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Comment by dkokelley | Hacker News Reader

I think a good analogy is that they are an application layer over the banks, which typically have a horrible backend. If they can create a great customer-facing front end in all aspects (customer service, funds processing, etc.) then they might do well. The way I understand it is that BankSimple has deals with the other banks (or maybe just accounts) in which they process transactions through. In that case, they can mitigate much of the pain the traditional bank puts customers through.

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I can imagine them improving the front end. But how do they get rid of the "hidden" fees if they're backed by normal banks? Is BankSimple just going to pay all those fees for you? Or are they going to reprint the fine print in size 48pt extra bold?

But how do they get rid of the "hidden" fees if they're backed by normal banks?

It's easy: "We'll get you X thousand customers, you drop the fees". Banks do special arrangements like this all the time.

From the article: "The FDIC-backed firms, in turn, get additional customers without paying for marketing, meaning "there's enough revenue for both of us to be happy," says Pete Chiccino of Bancorp, which is slated to join CBW Bank as a BankSimple partner. Reich also promises his company won't charge the kinds of extraneous fees that netted U.S. banks some $36.5 billion last year."

BankSimple's account never goes negative, so there is no fee. When your BS account (funny abbreviation) 'goes negative', BS can charge whatever they want, or nothing at all. BS only needs to ensure that their master accounts are in good standing, to avoid backend bank fees.

If this was the case then you wouldn't be FDIC insured. BankSimple very clearly states that: "Sure. For day to day banking, we envision no fees. There are some things, like international wire transfers, where we will directly pass our costs on to customers. For example, if our partners charge us $15 for an international transfer, we will charge you $15. We won’t use these fees as a source of revenue and will always be on the look out for lower cost partners."

So in actuality, they will charge you whatever the bank your money is currently in charges them.

Sure, for interactions outside of BankSimple there would be fees. Not so much 'gothca' fees, but services like wire transfers offered at cost. That point doesn't support your first assertion that the money wouldn't be FDIC insured. If the money is in the bank, it should be FDIC insured. It's really just a matter of WHO's insured. Is it you, or BankSimple?

As for drawing a negative balance, I don't think the bank your money is in will charge BankSimple, because I don't think BankSimple would open up thousands of individual accounts for each customer. The easier way to do it would be to have a single 'slush' account where all of the money goes. In that case, BankSimple wouldn't be charged for your overdraft, because their account never actually goes under.

Right but if BankSimple just uses 1 large slush account in each bank, then they can only be insured up to $250,000. And you are not allowed to have multiple accounts at the same bank that are FDIC insured so it is not possible for BankSimple to just open up a new account every time they reach $250,000. So the only way to properly insure your money at each bank would be to open an account under your name at each bank. My guess is that you are right in that BankSimple will probably just have large slush fund account at each bank. And they will be FDIC insured "at launch" as it says on BankSimple's website. But once that account reaches >$250,000 your money is not fully insured. Now BankSimple doesn't seem so transparent after all...

Well, FDIC insurance is limited to $250k. If BankSimple just pooled all of everyone's money into a single--say--Chase Cash Rewards Checking and kept ledgers in their system keeping track of your slice of the pie, only the first $250k of that pooled account would be insured.

So clearly BankSimple has worked this out with the underlying institution to create individual accounts for you. That seems like it has to be true, the only other alternative would be some deal cut with the FDIC which is not probable IMO.

But I think the original guy in this thread is wrong, too, because what BS can do, despite you having an individual account in your name at their backend provider, is ensure on your behalf that said account never goes negative. That is, abstract overdrafts within their Tier by extending you a line of credit -- deposited into your backend account. This is exactly what they're doing if I understand correctly.

Not to mention, if you're BankSimple and you go to Chase and you say "What kind of deal can you give us on APY and fees? I can bring you 900,000 accounts with $4.5Bn in deposits to your bank?"

Banks start fawning over you once you have $20k in an account with them. If you're ever fortunate enough to have $100k you start to get serious banking attention. $4.5 billion dollars is an enormous amount of capitalization -- even for huge banks like BofA and JPMC.

The impression I got was that they pool everyone's money into several accounts in several banks, so you still have "a slice of the pie" but the pie is in several plates. It wouldn't seem too hard to both have FDIC insurance and completely eliminate negative balances (or to continue the pie analogy, have your pie and eat it too).

FDIC insurance is tricky. $250k is the limit for a single account holder, but when you have join holders, it goes up. And if you have a trust, it goes up even more, as a function of the number of people listed in the trust. I'm not sure how BS would structure it, but it's possible to make sure everyone's account is FDIC insured (up to the individual maximum) and avoid overdraft fees.

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