:   We have been quiet over the past year only because we’ve been fully focused on building the product customers need, so we haven’t been speaking a ton to the press.

One thing we have been doing is engaging regulators. For instance, my Co-Founders Alex and Max Gasner submitted a response to the CFPB’s Request for Information regarding the use of Mobile Financial Services by underserved populations, and our comments were heavily cited in the report they recently issued – more than 20 times.

JS:   What are the origins of Bee?

VP:   My two co-founders are brothers – Max and Alex Gasner. I’ve known them for 17 years now. Two years ago, we were all at points of career change. I’d been at McKinsey for about five years and had also been teaching for about five years. Max’s previous company, Prior Knowledge, had been acquired by Salesforce.com, and Alex was at Oliver Wyman doing financial services consulting.

More than anything, we wanted to have a massive impact, and retail banking is such a massive industry. So we said to ourselves, what is a bank going to look like in ten years? It’s not going to look like a bank looks today. We were certain that everyone would have a smart phone, and people would use their smart phones for almost everything. Data is going to be cheaper, and free WiFi is going to be everywhere. And that has implications on how people are going to use different products and services, and on how they are going to use banking services in particular. So banking is going to change a lot. But if no-one comes along and creates that change, then maybe it doesn’t happen. So we said let’s be that change.

Then we said, in this industry, where’s our entry point? There’s so obviously an entry point serving people who live in dense urban areas where data plans are already quite good, where mobile penetration is already quite high, and where, frankly, banks have already shut down lots and lots of branches.

So we said, let’s design a product that will be valuable to people, that we can produce at a meaningfully lower cost, and then let’s pass those savings to the customers we serve. Out of that was born the idea of Bee – which is a replacement for a traditional checking account.

One thing that’s really interesting about checking accounts today is that they are really complicated products and they are difficult to compare. For instance, if you ask people what their minimum balance is, most people don’t know. People may know that they get hit with fees, but often they don’t know exactly why. Some people will say that their minimum balance is $1,500. But what does that really mean? At Bank of America and Chase, they calculate the $1,500 differently.

JS:   Often in a way that is disadvantageous to the customer.

VP:   That’s right. Chase is a little more aggressive. With “minimum daily balance,” Chase will look at your end-of-day balance, and if its below $1,500 a single day of the month you get hit with the fee. BofA is a little more lenient, they use “average daily balance,” so they take the average of your end-of-day balances over month. The point is that complexity makes checking accounts hard to compare. We wanted to create something that was simpler. We asked, what do people value? They value price transparency – and so we chose to have a small number of fees and we’ve tried to keep those fees as low as possible while still being able to sustain a business.

Many big banks are charging customers who don’t meet minimums $12 to $15 per month. We said, let’s make it $5.95. We’ll make that fixed, and there’s not going to be any guessing about when it applies. For ATMs, it can be hard to find one in your network, so we said you’ll get two free ATM withdrawals per month no matter where you go.

JS:   How do you define your target market?

VP:   Today, large banks primarily serve middle- and upper-income consumers. So there is a larger gap in the services provided to lower-income families, but what we are trying to do is build a product and a set of services that will ultimately appeal to everyone.

Our target market is people who live in large, dense cities who want better banking services than they are currently being provided.

Density is important to the way we physically operate today, which is through kiosks, trucks, and stands. Larger cities have very dense foot-traffic areas, which means we can reach a lot of customers without a big footprint, and have the face-to-face conversations which establish trust with our customers.

JS:   Which cities are you in today?

VP:   We are currently in New York, and we are anticipating a launch in the San Francisco / Oakland area soon.

JS:   Why aren’t banks offering high-quality, low-cost banking options to these customers?

VP:   You’d have to ask them, but our research indicates that it’s because branches are extremely expensive to build and to operate. Where people are wealthy, it makes sense to put a branch down. Where people are less affluent, the economics of a branch are not as attractive. And we see banks shutting down branches in low- and middle-income neighborhoods.

JS:   My guess is that banks are going to be perfectly happy to let you have these customers, at least initially. I think banks really don’t want them because they can’t service them profitably. But your infrastructure is going to give you a different breakeven.

How is Bee regulated?

VP:   We partner with with Community Federal Savings Bank. They are a federally chartered institution, which allows Bee to operate anywhere in the 50 states and the customers of Bee all get FDIC insurance. That’s really important to our customers.

And we also follow CFPB guidance very closely. One example is CFPB model disclosures. Our printed fee disclosure is closer to the CFPB model disclosure than any others I have seen.

JS:   Did you consider acquiring a banking license yourself?

VP:   Not at this point in the company’s life. It’s important to us right now to be able to move fast. We want to solve the hardest problems first, and we think those involve building a product that customers want and is valuable to them.

That’s the goal today. There are a lot of paths forward in terms of future regulatory status of the company, but that’s a question for the future.

JS:   Are you limited in what you can do by CFSB’s existing infrastructure and costs?

VP:   CFSB’s infrastructure is a constraint on us, but one thing that’s unique about our bank partner is that they themselves have a customer mindset when it comes to the infrastructure they build. Our customers are also their customers. We chose to work with them because they are forward thinking in supporting our goal to serve our customers. It’s also incumbent on us to identify what infrastructure we will need to serve our customers and convey those things to CFSB.

JS:   How are you making prospects aware of Bee?

VP:   Right now we use physical stands staffed by real people. Today you could have gone to Harlem and seen five our our staff with black stands and big, yellow umbrellas with the Bee logo on them talking to prospective customers. They can open up Bee accounts for you on the spot.

Today in New York we also operate in the Garment District, in downtown Brooklyn on Fulton Mall, sometimes in the South Bronx at Grand Concourse, and also in Bedford–Stuyvesant.

We post a schedule of locations on our website.

JS:   Does this approach scale?

VP:   We believe it does. Using this model alone, we can reach a million customers in five years. But the model also can be supported with direct mobile enrollments, where customers who learn about us can sign up without coming to our stands. That, and other partnership opportunities provide real avenues for accelerated growth.

JS:   What does this imply about your view of the future of branches?

VP:   It is hard to imagine that in 50 years there will be many bank branches. They’re just so expensive. At some point between now and then, people will build something different. We hope to be those people.

JS:   What is mobile technology doing to the delivery and consumption of financial services?

VP:   One thing that’s really interesting about mobile is that we have a closer relationship to our customers than other institutions do.

When I was younger, when my mother went to the bank branch to deposit checks or take out cash, she always went to the tellers and never used the ATM. She recognized many of the tellers since she’d been a customer for so long. They mailed a physical statement to our house, and that was the way they communicated with her.

And then we moved to a world where people primarily use ATMs and bank websites. They go to their desktop. Most bank now view their website as the primary place where they communicate with their customers.

With Bee, we have a first conversation live, face-to-face, and that allows us to tell people about our products and answer questions in a really rich and nuanced way. Then our customers carry us with them in their pockets. So we have a way to communicate with customers that is scalable and lower cost. We are there for them all the time.

We’ll use our website to tell prospects about our products and to communicate with the wider world; but, we are going to focus the customer experience on the mobile phone. We’re going to put our resources into building the best mobile experience. In five years, when all the big banks have legacy websites that only 3% of their users visit, but takes up 50% of their time and effort to manage, we won’t have that kind of baggage.

JS:   How are you handling risk assessment?

VP:   Checking customers have limited risks associated with them, and those risks can be substantially mitigated by the choices you make about the product.

A great example is overdraft. Most banks offer overdraft protection and charge very, very large fees in response to what are sometimes very, very small overdrafts. You can go $7 over on a swipe and be hit with a $34 penalty. Or you have $10 in your account and you have one expense for $7 and one expense for $14 – they process the $14 first and the $7 second so they can hit you with you two overdraft fees. It’s been widely reported on as an aggressive revenue-generating practice.

What we tell our customers is we’ll never charge you an overdraft fee. If you try to spend money you don’t have in your account, we’ll simply decline the transaction. We’ll send you a text or an email (depending on how you’ve set your notifications) telling you what happened and why.

JS:   That’s a better outcome for the customer.

VP:   Exactly. We believe customers prefer that outcome, and we know that puts much less risk on us because then we are not running negative balances. We just don’t put the customer that position.

JS:   You can make a lot of money in financial services by doing the wrong thing. You seem to be trying to do the right thing. Why?

VP:   Doing the right thing is always right. You shouldn’t need any extra reason to do the right thing!

We have these three constituencies. If you do good things for your customers, your customers will trust you, and then you’ll have long-lived customer relationships and that becomes the bedrock for building a long-term profitable business.

We have staff at headquarters and in the field who work really hard, are incredibly talented and passionate, and should be rewarded for the hard work they’re doing. They also want feel good about the work they’re doing and they really are genuine about serving customers in a high integrity way. I think that when people do work that is motivating, they do better work.

And when we do these first two things well, we build a massive business, and that leads to outsized returns to our investors.

If all three constituencies are happy, then I’m taking the weekend off.

JS:   What happens to customers who do incur negative balances?

VP:   There are just fewer ways to get to a negative balance with Bee than with a traditional account, so its not a real issue for us. We will never put you into a negative balance as a result of a fee. If charging a fee creates a negative balance, we waive the fee. For example, if you have only $4 in your Bee account on the day the monthly fee is charged, we won’t charge it.

JS:   Even if $100 comes in the following week?

VP:   If a fee is waived, it’s waived. We won’t “clawback” past fees.

JS:   What is the purpose of the Bee Vault? Is this essentially a savings account?

VP:   It’s a replacement for a savings account. There are important differences. Our Bee Vault is not interest-bearing. We are always really clear that there is no interest on that account.

JS:   There are limits on how much you can have with Bee: $15,000 in their Bee Account and $5,000 in their Bee Vault. What happens to customers who are doing well and who accumulate more than that?

VP:   It’s an evolving strategy. When the customers we are serving today have new needs, we plan to do what we can to meet those needs.

JS:   Talk to me about your next Bee products. I understand you are working on ways to help customers build credit.

VP:   Right now we are focused on the Bee Account as a replacement for a checking account and the Bee Vault as a replacement for a savings account. There are a lot of financial services products out in the world that could be improved. For example, credit establishment is a really interesting product. If you think of people who have thin files – not bad credit but rather no credit – a product that would help you build that history is something that a lot of our customers would find really valuable.

Even if it doesn’t generate a lot of revenue, it’s the kind of thing we think is important to earning trust with our customers – which establishes a baseline for a long-term relationship.

JS:   Can you compare the total cost of ownership of a Bee account versus a traditional checking account?

VP:   Under a pretty wide range of assumptions – by which I mean for a pretty wide range of Americans – Bee is going to be a much better option than what traditional banks or check cashers can offer.

Let’s take a customer who doesn’t have enough to meet a minimum balance requirement – someone who doesn’t have $1,500, which is a lot of people. Bee charges $5.95 per month for 12 months, or about $72. As long as you use an ATM twice a month (in the U.S., median ATM usage is 2.1 times per month), there are no ATM fees.

At a bank, they’re going to pay $12 per month, 12 months out of the year – $144. You can make an assumption about how many times they are going to overdraft – median users of overdraft in the US get hit seven times per year. That’s another $230 or $240. In total, the cost of banking can quickly get to $380 – that’s nuts.

That’s just on the cost side, let alone on convenience.

JS:   You’ve described OFH as an innovation lab. Does this mean you’ll be launching multiple companies in addition to Bee, or will you concentrate exclusively on Bee?

VP:   Bee is our first product (kind of a dual product in that there is the Bee Account and the Bee Vault). One Financial is the company. But we are definitely thinking about other products that may or may not be associated with the Bee brand.

JS:   You took part in the InSITE program in 2014. Do you recommend it to other startups?

VP:   I do. I was a member of InSITE as a graduate student for three years. Our first hire was a former president of InSITE. I certainly recommend it. They are some of the most motivated and passionate students in the New York are and they come with a wide range of backgrounds and skills. Companies from lots of industries are going to find InSITE teams that will serve them well.

JS:   Are you hiring?

VP:   Always. Go to: http://www.onefinancialholdings.com/careers/.

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