The bell is ringing and the Banks are starting to hear the Chime of the Challenger Banks that is eating into their market share.
We look at the Business Model Canvas of US-Based Chime and its 12 Million+ Customers.
Chime Chips Into the Big Bank Market Share
The branchless challenger banks were another beneficiary of the pandemic in many ways. While some floundered, others expanded exponentially and Chime sits at the top of the list. This particular post is US focused, as the dynamics between different regions (ie. EU vs US) are stark.
In the American market, we can see that the young generations joined challengers at a rapid pace, with Chime climbing the ranks in the US faster than any other challenger with more than 12 Million users as of Feb 2021.
In January 2020, just 4% of Gen Zers and Millennials considered a checking account from a challenger bank their primary account. By December 2020, that percentage had grown to 15%.
It is to the extent that Chime is now the 5th largest consumer bank in the US.
And the big banks (‘megabanks’) themselves actually lost 6.5% of ‘Primary Bank Customers’ in the same period while ‘large regional banks’ and ‘community banks’ each gained about 2.5% in the process.
After working out the kinks, the question is are the challenger banks like Chime ready to encroach on the big banks prized consumer end of the business? To answer that we need to look deeper into their business model.
How does Chime make money?
Interchange Fees.
Many of the other Neobanks operate on a subscription model, where users pay a monthly fee and then get a bundled set of services included depending on the tier. Chime, on the other hand, is a traditional banking model with a modernized product interface, which may explain their meteoric rise in the past year. Each time a user ‘taps’ their Chime card at a merchant terminal, Chime makes money on what are called ‘Debit Network Fees.’
“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.
The Financial Brand
Credit Card vs. Debit Card Interchange Fees
- Credit Card Interchange Fees can range from 1.6% – 3.5% + $0.30
- The average Debit Interchange Fees were $0.23, or roughly 0.57% of every transaction.
- That means that for Chime’s average customer – who is doing 50 card transactions per month with Chime’s Visa Debit card – they would be averaging about $11.50 (50 x $0.23 = $11.50) in revenue for the transactions in total.
This ARPU (Average Revenue Per User) per month does not all go directly to Chime, as each transaction is split between Card Networks, Issuing Banks , and then the Payment Processor (typically a PIN debit network such an Interchange or Maestro) who verifies the transaction. In this case, Chime would take a significant share of the transaction being on the ‘Issuing Bank’ side of the transaction. Chime’s actual Transaction Take Rate is unknown.
The merchant pays these fees, not the customer.
Chime incentivizes its customers to setup a direct deposit on ACH by offering them Chime Spot Me – a free overdraft service – after they have completed a qualifying direct deposit of $500 or more.
“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.”
The Financial Brand
Chime Credit Builder is a new service launched in 2020 aimed at younger consumers who prefer to spend on debit, but still need to build their personal credit history.
Chime wanted to develop a new kind of credit card experience due the growing popularity of debit cards in the U.S. In 2018, the U.S. Federal Reserve said debit cards represent 50% of all noncash transactions, the company noted. Younger consumers, in particular, prefer debit over credit, Chime had reported in the past.
Tech Crunch
Chime’s new Credit Builder straddles debit and credit cards by enabling users to first load their Chime Spending Account each month to pull money from (ie. savings not debt). Users then charge their everyday purchases to the credit card and at the end of the month Chime’s Safer Credit Builder automatically pays off the balance and reports the data to the major credit bureaus.
The card has no annual fee, interest, or minimum security deposit. The pilot project that they tested the product on showed that it helped users increase their credit score by an average of 30 points, and it helped 95% of its members who had no previous credit history to establish a credit score for the first time.
Chime’s credit card aims to straddle both worlds, debit and credit, by working to establish good credit while also preventing users from overspending.
Tech Crunch
Chime may also be able to earn Interchange Fees on these credit card transactions, although because this is a new and innovative product it is unclear how that works.
Overall, Chime is a branchless bank with no physical branches. Its all-digital product offers users free checking accounts with no overdraft fees (Spot Me), and now a new no-fee, no-interest Credit Builder credit card to help users improve their credit scores. Across its entire banking platform, they earn a small fee on every transaction, which is not paid by the user but the merchant every time a payment is made with a Chime Visa Debit or Credit Builder card.
Fifteen percent of Chime users already have the company’s credit builder card according to Cornerstone Advisors’ research.
Forbes
Like other Digital Banks, Chime also pays an APY (Annual Percent Yield) to depositors on its platform. Chime itself is not in the business of lending to its customers, so the Net Interest Margin (NIM) is made on the spread between whatever they pay to users and whatever they lend that money out at, presumably to other banking institutions.
Community-Centric or Commercial Partner Strategy?
Chime’s business model is built on its relationships with commercial partners such as Visa, Bancorp, Stride, Galileo and others.
Nevertheless, 70% of Chime’s new users come from Referrals, meaning that the company’s product has a strong community feel and loyal user base.
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.”
The Financial Brand
Starting with its main white-label banking services provider Bancorp, the two just re-upped their partnership agreement in February.
It will continue to be responsible for enabling Chime’s spending and savings accounts, debit card and the ancillary banking services.
Retail Banker
Among the challengers, SoFi also announced it had selected Bancorp as its banking service provider. SoFi owns Galileo (via a Q2 2020 acquisition for $1.2 Billion), which also provides API services to Chime and other major US Fintechs (ie. Robinhood, other Challengers). We can see that some of the major Fintechs have relationships that straddle between client and partner, as they work together to increase their market share against incumbents in the industry.
Finally, on Chime’s website you will see the following in relation to the issuance of their debit and credit cards:
“The Chime Visa® Debit Card … The Chime Visa® Credit Builder Card is issued by Stride Bank pursuant to a license from Visa U.S.A. Inc. and may be used everywhere Visa credit cards are accepted.”
Chime website
This relationship with Visa enables the company to have its cards accepted as payment from its customers anywhere that Visa is accepted, which is virtually everywhere.
Despite all of the high-powered partnerships that power Chime and its business model (Interchange Revenue), the company has built its reputation around being transparent about fees and creating new products for its users that fundamentally improve their financial health.
Because it is the younger demographics who use these products and engage with their peers online, they do have to maintain a sense of community in their branding, as this is part of what has made them so popular recently; how this community vibe scales is TBD (to be determined), but at least for now Chime seems to have users’ trust.
Fundraising and Valuation
Chime raised $485M in a Series F round in September 2020 at a $14.5 Billion valuation.
There are reports that the company is planning to IPO in late 2021 at a valuation around $30 Billion.
Chime has held preliminary talks with investment banks about launching a stock market flotation, which could value the financial services startup at more than $30 billion, as soon as the end of 2021, people familiar with the matter told Reuters.
Reuters
The company is private, so its financials are not disclosed, but it is was said in November 2020 that they were profitable on an EBITDA basis (“true EDITDA” according to the article).
“We’re more like a consumer software company than a bank,” Britt said. “It’s more a transaction-based, processing-based business model that is highly predictable, highly recurring and highly profitable.”
Tech Crunch
Chime Business Model Canvas
A business model is defined as:
“the rationale of how an organization creates, delivers and captures value.”
Alex Osterwalder et al invented the Business Model Canvas to help individuals and organizations conceptualize how to analyze, create, and develop business models.
Chime Value Proposition
Digital-only challenger bank giving customers a free checking account and overdraft protection (SpotMe)
- Chime Debit Card – allows for payments of everyday items from chequing account
- Chime Credit Builder – no fee hybrid debit/visa card to help users build credit
47% of Chime’s users report “somewhat” or “significant” improvement to the performance and health of their financial lives.
Chime Business Model Analytics
If we comb through the post here and look for key metrics and analytics that relate to the business model which could be interesting to follow going forward, a few stick out:
- the company stated it has ‘very healthy unit economics‘ which is likely the spread between ARPU (Average Revenue per User) measured over time as LTV based on its relationship to CAC (Customer Acquisition Costs). The evolution of these numbers leading up to the IPO will be interesting to track, especially now that they have so many more users.
- According to the Forbes article in November 2020, 15% of Chime’s users were using the Credit Builder credit card. With a rapidly growing user base, adoption rates of the credit product will another interesting metric along with the corresponding impact on User Economics given that credit card interchange fees are higher than debit fees (although it is unclear what type of Interchange Fees are earned from the Credit Builder product – debit or credit)
- Finally, the Share of Primary Bank Customers will be one metric that would have caught the Megabanks’ attention. How they respond and how these numbers evolve over 2021 will be another important analytic/metric to track
2022 – Delayed IPO & The Bid for DailyPay
At the beginning of 2022, many were thinking Chime was headed towards a potential IPO in the range of $30-40 Billion following their $750 Million raise at a $25 Billion valuation in Q3 ’21.
The market soured, Fintech funding rounds started drying-up, and here we are 12 months later with no timeline for an IPO and Chime’s long-term business model looking much less certain than earlier on. Most public and private Fintechs in the Digital Banking arena were down > 50% in 2022.
Chime laid off 12% of its staff in Q4 ’22, which is not necessarily noteworthy in and of itself given the broader environment in tech. But for a company that was (and still is) at the top of the Digital Banking competition in the U.S, a solid business model built on interchange fees, and $750 Million in the bank a year earlier, it signals that changes are coming.
Only recently did a report surface suggesting that Chime made a big $2 Billion offer for on-demand pay player DailyPay in Q2 of 2022. This was in fact the second offer, following an earlier $1.6 Billion offer.
An acquisition could have given Chime an additional vertical and expanded customer base, as debit card swipe fees currently contribute most of its revenue, while DailyPay’s focus is on-demand pay, the report said.
PYMNTS
It is an interesting move for Chime because ‘on-demand pay’ or EWA (early-wage access) is a high-growth area of Fintech whereby workers gain instant access to their wages.
DailyPay lets users access 100% of their earned wages, and it takes a transaction fee, which ranges from $1.25 to $2.99, every time a user takes an advance. The average advance is $66, and DailyPay users typically take advances once a week.
Forbes
The model lines up with Chime’s core model in some ways, which is leveraged towards debit interchange fees and not lending/credit-based revenue streams like most of the other Digital Banks. The problem possibly stems from the fact that Chime tried to make the offer partially in stock (+ $700M cash), and who knows what valuation they were using to issue said stock. On paper, the deal would have made sense for both parties.
Nevertheless, the move signals Chime’s intent to broaden its business model beyond debit interchange fees, which are much lower than credit card interchange fees. Payroll is one large and very compelling vertical outside of credit.
Chime is not public, so we don’t know its updated user numbers or ARPU/CAC/LTV breakdowns beyond what was stated above. We can presume their valuation would have come down significantly from $25 Billion, but the CEO recently stated they are ‘well capitalized’ so it is unknown what their future fundraising roadmap is.
Chime Outlook – 2023 and Beyond
Chime is one of top (if not the top) Digital Banks in the U.S. by almost every major metric; furthermore, many of Chime’s competitors in the space are in serious trouble given how difficult 2022 was. Reports in even the mid part of the year stated that Varo may run out of money by year end, while publicly-traded companies like Dave (Ticker: DAVE) and MoneyLion (Ticker: ML) were down 96.5% and 84.3% respectively in 2022.
On that dimension, the future outlook for Chime is very positive.
But given the hype coming into 2022, they seem like one of ‘fallers’ in the the Digital Banking space this year. They need more ‘meat on the bone’ for their business model to diversify outside of debit-interchange fees.
While interchange fees on debit swipes offered neobanks an easy path to day-one revenue, they will not satisfy investors over the long term
Fast Company
Despite Chime’s CEO calling it a ‘software company’ with a ‘transaction-based, processing-based business model that is highly predictable, highly recurring and highly profitable’ has the same feel of WeWork calling itself a ‘tech company’ a few years ago.
Customers deposit their money, save their money, build their credit scores, and keep their ‘financial health’ in check on Chime. Legal action in 2021 prevented themselves from calling themselves a ‘bank,’ but from a business-model perspective, they look a lot more like a bank than a payment processor.
And the banking business model is inherently unpredictable, as we have seen in 2022 with rapidly-rising interest rates, accelerating inflation, and skyrocketing consumer debt levels.
Chime’s strength is that they are not exposed – let alone overexposed – to consumer debt levels in the same way we saw with BNPL players like Klarna and Affirm for example.
The DailyPay acquisition, even though failed, seemed like a great idea. The report only surfaced weeks ago, yet the near deal happened 6-7 months ago. Thus, we can presume that Chime probably has some aces up its sleeve going into 2023.
Given the bloodbath in 2022, the market will be looking for some feel-good stories in 2023 to IPO. A betting man might be willing to wager that Chime does go public later on in 2023 and goes big.
In the interim, the beat goes on for Chime.