Forget pens on chains and lollipops at the drive-thru – how about accessing your paycheck two days early or the ability to overdraft at no cost?
These modern banking perks are popular among fintech companies like Chime, Current, and Varo, which have exploded in popularity in recent years. Often referred to as neobanks, these institutions intentionally position themselves as alternatives to legacy banks like Wells Fargo. Their mission statements prioritize inclusiveness; their ads target middle-class Americans who need flexibility in when and how they get paid. Simply put: they’re not your parents’ banks, and they don’t want to be.
The rise of neobanks can be attributed to changing demand in the retail banking market, says Marco Di Maggio, associate professor at Harvard Business School. Many people no longer trust large traditional institutions like Bank of America and JP Morgan Chase. Wary Millennials and Gen Z consumers, in particular, are looking for new options.
If you’re one of them, here’s what you need to know about the main players.
You may have spotted Chime in a Riverdale Jonas Brothers episode or music video. But it’s more likely the startup crossed your stream in 2020 when the government sent out its first round of coronavirus stimulus checks — and Chime members got access to their money early.
Reaching all kinds of customers is a major goal for Chime, says Aaron Plante, vice president of lending products and banking strategy.
Launched in 2014, Chime offers no monthly fees or minimum balances, as well as a no-fee overdraft product called SpotMe that allows most members to overdraw on debit card purchases up to $200. Features like these, Plante says, make it ideal for Americans who live paycheck to paycheck.
“Our regular, daily customer is someone who works 9am to 5pm, gets paid bi-weekly, and is a bit younger than an average bank customer,” he says.
Lately, Chime has been promoting its Credit Builder Card, a secure card that helps customers build a credit history. Credit Builder cards don’t require a credit check and don’t have a preset credit limit, so they don’t impact usage.
Carillon is not without controversy: in July, a ProPublica Survey found it was closing people’s accounts and racking up consumer complaints. It’s also important to recognize that Chime is a fintech, not a bank – in fact, a court legally said she cannot describe herself using the word “bank”.
As such, its banking services are provided by Bancorp Bank and Stride Bank; his debit card is a Visa. It makes money primarily through interchange fees, which are paid by merchants when you swipe your card in a store or make a purchase online.
Plante says the idea is that Chime is there for you, not to get you. For example, Chime made stimulus funds available as soon as it received the government brief rather than waiting for the money to actually arrive.
“Big banks could do it just as easily as Chime — probably a lot easier,” Plante says. “They’re choosing not to make it available until those dollars come in.”
New York City subway riders will recognize the Current name from the advertisements that have covered the trains. “Has anyone missed any bank branches during quarantine? We are resting our case,” it read. “Banks are cheugy”, proclaims another one.
Marketing copy can trigger your ” classmates “ radar, but the distinction is important, says chief technology officer Trevor Marshall.
“In a bank like Bank of America or Chase, you’re trying to bring in deposits to facilitate other types of transactions…You’re trying to sell a list of products that you typically make yourself,” he says. .
The stream is what Marshall calls “deposit independent,” meaning it generates most of its revenue from merchant interchange fees, effectively monetizing the flow of money instead of storing it. (Notice a pattern here? Big banks are running into price control policies on interchange fees when they have over $10 billion in assets, so they’re generally not attractive to large institutions.)
Founded in 2015, current features include faster direct deposit, cashback, removal of gas holds and teen banking. It also offers customers free overdrafts, allowing premium customers who deposit at least 0 per month to overdraw their accounts (up to $100) without incurring a penalty. Currently working with Choice Financial Group and Metropolitan Commercial Bank; the current debit card is a Visa. Access to ATMs is via Allpoint.
Marshall says Current works well for people who have multiple jobs or are unemployed — customers that big banks may ignore.
“We want to make sure the money is flowing,” he says. “We really are not suited and may never be suited for the top 1%.
Launched in 2017, Varo’s website offers “no hidden fees” and “advance direct deposit”. But the main factor that sets Varo apart is its national bank charter, issued in 2020.
The charter allows Varo to operate legally as a bank. When then-Acting Comptroller of the Currency Brian P. Brooks announced Varo’s charter in a statement, he said mobile-only banking “represents the evolution of banking.”
Eric Taylor, director of UX research at Varo, says the charter gives it “a distinct competitive advantage” over other fintechs.
“We don’t have an intermediary bank that gets a cut of every transaction,” he says.
While other institutions have to play “a phone game” with their supervising bank every time they want to change a feature, Taylor says Varo can move quickly because it’s directly regulated. It also means that Varo itself is FDIC insured and – a big selling point – can safely call itself a bank. Varo has 4 million accounts.
The bank has multiple revenue streams, but the primary way Varo makes money is through (yup) interchange fees.
Like other fintechs, Varo prides itself on advance direct deposit, delivering people’s paychecks as soon as it receives notification that payroll is being processed. For a typical Friday payday, that might mean getting paid as early as Wednesday. This method also allowed Varo to make stimulus checks and child tax credit payments available early.
“As customers need change, it’s very important to have your finger on the pulse,” says Taylor.
So what’s the problem ?
Chime, Current, and Varo may sound great, but the main reason they are able to offer these benefits to customers is that their operations are inexpensive. (As with online banks, they don’t have to pay to keep the lights on at physical branches.) But eventually, Di Maggio of Harvard Business School predicts, the other proverbial shoe will fall. It’s expensive for them to acquire customers – hence the subway ads – and blue-collar workers don’t necessarily generate a ton of revenue.
“The question is: is this not a sustainable model, or will there be other products that the neobanks will offer to make [them] profitable?” he said.
As such, Di Maggio predicts that we could see these fintechs expand into new areas, offering loan products or even charging some of those fees they claim to hate so much. At that point, members will have to decide whether to stay or leave. Fintechs are hoping for the former, especially because they are very lean operations.
Yet, he says, not all of them will survive.
In the meantime, consumers may want to tread carefully.
“They’re trying to get as big as they can with customer acquisition with all these cool features,” he says. “Then they’re going to figure out how to make those customers profitable.”
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