Is Challenger Bank Chime the Future of Retail Banking?

Are your retail customers in Chime's sights? If they're under 40 and middle income they almost certainly are. With over 9 million accounts and a valuation of $14.5 billion, this 'alternative bank' is more than living up to the 'challenger bank' designation. What banks and credit unions need to know about, and can learn from, this technology company that is upending traditional banking.

So popular have Chime’s early paycheck, early stimulus payments and no-overdraft fee features been during 2020 that its accounts have grown at a prodigious rate. Chime, which already had about 6.5 million accounts as of January 2020, saw a surge during the pandemic and was closing in on ten million accounts by yearend, according to an article on The Information website. In November 2020 alone it opened 400,000 new accounts.

In addition, the company — which prefers to call itself a technology firm offering banking services rather than a challenger bank — had more than tripled its transaction volume and revenue in 2020 through November, CNBC noted.

That kind of growth has not gone unnoticed. In early 2021, prepaid card pioneer Green Dot took direct aim at Chime with the launch of Go2bank, its own challenger bank brand with a very similar mix of products aimed at middle income Americans.

“Conventional thinking was that you couldn’t make a free checking account business work, but we’ve turned that notion upside down.”
— Chris Britt, Chime

Chime is by most accounts the most successful challenger bank in the U.S., which has proved a tough nut to crack so far for European-based challengers such as Revolut. Chime’s biggest digital banking competitors include Dave, Ally Bank, Marcus and Varo Bank. The last three all have banking charters, whereas Chime continues to rely on two partner banks, The Bancorp Bank and Stride Bank, to enable it to offer FDIC-insured checking and savings accounts and a traditional Visa debit card.

While not ruling out eventually applying for a charter, Chris Britt, Chime CEO and co-founder, says that he is in no hurry to pursue that route, preferring to invest the effort in further customer experience and product enhancements. (In February 2020, The Bancorp Bank said it had extended its private label banking services agreement with Chime.)

Key Components of the Chime Strategy

There’s a tendency to think of challenger banks and even direct banks as all about slick mobile apps, free or low-fee products, and (at times) higher rates. Chime meets the first two criteria, but even when it was economically feasible to offer high rates, the company never played that card. Launched in mid 2014 by Britt and co-founder Ryan King, Chime did for a time use high-rewards as a marketing hook, but realized quickly that wasn’t the best approach.

As you dig deeper into the Chime strategy, one notable thing emerges: Essentially the disruptor in one regard is following a classic banking strategy — but with a few key differences.

Chime’s strategy in a nutshell:

  • Build a modern tech stack.
  • Provide great mobile user experience.
  • Become consumers’ choice for their primary checking account.
  • Offer no-fee services enabled by low-cost technology and no branches.
  • Generate revenue from interchange.

Many challenger banks have a similar strategy, so why has Chime been so successful?

During various media briefings, Chris Britt has provided some illuminating details.

Britt, who gained banking and payments expertise working for Visa and Green Dot, felt that traditional banking wasn’t serving the consumer well, particularly the people in the huge middle income market.

“Any reasonable person that looks at consumer financial services can tell that there’s got to be a better, more consumer friendly way,” Britt recounted during a Bank On It podcast. “It’s a huge opportunity to disrupt a very big category.” Chime does this with a mobile-first banking experience including free checking, savings, and a traditional Visa debit card.

“Basic banking services in America should be free,” Britt told a Wharton Fintech interviewer. “You shouldn’t have to pay an institution to hold your money. They should pay you and provide services that are helpful and aligned with your best interest.”

Chime’s customers typically are late 20s early 30s, according to Britt. “We tend to attract customers predisposed to pay with a debit card,” the CEO said. “We’re not out there trying to get someone with a platinum Amex card to switch over to Chime. Our typical customers are what I’d call middle income consumers. We’re certainly not targeting the unbanked — also not the 1% — but everyone in between. A huge portion of America.”

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Using the Banking Playbook, But Doing it Better

Banks and credit unions have fallen in and out of love with free checking, but overdraft revenue was never part of the deal (or rarely). Chime forgoes that major revenue stream with its “Spot Me” feature that allows customers to overdraw their accounts, subject to some limitations and requirements.

“Conventional thinking was that you couldn’t make a free checking account business work,” says Britt, “but we’ve turned that notion upside down. We enjoy very healthy unit economics with a free checking account.” Those “unit economics” are driven by interchange revenue from debit card transactions. Chime customers average 50 card transactions a month, according to Britt.

“We very deliberately began our relationship with the consumer pretty far upstream — with direct deposits.”

That kind of frequent transaction engagement was part of the Chime strategy out of the gate. As Britt told Wharton: “We very deliberately began our relationship with the consumer pretty far upstream” — with direct deposits. “By owning the relationship that far upstream we believe we’re in the best position to help people with long-term financial success.”

“For most people, the moment of truth is when their paycheck hits. Are you going to do something frivolous.? Or are you going to put something in a savings account, start an investing habit, pay your bills on time? Those are decisions a lot of people aren’t really so good at,” he told Bank On It.

In reality, Britt says, Chime uses the playbook that banks have used forever — building a long-term relationship based on the checking account and daily transactions — but without any branches in Chime’s case. The checking relationship becomes a springboard for additional products — credit cards, other lending, and investments, in that order, Britt states.

Chime hasn’t been faultless in this strategy. In October 2019 it attracted national attention for a shutdown of its app and website lasting a day and a half during which customers could not access their accounts, withdraw cash from ATMs, or use their Chime debit cards. Yet the company bounced back from that near disaster.

Britt recognizes the significance of ironclad transaction performance. “This is a category where you can’t just be renegade,” he told The Information in reference to financial services. “We have a core value on our walls that says ‘Respect the rules,’ which is like the least Silicon Valley thing you could ever have.”

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The COVID Bump and its Bottom-Line Impact

One of the raps on fintech challenger banks is that they may grow rapidly, but they often only hold secondary accounts. Chime is an exception, thanks to its focus on checking accounts and direct deposits.

According to research conducted by Cornerstone Advisors in 2020, Chime had the highest number of consumers — 4.3 million — identifying it as their primary bank among all U.S. digital banks. Dave and Ally Bank came in second and third. That would make Chime a top ten bank based on primary bank customers, observes Ron Shevlin, Cornerstone’s Managing Director of Fintech Research. To put that into better perspective, more than 20 million consumers each consider Chase and Wells Fargo their primary institution, according to the research, and 52 million people saying that of Bank of America, which tops the list.

Nevertheless, Chime’s position is impressive. “We orient the consumer experience around driving people to sign up for direct deposit,” Britt states, “not just because it benefits our business but because that’s how they’re going to get the most benefit out of the account.”

Chime’s early-pay feature is a good example. By being a customer’s primary banking account, Chime sees ACH notifications for a direct deposit and releases those funds immediately — often up to two days early — which shows up on customers’ phones. Others now offer this function, but Chime was one of the first and its a highly popular feature based on surveys the company conducts.

That feature, along with the Spot Me no-fee overdraft function, and its new credit builder credit card launched in June 2020 all helped drive Chime’s spectacular gains in 2020. The company also picked up many new accounts by offering early access to government stimulus and tax refund checks in the spring of 2020 which it repeated at the end of the year with the second round of stimulus checks.

Already growing fast before the pandemic hit, Chime saw average transaction volume rise 50% year-over-year in 2020, The Information reports, with the typical customer spending over $1,000 a month with the Chime debit card. Britt told CNBC that the fintech had turned profitable during the pandemic.

The Information cites a Chime investor saying that the company generated more than $600 million in revenue in 2020, triple the previous year, “helping make the company profitable before interest, taxes, depreciation and amortization in the third quarter.”

Next Steps for Chime in the Year Ahead

With the average Chime member in the app between 22 and 25 days out of the month, according to Britt, the company is in a good position to add additional products. However, Chime is very measured about rolling out new products. They want to do it in a very “Chime-like” way: low-cost, friendly, helpful and easy to sign up for.

Britt says they build products around three core elements of financial health: 1. How consumers spend their money; 2. How they save; 3. How people manage their credit, and 4. How they invest — in that order. “People shouldn’t be using a robo advisor to invest if they’re not paying their bills on time or not able to pay off their credit card balance,” the CEO said during the Bank On It podcast.

When they do launch their next product it’s likely to be an in-house project. Chime does have product partnerships in ancillary areas like insurance, Britt told Wharton, but with lending and investment products, “I think we’re going to be in the best position to offer those products on our own integrated into a broader solution. I think the notion of having ten or 20 different point solutions, for different parts of your financial life, isn’t what people are really looking for.”

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