DEEP DIVE is a series of in-depth articles on FinTechtris that explores a particular fintech company, discussing its history, products / services, and how it has grown to be an industry leader. 

CHIME BANK’S MISSION:

“we believe everyone deserves financial peace of mind.  We’re building a new kind of bank account that helps members get ahead by making managing money easy.”

Chime Bank is an American digital bank (a.k.a. neobank or challenger bank) built on financial technology (FinTech) and based in San Francisco, CA. Chime’s mobile app provides banking services virtually without a physical location or any bank fees, such as overdrafts or monthly maintenance costs. The company is now valued more than $5 billion (as of December 2019), and has over 6.5 million active accounts. Chime’s emergence as the premier fintech unicorn and leader in the neobank sector has put the financial services industry on notice in the US.

Digital banks seek to improve the rigid structure of traditional banking and threaten established financial institutions by encroaching on market share. As the decade of the 2010s comes to a close, we take a look at how the top neobank in the US got here, what makes its offering so popular, and what the future holds in 2020 and beyond.

HISTORY OF CHIME bank

Chime was founded back in 2013 by Chris Britt (former senior executive at GreenDot and Visa) and Ryan King (former engineering VP at Plaxo). Both founders focused on the premise of a new approach to banking that didn’t rely on bank fees or profit from customer’s financial mistakes — instead it directly helped clients improve their lives financially.

It was only a few years after the Financial Crisis that the financial services industry had been undergoing huge regulatory changes. Chime Bank focused on catering to millennials who had been struggling the most post-Crisis, and couldn’t financially afford out-of-pocket costs for their banking relationship. This target group was also the most likely at the time to switch to mobile-app based banking services without the need for physical branch banking, which was undergoing its own digital transformation.

As financial institutions struggled to change their business model and adapt to quickly changing consumer preferences, Chime Bank grew in popularity for consistently delivering on its core value proposition.

The emerging US challenger bank had first focused on removing overdraft fees from its accounts, which had been forcing customers to pay hundreds or thousands annually to big banks. The next move was removing monthly fees that were mandatory for consumers who didn’t have the option of monthly direct deposit from payroll, or a minimum daily balance.

With the removal of these fees, Chime began to focus on helping clients build better financial habits through its mobile banking interface that quickly and clearly displayed all pending and posted transactions. Innovative features that other FinTech companies had pioneered were also added such as payroll advances, mobile payments, and savings tools that worked automatically. It wasn’t that Chime Bank was the first to launch these services or that banks wouldn’t react to add them later — it was that the virtual bank was constantly updating its platform with the latest products before customers knew they needed the upgrades. Chime had built a reputation for bundling the best in FinTech and not charging anything extra in return.

HOW CHIME BANK WORKS

I know what you’re thinking. If Chime doesn’t charge any fees or a subscription, how does the company make money?

Financial institutions have historically earned their revenue in three ways: bank fees, deposit interest margin (i.e. paying retail customers a smaller share of interest n savings than what they earn as an institution), and loan interest income (from personal, auto, residential, and commercial loans). There is a (more modern) fourth method of monetization that comes from card interchange revenue, which has become Chime‘s main road to growth.

The debit cards that are issued by Chime Bank are being used daily by clients to make purchases both in-person and online. In each purchase, there are merchant processing transaction fees that deduct from the total of the final authorized purchase. The purchaser isn’t paying anything extra, but the merchant that provided a good or service is paying a percentage of the sale to the parties involved — specifically the card network (e.g. Visa, MasterCard, American Express, Discover) and Chime (as the issuing bank).

Depending on the purchase category, interchange rates can pay 0.5% - 2% of daily spend. Even at a conservative amount of $20 spent per cardholder daily (or $600 monthly), issuing banks with 500K clients can generate over $1.5MM monthly. Chime Bank is already over 6MM customers as of the end of 2019!

Despite the tremendous upside to scaling up Chime’s customer base and their monthly spend, interchange is not a dependable revenue driver. Changes in consumer preferences towards competitor offers of additional rewards or better value, can quickly leave the neobank struggling. Without robust deposit share from clients with primary banking relationships or income from loan interest, Chime Bank must critically rely on driving customer loyalty in keeping clients (and their banking activity) as “sticky” as possible.

WHAT CUSTOMERS LOVE ABOUT CHIME bank

Chime Bank has converted its popularity to success in steadily building a loyal base of clients. Here’s a deeper exploration on why it has become a top neobank choice in the US:

• No-hassle, fee-free banking: ‘Bank-for-free’ is not an inherently new concept. Banks of all sizes have offered a free account in the past either through a temporary promotion (for new clients), waiver (e.g. student checking), or as a diluted product that removes critical features, such as check writing or debit card access. Credit unions that offer members free-checking lack the most up-to-date mobile access and services. Current models from big banks only offer “ways to pay” through a monthly ACH direct deposit (from an employer or government agency) or by maintaining a fixed (minimum) monthly balance. Chime has delivered a full checking account solution without any fine print or red tape to follow.

• Brand for best-in-class services: Chime Bank has been able to consistently offer industry-leading services in its checking account. On top of not charging for add-ons, the neobank has built a strong reputation as a brand that delivers the best of FinTech. Clients believe that the company will continue to provide the best products with a focus on helping them improve their financial lives. For customers that need financial guidance or believe banks don’t represent their best interest, Chime Bank has become a strong alternative to switch towards.

• User onboarding: The first experience a prospective client has with Chime Bank is in its customer onboarding journey. Where other companies and financial institutions have struggled in the past, Chime has been able to thrive by allowing customers to join and open an account in minutes with as minimal work as possible, or the need to talk to a salesperson. Competitor offerings, including account opening at physical bank branches, may have a prolonged onboarding process of days or even weeks. Providing a fast, seamless option that is active in minutes has helped build trust instantly.

Despite these value propositions, Chime Bank’s greatest strength in technology can also be its greatest weakness. In October 2019, Chime suffered from an outage that left its 5MM customers without access to funds or the ability to make purchases. Large banks and credit unions have suffered their own outages in the past, but the option for clients to physically go into a branch and talk to a banker was helpful in these emergency situations. With branchless banks that solely rely on technology to do business and interface with clients, the reputational damage and loss of trust is a far greater risk than in traditional banks.

Chime placed the blame of the outage on its payment processor, Galileo Financial, who suffered an incident impacting a limited number of customers. This was the third outage that the neobank had faced since July. Ultimately, customers that lose confidence on the technology stack powering Chime Bank can easily leave and start a banking relationship with a competitor deemed as a highly reliable alternative.

WHAT’S NEXT FOR neobanks

For neobanks as an industry sector, the future is wide open for growth. Globally, individuals have become comfortable transacting and sharing financial information digitally — over 50% either have an online account with a FinTech or would be willing to open one in the next 12 months. Regulatory agencies around the world are creating flexible and supportive frameworks for challenger banks to emerge and compete for customers.

Existing challenger banks have already established a track record from the last 5 years of operations, and are poised to successfully launch the next wave of innovation by delivering cross-functional products and services beyond their initial core offering. Legacy banks and financial institutions have become more likely to partner with fintechs and digital banks to enhance their own existing product suite to maintain and deepen existing client relationships.

For Chime Bank, the focus will continue to be on delivering banking as simple and low-cost as possible, with new complementary services that would directly help customers reach financial wellness. With its recently upgraded valuation and funding, acquisitions and talent are top of mind for Chime in 2020. In order to maintain its status as an industry leader, Chime Bank will look to lead the way with game-changing products that cater to multiple customer segments at different stages of life, from students to retirees. Similar to other established fintechs, look for Chime to add tiered product sets and credit offerings to better monetize on its diverse volume of clients.

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