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Thursday
Feb072013

Will the next bank be a bank at all?

Before the holidays I wrote a post in which I briefly mentioned Bluebird, a new service from American Express that was launched last year in the United States. I believe the introduction of Bluebird will eventually be seen as watershed in the history of consumer finance, because it is the first credible alternative to a traditional bank account offered by a nonbank in the United States. This should unleash some salutary competition in a depressingly sclerotic space.

Bluebird was launched by an unlikely revolutionary: American Express, a venerable player in financial services. But it makes most of its money issuing credit cards to companies and high earners, and its management sought to diversify these revenues by offering a product for customers that might never qualify for an American Express credit or charge card, including the currently unbanked or underbanked.

Bluebird accounts are issued under prepaid card regulations, which have been around in the US since 1978. (Although American Express does own a bank—more on that in a minute—Bluebird is not offered by that subsidiary.) But Bluebird offers basically the same functionality that customers currently expect from their transactional bank account: 

  • You can make deposits by taking a photo of a check with your smartphone, by transferring money from another bank account, or, thanks to a distribution deal with Walmart, by cashing in any of their 4,000 stores. Crucially, customers can also arrange to have their paycheck paid into their Bluebird account using direct deposit.
  • You get a debit card to use to make purchases at retail and ATM withdrawals, and you can use Bluebird's online and mobile interfaces to pay bills. American Express is even working to allow Bluebird customers to write checks

So how is Bluebird different from a bank? Principally, the lack of branches. Amex can’t intermediate Bluebird deposits, so their accounts don't pay interest—but this is normal for basic transactional accounts offered by banks, too (I have current accounts with Citibank in both the US and the UK, and neither pays interest). Anyone with a more than a little savings in cash will want to move it out of a basic checking account and into a high-interest savings account offered by a specialist like Capital One 360 (known, before its acquisition, as ING DIRECT) online. As it happens, American Express runs just such a business itself, and surely Amex will eventually make it easy for customers to move money into and out of such interest-bearing accounts from Bluebird, just as it will probably start to mine its Bluebird account data to identify customers who could be cross-sold an American Express credit card.

I don’t know if Bluebird will succeed or fail. (I’ve been unable to sign up for an account because of an obscure problem verifying my identity, so I can’t speak to the user experience personally.) But I do feel confident predicting that services like it are going to give banks a run for their money. Because at the end of the day, customers don’t care if their “banking” needs are met by a bank or a nonbank—rather, they care about how well, and at what cost, those needs are met. Now that American Express has blazed the trail, I reckon there are many other nonbanks that will relish the opportunity to try beating the banks at their own game.

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