Challenger Banking Picks Up Steam

No-fee mobile bank Chime recently announced a US$70 million Series C funding round led by Menlo Ventures. Existing investors Forerunner Ventures, Aspect Ventures, Cathay Innovation, Northwestern Mutual, Crosslink Capital and Omidyar Network also participated.

Chime has valued its business at $500 million. With the Series C funding, the company has raised more than $100 million in total funding.

Investors seem to have confidence in Chime’s business model because “it’s very clean with extremely low overhead,” remarked Rob Enderle, principal analyst at the Enderle Group.

“Chime also appears to be where other banks need to go, and investors tend to invest in the future,” he told the E-Commerce Times.

The Rise of NeoBanking

Chime is one of several digital-only banks that have emerged in recent years. They’re generally known as “challenger banks” or sometimes “neobanks.”

These newer banking organizations don’t have legacy technology or cumbersome organizational structures such as major branch operations, KPMG has noted.

Mobile account opening is now the standard for large banks, particularly in the United States, where it comprises nearly 40 percent of new accounts, according to Avoka.

Mobile is the fastest-growing channel for digital banking, said Don Bergal, chief marketing officer at Avoka.

“We’ve seen hard evidence in recent months of a tipping point with more mobile openings than desktop digital,” he told the E-Commerce Times.

The Threat to Traditional Banks

Neobanks and challenger banks don’t offer a full suite of services, so they’re less impacted by regulatory requirements than traditional banks and can move more rapidly.

“Challenger banks are a big threat for the future, but they aren’t immediately taking significant share from retail banks today,” Bergal said. “The danger is getting blindsided by the challengers once they get momentum and it’s too late to react.”

That said, one neobank — Tandem, in the UK — has announced a deal to acquire the two-century-old Harrods Bank to gain a full banking license.

Larger banks, which have significant infrastructure investments, find it easier to go digital, Bergal said. Avoka offers a turnkey digital account opening and onboarding solution to smaller banks and credit unions.

How Chime Works

Chime has no monthly, minimum balance, overdraft or international transactions fees. Customers can make unlimited withdrawals at more than 30,000 fee-free MoneyPass ATMs and more than 30,000 cash-back locations.

Customers have to open a Spending Account — a demand deposit account available from The Bancorp Bank. They then can open an interest-bearing savings account, subject to restrictions.

The interest rate on savings accounts is .01 percent APY — but some online banks offer close to 2 percent.

Accounts are for personal use only and may be closed if Chime determines they are being used for business.

Deposits are FDIC insured for up to $250,000 through The Bancorp Bank.

Chime also offers the following:

• A Visa debit card with daily balance notifications and instant transaction alerts. Lost or compromised cards can be blocked with a single swipe;
• An automatic savings feature;
• A no-fee paycheck advance;
• Mobile check deposits and payments;
• Money transfers between Chime accounts and with external bank accounts; and
• Mobile cash transmissions to other Chime users or to non-users through Venmo.

Chime supports mobile payments through Apple Pay Google Pay and Samsung Pay.

Preauthorized direct debit payments or direct debits to savings accounts are not offered.

“The appeal of challenger banks is a more friendly experience, faster response, and the convenience of anywhere access instead of still being tied to a branch at some point,” Bergal pointed out.

“Challengers tend to look and feel like retailers, not like banks,” Bergal said, “and that’s the appeal for consumers, especially millennials.”