Tech start-up Chime gives users paychecks early. It wants their savings too

In Silicon Valley, entrepreneurs and venture capitalists are making big bets that the future of banking is digital, doesn’t have fees, offers a relatively 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 start-ups offering debit cards, checking accounts and other financial services. And despite not having a banking license, Chime operates enough like a regular bank that Chief Executive Chris Britt, 46, says it’s stealing away customers from companies like Wells Fargo & Co. and JPMorgan Chase & Co. 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 with the biggest banks, but it’s Chime’s growth that’s catching investors’ attention. In 2018, the company had only about 1 million people signed up. “The majority of our members are coming from the big banks,� Britt said.

On Wednesday, in a bid to keep up that momentum, Chime announced a new 1.6% interest rate on savings accounts, which compares with most large banks’ rates of well under 1%. Chime, which had not previously offered interest on savings products, 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.

Chime has a reported valuation of $5.8 billion, which makes it one of the 25 largest start-ups in the U.S., according to research firm CB Insights. But it’s one of many companies 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 Wednesday, 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 technology start-ups that first launched with checking accounts or credit cards now have more than 54 million accounts all together, the report said.

Of course, start-ups 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 an existing 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 probably 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 of its members do. Britt said that’s a key element of the company’s business model; Chime 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.�

Although 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 and each additional user gets more expensive to win over. And as some people feel less tied to a single bank, they could become harder to reach with multiple products — for example, a user might choose Chime for a checking account, Robinhood for a brokerage account and Chase for credit cards — undermining financial institutions’ attempts to cross sell.

At Chime, Britt wants to transform the company from an upstart into an “iconic, nationally known brand.� That will mean big sustained growth and even more product announcements in the future. “I think this next chapter for us is going to be a lot about expanding our voice and raising awareness of the brand more broadly in the population,� Britt said, brushing aside competitive fears. “It’s a big market.�