Business

This startup is taking on big banks. And it's working.

Posted October 5, 2020 6:31 a.m. EDT

— The economic forces set off by the pandemic are crushing traditional banks. Yet Chime, a startup taking aim at big banks, is booming. And it doesn't have a single bank branch.

Chime, which provides banking services via a smartphone app, has more than tripled its transaction volume and revenue in 2020. The company says it is signing up hundreds of thousands of new customers each month, and some of them are ditching big banks for Chime.

And while big banks such as Wells Fargo and Bank of America have lost tens of billions of dollars in market value during the pandemic, Chime's price tag is going parabolic.

In just 18 months, Chime's private market valuation has spiked by a staggering 1,015% to $14.5 billion, according to PitchBook. That makes Chime more valuable than publicly traded companies including United Airlines, Tiffany or Whirlpool. Chime has even overtaken Robinhood, the red-hot trading app, to become the most valuable VC-backed consumer fintech startup in the United States, according to PitchBook.

"We've gone through explosive growth," Chime co-founder and CEO Chris Britt told CNN Business. "We're a company that's in the right place at the right time because so many Americans are feeling anxiety about their money."

Chime is known for giving Americans early access to their paychecks through a feature called Get Paid Early when they sign up for payroll direct deposit using their Chime account.

Fee-friendly, interest-rate resilient

Chime has a simple advantage over traditional banks: It isn't actually a bank. Although Chime competes with banks for checking and savings accounts, its own FDIC-insured accounts are held at partner banks including Stride Bank. Chime is really a consumer fintech company -— one with a totally different business model from lenders.

The company prides itself on not relying on the kinds of fees that consumers despise (and that many people can't afford right now). Instead, Chime earns a small fee from Visa every time users swipe their cards.

And in place of overdraft, Chime's SpotMe feature allows users to take their account negative without incurring a fee.

"The big banks are good at serving the top 20% or 25% of Americans," Britt said. "Everyone else in the middle feels nickel-and-dimed."

Another key distinction is that Chime isn't at the whims of the Federal Reserve and the bond market. Main Street banks make money off the difference between interest charged on loans and what is paid out on deposits. Right now, that gap is extremely narrow, making it challenging to make money on loans and deposits.

But Chime doesn't really have a lending business, meaning it isn't being hurt by rising bankruptcies nor historically low interest rates.

If anything, Chime is being helped by these trends. Rock-bottom rates have made investors around the world desperate to generate healthy returns on their cash. They are being forced to gamble on risky stocks, where valuations have surged to 20-year highs, and plow money into fast-growing startups like Chime.

"Investors really like the predictability, recurrence and margin structure of our business model. It's very predictable and not subject to the credit cycles," Britt said.

Early access to stimulus checks

Chime raised $485 million in its latest round of funding last month, bringing its total fundraising haul to $1.5 billion.

"The pandemic has favored financial services that are fully digital, user friendly and easy to sign up," Robert Le, senior fintech analyst at PitchBook, said in an email.

Le pointed to the recent fundraising success of other digital fintechs, including millennial-focused Robinhood and small-business insurance provider Next Insurance.

That's not to mention the skyrocketing share prices of other tech companies that cater to doing business remotely, including Zoom and DocuSign.

Chime made a huge splash this spring when it gave users access to its $1,200 stimulus checks five days early. In total, Chime gave members early access to $1.5 billion in government stimulus payments.

"That created huge buzz and drove some of our biggest enrollment days in the history of our company," Britt said. "We have a high degree of empathy for challenges everyday Americans are going through. One of our core values is to be human and to understand the needs of our customers."

Will Chime get into lending?

One major challenge facing Chime is its ability to live up to the hype that comes along with its skyrocketing valuation.

"The company will be hard-pressed to remain on its growth path to prove that it commands the hefty valuation, which is currently over 20x revenue," PitchBook's Le said.

Another obstacle is competition, especially as Chime targets higher-earning customers who already have accounts at Chase and other full-service financial institutions. That will put the onus on Chime, which doesn't make mortgages or have financial advisers, to keep innovating to stand out from rival platforms.

To boost its visibility, Chime spent aggressively on marketing earlier this year by inking a multi-year brand partnership with the Dallas Mavericks. The deal made Chime the NBA franchise's official jersey sponsor.

In June, Chime rolled out a no-fee Visa credit card designed to help Americans boost their credit scores. The card doesn't require a credit check because it's backed by a secured account that users put money into ahead of time. (They get a line of credit equal to that amount). And Chime reports these monthly payments to major credit bureaus, boosting credit scores.

"People enjoy it," Britt said, "because they can't get themselves into trouble."

Chime's "next chapter," according to Britt, will be to push further into lending, potentially through an unsecured credit card that is powered by the startup's treasure trove of data on its users' spending and bill-paying habits.

Britt also said it would be "natural" for Chime to eventually consider adding an automated, basic investment platform that features ETFs and other low-cost financial products.

Going public?

Longer term, Britt expressed confidence that Chime will eventually be an independent publicly traded company, though likely not through a SPAC, or a special purpose acquisition company. That's the increasingly popular way that companies including Nikola, DraftKings and Virgin Galactic have gone public. Lifestyle brand Playboy became the latest to join the SPAC craze.

Britt said a SPAC is likely not the right approach for Chime and emphasized the startup doesn't have an urgent need to raise cash through an IPO.

"We're not in a rush to go public to capture a valuation just because all the indexes are up and companies are trading at a high multiple," Britt said.

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