Debit Cards Aren’t For Stupid People: Q&A with PerkStreet CEO on Flying Into the Startup Abyss

Dan O’Malley created a Web-based financial services company in 2008. Crazy, to put it in his words, since the financial markets were in meltdown mode. Now his startup, PerkStreet Financial, says it has more customers than half the banks and credit unions in the country each do.

Boston-based PerkStreet has gotten plenty of buzz for its debit card that gives consumers cash rewards without the debt or limits associated with credit cards. PerkStreet account holders just have to make one transaction on the account per month to avoid a $4.50 fee (which goes to services like access to more than 37,000 free ATMs across the country in places like 7-Eleven, CVS, and WalMart).

Customers can get rewards in the form of separate debit gift cards or gift cards to places like Starbucks or Amazon. Accounts with at least a $5,000 balance earn 2 percent cash back, and those below that cutoff earn 1 percent. Points can be redeemed at any time, and PerkStreet covers the cost of activating and shipping the cards. The PerkStreet card is designed to provide the rewards benefits of a credit card while preventing consumers from racking up debt. O’Malley says a debit card—which pulls from the money already in an account—helps consumers stay on track financially by spending only what they actually have.

O’Malley, a former Capital One exec, founded the company with a few other banking veterans to challenge the industry to pivot from its focus on credit cards and rich people to serving customers with more average incomes and spending habits. It seems to be catching on. In the last six months, PerkStreet says it has quadrupled its customer base and its revenue. And earlier this month, the company announced it had raised a $9 million financing round from Globespan Capital Partners and Highland Capital Partners.

But enough from me. Read the edited transcript below from my interview with O’Malley last week to get his take on the typical PerkStreet customer, future technology rollouts from the company, and why a debit card like his (unlimited 2 percent cash back) couldn’t happen at an existing bank.

Xconomy: What pushed you to first want to start PerkStreet?

Dan O’Malley: I was at Capital One for a pretty good long time. I had spent most of my time there focusing on credit cards and co-founding and building a business based on debit cards. My eyes were really opened to the fact that the lives of the average person are very different from the lives of the average banker. I honestly think that’s the reason we ended up in a bit of pickle as a country over the last few years. There’s nowhere that’s more apparent than debit cards.

People like to use debit cards because it lets you stay on top of what you’re spending. When I was at Capital One, it was interesting. I suggested forming a new line of business focused on debit cards. Every time we’d talk with other members of the executive team, they’d say, “Aren’t debit cards for stupid people, who don’t know you should use credit cards?” I have to say, that really pissed me off.

I knew a lot of people who used debit cards. That was really motivating for me. I wanted to create a totally different model, and give hundreds, if not thousands of dollars in cash back.

I pounded my head against the wall for about a year and a half, and thought, I’m not going to stay here and look back in 10 years and see someone start this business instead of me. Most bankers just don’t get it. That’s what led me to jump off the cliff, leave Capital One, and fly into the abyss of starting a company.

X: This was about three years ago, in 2008…?

DO: Sounds really crazy, huh? Right as the world was ending I quit an executive job at one of the strongest banks in the country. I was passionate about building an institution about changing the lives of the average American. It was never going to happen at an existing bank. This idea is too cannibalistic to the profits of an existing bank.

X: How did you sell the idea of a financial services startup to VCs in ’08?

DO: It was both easy and hard. We had a team of really good people coalesced around an idea that had so many growth trends around it. Debit cards, online banking. Everyone was excited about the idea of making a lot of money. The hard part was making the power of our product in the lives of the average American really come through. Most investors and startup executives are in a similar boat to an average banker.

X: What do you mean?

DO: Zero percent of venture capitalists use a debit card. Zero. None. Never. You never come across one. I needed to make that story come alive to a group of people that didn’t really need money. Our product can give the average family 600 bucks a year for doing what they’re already doing. I needed to tell the story of the average American. It was about hearing the difference a product can make in the lives of people. That’s what led us to do a fundraise and get people excited about PerkStreet.

X: So Highland was your founding investor?

DO: Yes, we raised a $6 million first round with them.

X: Tell me more about your team.

DO: The unifying characteristic about all of us—and this is pretty special—is we’re all from financial services. If you want to start a financial services company, you have to have this in your DNA. At the same time, we don’t just come from the industry, we’ve all built businesses before.

X: What does the average PerkStreet customer look like?

DO: The exciting thing about working on checking accounts, is it’s kind of a product that everybody has. What we have seen is that we’re signing up a good cross section of the country. Our average customer is 40 years old. We’re not just serving the 22-year-old, bleeding-edge adopters. We’re not just serving people here in Boston; we’re serving people in Tennessee and Colorado. And that I think has been one of the most exciting things about our business, and what I enjoy. We’re building this business for the everyday person.

Who we’re signing up most aggressively is the person who’s the smartest about saving money. The one that always has the Groupon for the restaurant. Always haggles, never pays full price for anything. And they’re the people that talk.

X: How did you go about getting those customers?

DO: We call it using communities to tell the story of PerkStreet. It used to be that a bank would go into a community, build a branch there, and serve the community. We look at how we serve our business in a very similar way, except we do it online. We work with a group of websites to tell a story in their community.

We do some endorsement work, using other communities to bring PerkStreet to them. We probably have 200 personal finance blogs we’ve partnered with. We appealed to this community of people who like to save money. We find them through social media, which I think is really exciting, because let’s face it, banks just don’t know how to do that. We find them through word of mouth, and we also do a small amount of paid media.

X: So are you a Web startup or a financial services startup?

DO: I think in some ways we’re hard to categorize because to be successful, we have to be both. We have to be a great consumer Web startup, because that’s where our product exists. At the same time, if we can’t bring all our financial services skills to bear, we couldn’t have started the company. We have to be a financial services company. Which makes us unique.

X: How has the PerkStreet customer base grown since the debit card launched in late 2009?

DO: If you look at all the banks and credit unions in the country, we serve more customers than half of them [as individual units]. Which is very exciting to say barely a year after the launch.

We give away more than a million dollars a year to customers; $10 million in cash back is not that far away.

X: What would you say to Capital One now?

DO: I would turn it on its nose. I’d say the smartest customers in the country are using PerkStreet to buy what they’re already going to buy and get money back for it. No Visa or MasterCard in the world gives that much cash back.

And I have nothing against Capital One. Capital One is a phenomenal bank. I have a lot of respect for what they do. It’s about one of my more broad goals: I wanted to push the industry—kicking and screaming—to one that was better, more responsive, and more in tune with the lives of the average person. We’re going to see a mega shift from holding money, what banks have done, to helping people find ways to save money. I think if you’re going to have the single closest financial relationship to a person’s life, it’s an obligation.

X: How have Internet trends enabled PerkStreet to grow?

DO: I don’t think you have to look any further than Groupon, LivingSocial, and BuyWithMe to see that people want to save money. Merchants are working to put deals together to help customers save money. Why haven’t banks done that? I think the group buying trend is huge. I think the private sales trend is huge. I think the ability to take all of what we know about customers, and use that to recommend what we do, is huge. I think where the Internet is going is all about using data. We’re building some technology that brings that in front of our customer base.

X: What new products and technology can we expect to see from PerkStreet in the coming months?

DO: The ability to log on to your PerkStreet account, see all transactions, not only see all your cash back, but have another product standing by it that is constantly, on a daily basis, bringing you ways to save money. That platform, that piece of technology, we’re incredibly excited about.

We’re coming out with other financial services products, ways to earn cash back. A savings account, which will probably be the first thing we launch. The hard thing every month is putting more money into a savings account. What if we gave you cash back for putting more money away for tomorrow? That would be really fun to do.

Mobile is coming soon. Easily over the next two quarters. Mobile is a big deal; in particular, it’s going to allow us to cut out right at the source the last piece of paper in the whole banking system. Checks you want to deposit. You’ll have the ability to take a picture of a check you want to deposit and put that into your account. You don’t have to bother to send it to us.

X: How does the reception of PerkStreet point to bigger trends in the industry?

DO: I think the big trend we’re seeing is twofold. Banking needs to make the transition from holding people’s money to helping them save money on a daily basis. It’s not about an interest rate. That’s the old way of doing it.

Trend No. 2 is banking has to become more transparent. It’s sad that it hasn’t happened so far. The way we engage customers in social media is different than any other institution in the country. Banks shouldn’t be afraid of answering customers’ questions on a Facebook page. They’re going to have to do that.

We’re well positioned to take advantage of both. We want to be the institution that’s viewed as the biggest help to people in their financial lives. It’s taken banking a long time to catch up to the rest of the digital world and make that shift, and it’s finally happening now.

X: PerkStreet isn’t a nonprofit so what’s different between the way it and other banks make money?

DO: At the end of the day, banking has always been a really profitable industry. You make money when you hold people’s money. What we changed is giving a lot of that back to customers. We can do that because we don’t have branches. The industry pays 800 bucks a year to serve each customer. I certainly haven’t gotten that much back in value from my bank. We give a lot of it back. It’s a great model.

X: Do you still have a traditional banking account?

DO: Everything’s at PerkStreet. I’ve banked direct for about a decade. I loved it, I got a better deal. For me, that returned a fair bit of money. Our big insight was: higher interest is great, but what if you don’t have $50K in there? We give it back in cash, because everybody can appreciate that. Everybody has to buy stuff.

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3 responses to “Debit Cards Aren’t For Stupid People: Q&A with PerkStreet CEO on Flying Into the Startup Abyss”

  1. Gerrit Bradley says:

    I wish more mechanics of the business model were discussed. After reading the fine-print for PerkStreet and their rewards it appears that you only get cash-back when you use your debit card as a credit card. When a customer completes a transaction this way the merchant pays a much greater fee (based on percentage of sale), as opposed to the customer who types in their debit card number (flat fee). Congress is trying to reduce the fees charged merchants when customers unwittingly use their debit card as a credit card. Banks are all to happy to give back fees collected from merchants. Yes PerkStreet is the best at giving back the most money, but what really is happening is a transfer of costs from a merchant and their other customers to the rewards program of PerkStreet and other banks. If my understanding is wrong please detail how, and explain why there is so much lobbying by the banks to prevent Congress from reducing fees related to debit cards.