Chime

  • Digital-only banks, or ‘neobanks,’ like Chime are seeing record signups for their online banking products amid the coronavirus pandemic.
  • In the traditional business model for banks, they take in deposits, then lend that money out and charge interest.
  • They make money on the ‘spread,’ or, the difference between the deposit and loan rates, as well as non-interest income like overdraft fees. 
  • Instead of earning interest rate spreads, neobanks like Chime, Monzo, and N26 rely on interchange fees earned from debit card transactions.
  • Amid the coronavirus pandemic, Chime piloted a way to get consumers’ government stimulus checks early using its overdraft protection product, SpotMe.
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As brick and mortar banks close amid the coronavirus pandemic, neobanks like Chime are seeing record signups for their digital-only banking products.

In February, Chime surpassed the 8 million customer milestone. And as more users sign up for the branchless bank, Chime has been experimenting with a way to for its customers to get part of government stimulus payments, which are part of the CARES Act, early.

Chime began testing the stimulus payments with its SpotMe feature, a product that lets users overdraft their accounts for free, in early April. It found that its users wanted some, not all, of the stimulus checks early, so it doubled its SpotMe limit to $200 for select users.

By the time most banks posted the stimulus checks last week, Chime had already distributed more than $1 billion in stimulus payments to over 600,000 users

And last Monday, Chime saw the highest number of account openings since it was founded in 2013, Business Insider has reported.

But still, Chime and its fellow neobanks like Monzo, N26, and Varo, have not launched full blown lending products.

Traditionally, banks make money on interest rate spreads, or, the difference between the rates they pay costumes for their deposits and rates they charge borrowers.

But neobanks currently only play on the deposit side of the balance sheet, offering checking and savings accounts.

And these neobanks are attracting waves of VC cash. In 2019, neobanks raised more than $3.7 billion in VC cash, a new record following 2018’s $2.3 billion, according to CB Insights.

In December last year, Chime’s valuation quadrupled to $5.8 billion following its massive $500 million Series F. The round was the largest single equity investment in the neobanking space, a record previously held by Brazil’s Nu Bank, according to CB Insights. 

Chime’s investors include Dragoneer Investment Group (Compass, Klarna, Nubank), DST Global (Nubank, Robinhood, Root Insurance), and Menlo Ventures (Betterment, Carta, Roku).

And Chime isn’t profitable, but its CEO Chris Britt told Forbes in November last year that it could be if it reduced its marketing spend.

Fees for card swipes and membership

Since many digital-only banks are not lending in the US (some of them, like Monzo and N26, offer credit products in the UK and Europe), they need other sources of revenue.

For example, every time a customer uses their debit card, the banks earn transaction processing fees —  sometimes called interchange fees — from merchants.

Beyond interchange, digital-only banks are also experimenting with membership models. Germany’s N26, for one, offers tiered freemium membership to its European customers, and now it’s thinking about rolling that model out in the US.

N26 offers a free standard membership and tiered levels for a monthly subscription fee. 

Each tier comes with its own perks, like dedicated customer service, discounts at merchant partners, and insurance on car rentals and cell phones.

The UK’s Monzo, which had rolled out, then shut down its premium membership offering in September last year, just announced its plans relaunch the product in the first quarter this year.

Both Monzo and N26 are also neobank unicorns. Monzo was last valued at $2 billion, following its $113 million Series F last June. N26 was last valued at $3.5 billion valuation after its $470 million Series D last July.

Chasing customer stickiness

To grow both membership and interchange fee revenue, neobanks are prioritizing customer acquisition, then customer stickiness.

And in banking, stickiness is often pegged to establishing what’s called a primary banking relationship. 

To be sure, the nature of a primary banking relationship has evolved. Over the past several years, fintechs have been riding a wave of unbundling — meaning they offer consumers pieces of the suite of products typically offered by a bank, like a high-yield savings account or passively managed investment accounts.

But for digital-only banks, there’s a key piece of a consumer’s banking habits that could increase stickiness: payroll direct deposit. The neobanks have deployed products like access to wages two days early and no-fee overdrafts, specifically for customers who use the accounts for direct deposits.

And their customer bases are growing. N26 just announced it has 5 million customers globally (including 250,000 in the US), and Monzo says it has 3.8 million customers.

That said, the number of open accounts is not necessarily the same as the number of active deposit customers, so pinning down exact customer numbers is tricky. In some cases, one customer who opens both a checking and savings account could be counted with two open FDIC-insured accounts.

Since the neobanks are private companies, they are not subject to the same disclosures as public retail banks. Ten-year-old Ally, one of the US’s largest digital-only banks which went public in 2014, reported 1.97 million retail deposit customers in fourth-quarter earnings last year.

Chime SpotMe

Chime makes the majority of revenue via interchange

Chime earns the vast majority of its revenue from interchange paid to Chime by Visa, a Chime spokesperson told Business Insider in emailed comments in December last year. 

Every time one of Chime’s customers makes a purchase with their debit card, the bank earns a fee. 

Chime also earns a “modest percent of revenue” from referring customers to other fintechs like SoftBank-backed renters insurance startup Lemonade and fellow DST Global portfolio company Root Insurance, the spokesperson said.

In February, Chime announced it would offer a high-yield savings account with rates starting at 1.6%, well above the national average savings rate of 0.07%, according to the FDIC. Other digital-only banks unburdened by the cost of brick-and-mortar footprints, like Goldman Sachs’ Marcus and Ally Financial, also both offer high-yield savings.

While Chime doesn’t currently offer direct lending products, it’s been vocal about its ambitions to enter the credit side of the balance sheet. But the timelines are unclear.

In March of 2018, Chime’s CEO Chris Britt told Bankrate that it would launch lending products within the year.

“Our initial efforts in the area have been focused on the short term lending segment, and more specifically, the overdraft fee epidemic facing our country,” the Chime spokesperson said.

Chime launched SpotMe in September last year. Customers who direct deposit at least $500 per month are typically able to overdraft their accounts up to $100. 

There is no interest applied to the overdrafts, which are repaid to Chime from the next payroll direct deposit. Users are offered the option to leave a tip to “pay it forward.”

“While we’ve publicly announced our intention to launch other credit and lending products, we’ll focus next on helping our members improve their credit scores and will announce a new service in this area in the first half of 2020,” the Chime spokesperson said.

Neobanks are challenging legacy players’ fee structures

In addition to free overdrafts and getting your paycheck a couple days early, there are other features of these digital-only neobanks attracting customers. 

Across the board, they have leaned into fee transparency, and largely moved toward eliminating things like minimum balance and account maintenance fees. 

Incumbent retail players like JPMorgan and Bank of America both charge $35 for every overdraft, and $12 in monthly maintenance fees. 

According to Chime’s website, the only fee it charges is $2.50 for out-of-network ATM withdrawals. N26 doesn’t charge overdraft, maintenance, nor foreign transaction fees.

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