Modern Banking to the Masses☕
Chime is the leading US-based neobank on a mission to democratize financial services...
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Today almost 4 billion people have smartphones with internet access. Just like Amazon rendered much of retail obsolete, the same thing is happening to banks. Bank branches (like this last Blockbuster) are anachronisms. Eventually every consumer will run their financial lives through a mobile app.
The financial industry is entering a new frontier and investors cannot get enough. Fintech is hot.
The convergences of mobile, digital money, and new data sources offer startups a unique opportunity to surpass outdated infrastructure and compete with the legacy financial institutions to reimagine the way we manage our finances.
Coinbase and Robinhood have already made their public market debuts this year and have commanded huge price tags but there are still several unicorns left in the space.
*Enter Chime*, the largest American-based neobank recently raised a Series G (their 5th fundraising in 3.5 years), valuing the company at $25 billion dollars and positioning them to continue challenging the personal banking industry.
Lets get into it:
The last two decades have been defined by software transforming and upending every facet of business; from movies to transportation, businesses are being run on software and delivered as online services.
The one industry that has managed to allude this digital revolution is banking. The bureaucracy of incumbent banks has resulted in them dragging their feet and resisting innovation while the world is digitized around them.
A survey conducted by the World Economic Forum found that just 28% of the millennial and Gen Z generations trust their banks to be fair and honest. That is a far cry from providing great customer experience. Everyone is well aware of the 1990’s caliber services that exist when dealing with banks, but the regulatory hurdles and complex infrastructure required to challenge this system are enormous. In most industries, if you do not comply with regulation, you will get fined; in financial services, you will go to jail.
The good news is complexities spur innovation and fragmentation. While historically the complexities of starting a bank included a laundry list of items ranging from bank charters to fraud protection and everything in between, now each of these items are offered as services by other companies. This idea of infrastructure as a service is the undercurrent enabling neobanks to challenge incumbent financial institutions. All of these integrations offered as services dramatically reduce the friction of starting a business and allow companies to focus on bringing new products to market faster. The traditional banking stack has been fractionalized and specialized by startups such that each layer is offered as a service. Innovation breeds innovation.
The fractionalization of the bank stack serves as the underpinning of Chime’s and other neobanks’ business models. Neobanks are fintech companies that are 100% digital and offer financial services to their customers by way of a mobile app. Notwithstanding having no physical presence and being only 8 years old, as of their Series G, Chime would be the 13th largest listed bank; something is clearly working.
Chris Britt, Chime’s co-founder and former Visa executive said, “Nobody wants to go into bank branches, nobody wants to touch cash anymore, and people are increasingly comfortable living their lives through their phones. We have a website, but nobody really uses it – we are a mobile app.” In the US there are roughly 30 million digital-only bank account holders, about 11% of the population, that number is expected to grow to 25% by 2025. This is a trend that has been taking shape for many years but was radically pulled forward during COVID lockdowns and neobanks were the primary beneficiaries.
The 25% of Americans who are either unbanked or underbanked cite account minimums, fees, and inconveniences as the primary reason they do not have a bank account. Lack of accessibility to basic banking services occurs disproportionately in low-income areas, perhaps a segment of the population that has the greatest need for bank services. Access to safe, affordable, and transparent financial services is a basic, but vital requirement to a sufficient living standard. As this reshuffling continues, sometime in the future, everyone, no matter their socioeconomic status or geographic location, will have access to affordable financial services.
With no account minimums or overdraft fees, Chime is aiming to solve this problem. Starting from nothing and being free from the weight of maintaining physical bank branches, neobanks can be more flexible and inclusive than incumbents, allowing them to serve vulnerable or underserved customer segments.
To date, Chime has focused their efforts on two types of customers: the ones legacy institutions have left behind, and the millennial and Gen Z generations that conduct their lives digitally. But, with their latest capital injection, I believe Chime will roll out a suite of products to further attract prime customers, those with a banking history and good credit but who are tired of the archaic user experiences of legacy institutions.
Opening an account takes 10 minutes and can be done entirely from a smartphone. When you create an account on Chime’s app you get a physical Visa card along with your bank account. Chime’s mission is to “profit with (their) members, not from them”. Whereas the business model of a traditional bank relies on overdraft fees, monthly service, minimum balances, and other hidden fees, Chime makes their money from Visa every time a customer uses their card.
Currently, Chime offers three types of accounts: Spending Accounts, Saving Accounts, and Credit Builder Accounts.
Some of the basic features of a Chime Spending (checking) Account include:
No monthly account fees
No minimum balance requirements
Every time your debit card is swiped, Chime rounds up to the nearest dollar and transfers the round-up from your Spending Account to your Savings Account as a way of automatic savings
Mobile app on iOS and Android that support mobile payment such as Apple Pay and Google Pay
Mobile check deposit
Free ATMs in its networks
Free mobile check deposit of paper checks if you have a payroll direct deposit of more than $200 per month
Free debit card replacement
Direct deposits arrive two days early
Additionally, their Savings Accounts pay a variable 0.5% interest annually (the average national savings account IR is 0.05%. And setting up direct deposits are easy.
Worldwide, debit card usage accounts for 50% of all noncash transactions and is particularly popular with younger generations who believe debit cards are more secure and less likely to get them into debt. However, relying on debit alone means consumers are not building up their credit history – a decision that will come to matter when its time to finance a larger purchase like a car or a house.
Almost 90 million Americans have no or very little credit history – making it very difficult to get a loan from a bank.
Last summer Chime made their first move towards becoming an all-inclusive financial management tool with the delivery of their Credit Builder product to help customers improve their credit score in a controlled way through everyday transactions.
Users control how much they want to spend by transferring funds from their checking account to their Credit Builder Secured Account and then they can charge up to that amount on their credit card. At the end of the month, Chime automatically pays off the credit from the secured account balance and reports the on-time, paid transactions to the major credit bureaus. This makes the card feel like a debit card since it is tied to how much money is set in the credit account.
Chime’s credit product does not have an annual fee, interest, or minimum security deposits like most other secured credit cards.
Strengths: Chime offers consumer centric bank products in a modern, digital way. They create a user experience unbeknownst to legacy banking and allow customers to run their financial lives just like they do every other part of their life, through their mobile phones.
Weaknesses: Neobanks have saturated the subprime and millennial markets. Chime will need to expand its product offerings to attract prime customers. Chime does not yet offer loan or investment products; limited optionality may cause hesitancy for consumers considering leaving their current financial institutions. Chime (and other neobanks) have very limited customer service since they functionally offer banking-as-a-service. They have chat bots, social media, and customer support reps ready to answer basic banking questions but if your account is frozen or closed for suspected fraud, you may have a tough time getting in touch with someone authorized to help.
Opportunity: Chime has already captured the lion’s share of US-based neobanks’ target markets and is the most well positioned to steal market share from traditional incumbent institutions. They have begun their push to be a one stop shop for financial management and have only scratched the surface. With new funding Chime has the opportunity to expand their dashboard to include budgeting tools, investment products, and loans.
Threat: Incumbent institutions are not going to roll over and die without putting up a fight. Many have already tried to take a page from Chime’s book and rolled out digital banking features for their customers. If successful, Chime will be fighting an up-hill battle in prime customer acquisition. Luckily for Chime, fighting through bureaucracy in such institutions makes bringing new products to market a long-term process. If Chime stays lean and flexible, they will be able to move faster than their incumbent competitors.
Chime is tackling an age-old problem and is growing at breakneck speed. They are the leading neobank for subprime and young customers and are encroaching on legacy bank prime customers. As they grow and bring new products to market, it is crucial that they establish themselves as an all-inclusive financial services provider fit for everyone regardless of socioeconomic demographic.
Until next time ✌️ ,
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