Bank disruptor Chime dangles hefty interest rates on deposits

In Silicon Valley, entrepreneurs and venture capitalists are making big bets that the future of banking is digital, doesn’t have fees, offers a high savings rate—and might not technically be a bank at all.

Chime Inc. is part of a fast-growing class of well-funded financial technology startups offering debit cards, checking accounts and other financial services. And despite not having a banking license, Chime operates enough like a regular bank that CEO Chris Britt, 46, says it’s stealing customers from companies like Wells Fargo and JPMorgan Chase by the millions.

Today, Chime has 8 million accounts, the company said, about half of which use the company for direct deposits. That’s still small compared to the biggest banks, but it’s Chime’s growth that is catching investors’ attention. In 2018, the company had only 1 million people signed up. “The majority of our members are coming from the big banks,” Britt said.

In a bid to keep up that momentum, Chime recently announced a 1.6% interest rate on savings accounts, which compares with most large banks’ rates of well under 1%. Chime had not previously offered interest on savings products, and will partner with existing licensed banks to offer Federal Deposit Insurance Corp. coverage.

The offering is the latest in a series of moves Chime is making to broaden its appeal to even more users, including a product that allows overdrafts of up to $100 without penalty, and a multi-year advertising deal with the Dallas Mavericks. Britt said he is not looking at the new offering as a revenue opportunity, but as a way to bring in new customers.

Chime has a reported valuation of $5.8 billion, which makes it one of the 25 largest startups in the United States, according to research firm CB Insights. It’s one of many firms looking to bring new technology to the banking industry. Globally, digital banks—sometimes also called challenger banks, or neobanks—raised more than $3.7 billion in 96 separate deals in 2019, according to a report from CB Insights released on Feb. 26, marking a record-breaking year in terms of both funding and the number of deals.

That uptick in funding has followed rapid user growth. Financial tech startups that launched with checking accounts or credit cards now have more than 54 million accounts all together, the report said.

Of course, startups have hit some bumps in the road as many rush to add banking services. Most new digital banks don’t yet turn a profit. That includes Chime, the CEO recently said. Robinhood Markets Inc. ran into regulatory hurdles when it launched a checking-like service in late 2018 without securing deposit insurance (it has since debuted a similar product after partnering with a licensed bank). And Chime experienced widespread outages last fall that rendered its website and debit cards inoperable, stranding some customers.

“The opportunity is obviously there,” said Conor Witt, a fintech analyst at CB Insights, adding that the savings product could boost customers’ trust. Eventually, “the goal is still to build a stand-alone challenger bank that becomes a mainstream bank over the course of time,” said Satya Patel, a partner at Homebrew and one of Chime’s first investors.

If you’ve seen an ad for Chime on TV, it was likely talking about one of its most popular features: getting your paycheck two days early. In order to use this feature, as well as a few others, users have to set up their paychecks for direct deposit into their Chime accounts, something about half its members opt to do.

Britt said that’s a key element of the company’s business model, which does not charge monthly fees and generates revenue primarily through interchange fees on debit cards and other transactions. “Once a user signs up for direct deposit,” Britt said, “engagement is off the charts.”

While the industry is growing rapidly, there are still risks ahead for rising digital banks. After a certain point, investors worry, growth could become trickier, particularly as competition increases.•