Forget the pens on the chains and the lollipops at the drive-thru – what about accessing your paycheck two days early or being able to overdraft at no charge?
These modern banking benefits 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 are intentionally positioning themselves as alternatives to the old, suffocating Wells Fargo-type banks around the world. Their mission statements prioritize inclusiveness; their ads target middle-class Americans who need flexibility in knowing when and how they get paid. Simply put: these aren’t your parents’ banks, and they don’t want to be.
The rise of neobanks can be attributed to changing demand in the consumer banking market, says Marco Di Maggio, associate professor at Harvard Business School. Many people no longer trust big, traditional institutions like Bank of America and JP Morgan Chase. Mistrustful 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 major players.
You may have seen Chime in a Riverdale Jonas Brothers episode or music video. But the startup is more likely to have crossed your stream in 2020 when the government sent out its first round of coronavirus stimulus checks – and Chime members had access to their money earlier.
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-charge overdraft product called SpotMe that allows most members to overdraft on debit card purchases up to $ 200. Features like these, says Plante, make it ideal for Americans who live paycheck to paycheck.
“Our regular customer is someone who works 9 to 5, gets paid every two weeks, and is a bit younger than the average bank customer,” he says.
Lately, Chime has been promoting their Credit Card Builder, a secure card that helps customers build a credit history. Credit Builder cards do not require a strict credit check and do not have a preset credit limit, so they have no impact on usage.
Chime is not without controversy: in July, a ProPublica survey discovered he was shutting down 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 he cannot describe himself 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 at 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 he received the dossier from the government rather than waiting for the money to actually arrive.
“The big banks could do it as easily as Chime, probably a lot easier,” says Plante. “They choose not to make it available until those dollars arrive.”
New York subway riders will recognize the name Current from the advertisements that covered the trains. “Did anyone miss bank branches during quarantine? We’re resting our case,” it read. “The banks are cheugy”, proclaims another one.
Marketing copy can trigger your “Other children” radar, but the distinction is important, says CTO Trevor Marshall.
“In a bank like Bank of America or Chase, you try to make deposits to facilitate other types of transactions… You try to sell a list of products that you usually make yourself,” he says.
Current is what Marshall calls “deposit-agnostic,” which means it generates most of its income from merchant interchange fees, effectively monetizing the flow of money instead of storing it. (Notice a trend here? The big banks are running into price control policies on interchange fees when they have more than $ 10 billion in assets, so they are generally not attractive to large institutions.)
Founded in 2015, current features include faster direct deposit, cash back, gas hold withdrawals and the adolescent bank. It also offers customers free overdrafts, allowing premium customers who deposit at least $ 500 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 with multiple jobs or who are unemployed – customers that big banks may overlook.
“We want to make sure the money is flowing,” he says. “We are really not suited for and may never be suitable for the top 1%.”
Launched in 2017, the Varo website offers “no hidden fees” and “early direct deposit”. But the main factor that sets Varo apart is its national banking charter, published in 2020.
The charter allows Varo to operate legally as a bank. When then Acting Currency Comptroller 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 share of every transaction,” he says.
While other institutions have to play “a phone game” with their parent bank every time they want to change a feature, Taylor says Varo can act quickly because it’s directly regulated. It also means that Varo itself is FDIC insured and – a big selling point – can safely be called a bank. Varo has 4 million accounts.
The bank has multiple sources of income, but the main way Varo makes money is through (yes) interchange fees.
Like other fintechs, Varo prides itself on early direct deposit, providing people’s paychecks as soon as they receive notification that payroll is being processed. For a typical Friday payday, that could mean getting paid as early as Wednesday. This method is also what allowed Varo to make early stimulus checks and child tax credit payments available.
“As clients need changes, it’s very important to take the pulse,” says Taylor.
So what’s the catch?
Chime, Current, and Varo may sound like 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, according to Harvard Business School’s Di Maggio, the other proverbial shoe will fall. It’s expensive for them to acquire clients – hence the ads in the metro – and blue collar workers don’t necessarily generate a ton of income.
“The question is: is it not a sustainable model, or will there be other products that the neobanks will offer to manufacture? [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 that they claim to hate so much. At this point, members will have to decide whether to stay or to leave. The fintechs are hoping for the first, especially because it is such light operations.
Yet, he says, not all of them will survive.
In the meantime, consumers may want to exercise caution.
“They’re trying to get as big as possible with acquiring customers with all of these great features,” he says. “Then they’re going to figure out how to make these customers profitable. “
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