On the Hot Seat

Boston start-up offers a different twist on banking

Dan O’Malley, chief executive, PerkStreet Financial Inc. Dan O’Malley, chief executive, PerkStreet Financial Inc. (Pat Greenhouse/ Globe Staff)
By Todd Wallack
Globe Staff / January 16, 2011

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There are hundreds of banks and credit unions in Massachusetts. But PerkStreet Financial Inc. is a bit different. It’s a two-year-old start-up in Boston that offers checking accounts with rewards debit cards. But instead of maintaining customers’ cash internally — and taking on all the expense and complications of running a bank — it inked a deal to park the money in Bancorp Bank in Delaware. Globe reporter Todd Wallack recently sat down with cofounder and chief executive Dan O’Malley, 32, to talk about the business.

How do you classify yourself? Are you a bank? A marketing company that works with a bank?

PerkStreet is a financial institution. We don’t have a banking charter, but we create, sell, and service checking accounts, which puts us in kind of a unique position.

Who regulates you?

The bank we work with is regulated by the [Federal Deposit Insurance Corp.]. It has full FDIC insurance. It’s as safe or safer than any other institution in the country.

But the FDIC wouldn’t inspect your books?

We’re not the institution that gets regulated.

Why wouldn’t customers go directly to the bank instead of using a middleman like PerkStreet?

Banks don’t want to do what PerkStreet does. There is no other bank account in the country that will give you as much cash back just for using it. There is no other Visa or MasterCard in the world — whether we are talking debit cards or credit cards — that will give you unlimited 2 percent cash back.

Fidelity offers an American Express card with 2 percent cash back.

The only other card in the world that will give you 2 percent is American Express — the Fidelity card. The only Visa/MasterCard that does is ours.

Why can’t you get one from a bank?

Branch banks simply can’t afford to deal with you. Branch banks spend $800 every single year per household in this country. That’s a lot of money. What we do at PerkStreet is simply give most of that back to customers.

How many customers do you have?

We’re private and venture backed, so we don’t release our customer stats. But every month there are thousands of customers switching to PerkStreet. Based on industry data, we have more customers than almost half the banks and credit unions in the country.

A lot of credit unions and banks are very small. Is it in the tens of thousands or hundreds of thousands?

I’d get yelled at by my investors if I went public with our figures.

Who owns you?

Our major institutional investor is Highland Capital. We also have some private investors who largely come from the financial services industry.

Are some potential customers concerned PerkStreet might be a scam?

We often do run into customers who ask, “Is this too good to be true?’’ It’s less because they don’t think PerkStreet is credible — we work with some great partners who bring their credibility to PerkStreet. The question is how can you afford to give me 2 percent cash back when my bank gives me none?

How do you make money?

When customers use our cards, we make money off those transactions. As we bring in deposits to the bank that we work with, they pay us a portion back of those deposits. They’re kind of sharing the money that they make off of investing. And we make a small amount of money off of fees [such as for a certified check], but it’s a 10th of what a typical bank does.

How will you be affected by new regulations limiting the transaction fees banks can charge merchants for debit cards?

The new regulations, if they are implemented as the Fed has suggested, are going to cause substantial problems at big banks. We are going to witness the end of free checking, which is probably bad for consumers. For PerkStreet — since we’re not in that list of top 100 banks — our accounts aren’t affected.

Why did you start your company in Boston?

If you want to start a financial services company, there is no better place in the country or the world. We have the entrepreneurial ecosystem here to help you start a company, and we have the deep talent and the deep expertise in financial services as well.