PerkStreet Financial, a Boston start-up that promised to disrupt the traditional banking model and tried to capitalize on consumer rage over bank card fees, said this week that it will shut down.
The company was hit by headwinds that have challenged traditional banks, too: low-interest rates that hurt profit margins and new laws that limit the fees merchants pay when customers swipe debit cards.
PerkStreet, launched five years ago, could not grow quickly enough attract new investors to keep the company operating, said Dan O’Malley, its chief executive.
PerkStreet shuts down Sept. 26, but much of its 25-person staff will be laid off before then, he said.
“The industry is just tough,” O’Malley said.
‘If the government told you could only charge so much for a hamburger, what would you do? You’d raise the price of the soda and the fries.’ —Greg McBride, at Bankrate.com, on the effect of new US regulations on banks
O’Malley declined to say how many customers had joined PerkStreet, but said they spent about $500 million a year in transactions. While their deposits, placed in FDIC-insured banks, are safe, PerkStreet does not have the money to pay the generous rewards it offered to entice customers to open checking accounts and use debit cards, O’Malley said.
That has angered some customers, including Gabriel Fancher of Tennessee. Fancher said the company should have warned customers that it was closing its perks program. He had earned over $500 in rewards and was saving to buy a computer.
“I feel cheated, and I’m really disappointed,” Fancher said in an e-mail.
PerkStreet was among a new breed of financial companies that aimed to use the Internet and other technologies to provide products and services at lower costs and disrupt the traditional banking model.
Early on, PerkStreet offered online checking accounts and rewards that paid 2 percent cash back on debit card purchases to checking account customers who maintained balances of $5,000 or more and 1 percent for other customers.
To reduce its costs, the company recently shrank its rewards to 2 percent on online purchases and 1 percent on all other purchases.
The strategy was to profit from the fees that merchants pay banks each time customers use debit cards.
The Dodd-Frank law, adopted by Congress after the recent financial crisis, capped the so-called swipe fees at 21 cents for each transaction, compared to 44 cents previously. The savings for retailers was supposed to lower costs for customers.
The new law cut into bank revenues, and many financial institutions have eliminated rewards programs and tried to raise fees elsewhere, said Greg McBride, a senior analyst with Bankrate.com, a consumer-oriented financial site.
“If you owned a fast-food joint, and if the government told you could only charge so much for a hamburger, what would you do?” McBride asked. “You’d raise the price of the soda and the fries.”
PerkStreet faced other problems. It tried to partner with traditional banks to hold and insure its deposits. But low interest rates, which limit the profits banks earn from lending those deposits, made it difficult to attract partners.
With fewer banks willing to participate, the existing partners — Bancorp Bank in Delaware and New York-based Provident Bank — could charge more, cutting into the company’s revenue.
PerkStreet’s failure is a reminder that disrupting the traditional bank model is difficult, said Jim Van Dyke, president and founder of Javelin Strategy & Research, a California firm that tracks bank innovation and technology.
A good debit rewards program is not enough to entice customers to leave their bank, where they may have multiple accounts and their mortgage and other products, Van Dyke said.
Start-ups that are working with merchants to develop online payment networks and offering consumers more control over their accounts will probably fare better, he said.
“Their value proposition wasn’t compelling enough,” he said of PerkStreet.
Provident Bank, which is shutting down its PerkStreet accounts, has agreed to redeem rewards for its customers. Bancorp will keep the accounts open, if customers want, but won’t redeem rewards.
O’Malley, who has been responding personally to angry Twitter and Facebook posts from customers, said PerkStreet had paid out more than $4 million in rewards before running out of money.
“I wish we had another option,” he said, pointing out that he will soon be working without pay. “It’s disappointing for customers and us.”