Med school dropout Josh Reich makes $130m look simple; Reich just sold his US online banking start-up, Simple, to Spanish global bank BBVA for $US117 million

Med school dropout Josh Reich makes $130m look simple

Published 03 March 2014 10:51, Updated 04 March 2014 10:02

John Kehoe

Simple Bank co-founder and CEO Josh Reich in New York. Photo: Trevor Collens

Australians love to bash their banks. Josh Reich is a 35-year-old Australian who has turned bank bashing into a rich-list fortune.

The med school dropout has just sold his US online banking start-up, Simple, to Spanish global bank BBVA for $US117 million ($130.5 million).

Set up five years ago in the basement of Reich’s New York City apartment, Simple gives its 100,000 American customers all the typical services offered by Australian online banks such as ING Direct or National Australia Bank’s Ubank. But thanks to Reich’s data-crunching skills, with Simple they get much more. “Technology is a great way to help customers understand their finances,” Reich tells AFR Weekend from New York.

“The large banks make more money by keeping customers confused.”

A Simple customer can type “dinners in New York” into the app on their smartphone to see how much they have spent on these outings over the last month, or find the name of that great restaurant they ate at last year but now can’t remember the name of. Employees trying to keep track of business trips can type “travel to Boston” to get the details they need to get reimbursed. Those worried about fraud can plot their purchases on a map .

Reich, who will share his new-found wealth with his co-founder friend and some venture capital firms, and which will easily propel him onto BRW’s Young Rich List, has until now flown below the radar in Australia. But executives at Australia’s big four lenders have been aware of this name. And probably hope he stays on the other side of the Pacific.

Career change

Reich did not plan to set up a branchless, online banking service.

He was on track to take the same career path into medicine as his father and two sisters.

After making it to the fifth – and final – year of medical school at Melbourne University, Reich, in his own words “dropped out”.

“I was working at the hospital delivering babies and in between I’d go to the nurses’ station computer and be writing codes,” Reich says.

“At that point I thought if I’m ignoring my medical duties to write codes, maybe I’m in the wrong profession.” He admits he was always a little “nerdy” and “computery” as a kid. At the age of 10, he and two mates set up a computer software company. “It was like Yes Minister,” he recalls. “We ended up spending more time writing minutes for our meetings than writing software.”

More than a decade later, the ­self-taught software engineer found himself working for a Melbourne technology start-up while completing a maths degree.

A relocation to the United States in 2004 to study his MBA in mathematical finance would change his life forever. It would also shake up the US banking industry.

“I had to pay my first gas bill in America by cheque. I’d never had to pull out a cheque before in my life,” Reich says.

“It was a dawning realisation that I was stuck in an adversarial relationship with my bank.”

Business opportunity

Unlike Australia, there was no BPAY in the US to pay bills online directly from a bank account. Reich saw a big business opportunity to set up an online bank with tools to make banking easier.

He approached his business school friend from Carnegie Mellon University, Shamir Karkal, who was then working at McKinsey. Within weeks, in 2009, they became the co-founders of Simple, with Reich as chief executive and Karkal chief financial officer.

Reich, educated at Melbourne’s Mount Scopus School and Melbourne Grammar, drew self belief that he could be successful in business from his mother, an entrepreneur who started a successful educational video company. From day one, Simple prided itself on not being a bank.“If you walk around our office, it looks more like a start-up than a bank. Banks tend to be slow and behemoth,” he says, with Swiss balls rolling around the office floor.

“They work on innovative projects but not the innovation that customers actually want.”

The genius behind his business lies with deep data. Banks collect as many as 80 pieces of data every time a customer makes a purchase, but generally they only tell customers about three things: where their purchase was made, how much and when.

Simple’s app draws on the full suite of 80 data fields every time a customer uses their white debit-like card. That allows customers to track spending across different sectors of the economy and geographic jurisdictions through easy-to-understand diagrams.

“It’s designed to help customers spend smarter and save more,” Reich says. Even better, Simple doesn’t charge its customers fees and instead makes money through store merchants ­paying fees for transactions on Simple customer cards.

The firm also invests surplus ­customer deposits in low-risk, ­interest-bearing products such as US Treasury bonds, via its federally-insured bank partners which hold its customers’ money.

Next step

Francisco González, chief of BBVA, a multinational Spanish banking group operating in 40 countries, which this week dished out $US117 million to buy Reich’s business, says: “Simple’s customer experience is unmatched in the digital banking world.”

Reich says González, who began his career as computer programmer at IBM, “sees banking through the eyes of a technologist, which is very rare”.

Last year, Simple, which moved its head office to Portland, Oregon, in 2011, processed more than ­$US1.6  billion ($1.8 billion) in transactions. It does not disclose revenues or whether it is profitable. The $US117 million purchase by BBVA will be paid in cash.

Reich declined to disclose the proportion of the company that he owns. The deal allows Simple to start thinking about expanding overseas. Reich will remain head of the company.

So could Simple take on the big four banks in Australia?

An expansion into BBVA’s existing Latin markets is probably the most likely course, at least initially.

Reich says banks in Australia are not as bad at meeting the need of customers as US banks, but “they’re not great either”. “There are definitely opportunities to get into the market and disrupt the status quo,” Reich says.

“I think a lot of the banking problems in America, you see in Australia.

“The banking landscape is dominated by four players who don’t really compete for the benefit of consumers.”

Support for start-ups

Reich is the latest example of ­Australians moving to the US to ­successfully develop tech start-ups. “I think the entrepreneurial ­culture in America is definitely bigger, although I think that’s changing,” Reich says.

He is hopeful more investors will direct funds to venture capital in Australia to back entrepreneurs at home.

Several Australian start-ups have chosen to move to the US, where employee share schemes are a major form of remuneration in the tech sector. A common barrier cited by local technology entrepreneurs is the up-front taxation of employee share options, which are used to attract talent instead of paying high salaries in their early years.

The Abbott government has rebooted a stalled inquiry into the issue and Reich is supportive of a more accommodative tax regime to encourage home-grown start-ups. “Equity compensation is integral to the start-up culture in America,” Reich says. As for how he will celebrate his big pay day, he has no plans to take an expensive holiday.

Buying a car is not on the agenda, as he doesn’t have a drivers licence. “I’m looking forward to getting back to Melbourne in the next few months to see my nephews and nieces, and hang out with the family,” he says.