Banking Innovation Challenges

You're really thinking of finance. Pure banking is solved long ago.

Banking isn't the same as everything else.

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.

Why are banks so resistant to this?

I think becoming a bank was a big hassle and being a bank is less profitable than core Microsoft or Google activity. Having said that, PSD2 regulation in EU might change all of this - any institution will be able to do banking operations on behalf of the customer. There are some requirement too, but the bar is significantly lowered.

It sounds more like a banking problem than an innovation problem.

The banks already work just fine there, the little edge some startup may have is not worth the hassel

Banks have most people by the balls. Most SaaS don't and wish they did.

Why would a startup use a risky bank?

I'm surprised the play here is to make your own bank rather than integrate existing banks. I've never worked in finance though, maybe integrating with banks is a PITA.