Building A Challenger Bank That Actually Challenges Traditional Banking

There are several reasons why consumers might complain about the services provided by their traditional banks. Perhaps the worst, HM Bradley CEO Zach Bruhnke told Karen Webster in a recent conversation, is when one gets the feeling that their bank isn’t all that interested in them — until it is suddenly.

This isn’t just a hunch, he told Webster, but something he personally experienced in his earliest days as an entrepreneur — and a successful entrepreneur, at that. After selling his first company in his early 20s, he found that his bank liked him a whole lot better with a pile of money in his account. Seemingly overnight, Bruhnke said, he went from “being some schmuck with [an] account number [to] being Mr. Bruhnke.”

So, off he went to find a financial institution (FI) that might like him for richer or poorer. It was then that he hit a wall. Bruhnke found challenger banks were plenty, but they were, for the most part, a prepaid card bundled with a slick mobile app.

“[Challenger banks] aren’t [very] useful as a bank,” he explained. “A bank can offer me a credit card, or give me a mortgage. What I wanted was a better bank, not a prettier app. So, I decided to build one — with an idea that we could align the incentives of the bank with incentives of the customer.”

That bank’s name is HM Bradley, and though it has yet to launch, it has already attracted a fair amount of interest from both potential consumers and active investors. The first check written to get the bank up and running was signed by PayPal founding team member and Affirm CEO Max Levchin.

Aligning The Incentives 

Minus the CEOs at the top-10 largest banks in the U.S., whose main concern is probably figuring how to deal with their trillions of dollars’ worth of assets, nearly the entirety of bank CEOs outside that tier have one primary concern, according to Bruhnke: How do they grow deposits? Meanwhile, he noted, bank customers also have a singular desire: How do they make the most money on the funds they have deposited?

The best way to get those incentives to align, Bruhnke explained, was to drop some of the commonalities that have united all banking products for the last 100 years or so.

The first was the idea that funds in one kind of account (savings) get paid out on different funds in a different type of account (checking), forcing customers to do a lot of awkward shuffling of funds between them to maximize yield versus accessibility. Instead of separate accounts with different rules, HM Bradley allows consumers to subdivide their accounts into separate plans, into which funds flow. Some of those plans can be dedicated to short-term spending, others to longer-term savings, and customers can move funds between them as they want or need.

Consumers can save for the house-down-payment plan, take-a-heliskiing-vacation plan, pay-for-the-daughter’s-wedding plan and many more. Those funds are earmarked — a la the old-fashioned-envelope plan — for those purposes.

The second idea, he noted, was dropping the flat APR that all customers at the same traditional bank get paid for all the funds on deposit in that account. No matter how much one saves, they are going to yield the same low-percentage returns. Not so at HM Bradley.

Pricing everyone identically doesn’t make sense, and favorable pricing should not only apply to those who need it least — those with the most zeros behind an integer in their account. What HM Bradley seeks to do is simply reward people for forming the right habits. Customers who save at least 10 percent of their income are rewarded with a 1-percent return on their savings, those who save 10 percent to 15 percent get an APY of 1.5 percent, 15 percent to 20 percent gets 2.25 percent as an APY and those who save 20 percent or more get an APY all the way up to 3 percent.

Customers who save more of their income get a higher reward and rate of return on all the funds — the more of their income they save, that pays more interest. Bruhnke believes taking that holistic view is more likely to help customers build better financial habits.

“We think this is how you find the right type of customer — or build them,” he said. “What we really want to see is our customers doing what my parents advised me to do: Have six months’ worth of cash in the bank.”

As for who those customers are, HM Bradley is still in its pre-launch customer sign-up period — so, ultimately, the face of its customer base will be a work in progress. Generally speaking, he expects its customers to fall into a few tiers.

The primary and largest tier, at this point, is younger working professionals with W-2 income north of $70,000 per year, who are already saving well or interested in doing it better. However, HM Bradley also has a large class of customers who are, what he calls, “aspirational savers.” They aren’t saving today, and don’t really know how, but are hoping to get on the right path with better guidance.

The Long March To Launch

It’s been a long walk to launch — since getting regulatory approval to start a bank is not easy work. Many players hoping to disrupt banking, he noted, have sought to get there by skirting and dodging regulation, and playing with definitions to stay outside their reach. Bruhnke took the opposite road, and fully embraced the end-to-end process of getting the regulators' blessing, because it didn’t seem smart in the long run to “try to Uber my way into being the bank.”

To really change this traditional system, he said, it seemed clear to him that it had to be an inside job — an inside job still in its early phases. Bruhnke joked with Webster that he often tells his staff that they are still in the “mailing DVDs” phase of this business, referring to Netflix's early days, and how its first effort was just the tip of a massive entertainment-industry-disrupting iceberg.

His hopes for HM Bradley are similar, starting with the obvious breakpoints, and building up from there to be the challenger bank that offers services that both delight consumers and help them to be more responsible financial citizens.

“We are going after anyone who cares about saving, and anyone who wants to learn how to do it better. What I would like to say is that we aren’t going to be the bank for everyone. No one is, but we can be the bank for anyone,” he said.



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