Digital Bank Chime Will Quadruple Its Revenue In 2019, Reeling In Direct Deposits
A growing throng of startups are betting you’d like to do your banking on your smartphone. San Francisco-based Chime, which offers a debit card with no monthly or overdraft fees, has seen its revenue explode over the past year. In 2019, it will reach nearly $200 million, a fourfold increase over 2018, according to a person familiar with the matter. Now the company plans to expand into other products like credit cards and investment services in its quest to become a full-service digital bank.
Chime has attracted five million accounts—or roughly 3.3 million customers, based on an estimated average of 1.5 accounts per customer—through a few key strategies. First, it has offered products for free that banks have traditionally charged money for, like basic checking accounts with no minimum balances, and it has packaged them into an app that customers rate highly. Second, it has spent heavily on marketing. The startup sank $32 million into TV ads during the first eight months of 2019 alone, according to research service Kantar, and that doesn’t include any online marketing expenses. Neither strategy would be possible without the $300 million that Chime has raised in venture capital.
Third, it has convinced more than one million people to sign up for direct deposit, having their paychecks sent to their Chime debit account, a source says. Reaching a large customer base is critical for Chime, partly because it doesn’t target affluent users. Its average customer is between 25 and 35 years old and earns between $35,000 and $75,000 a year. And the startup makes almost all its money on interchange—the 1% to 2% fees that banks charge retailers each time a debit or credit card gets swiped—so Chime wants you to make all your purchases using your Chime card. If it can convince you to deposit your paycheck there, you’re better equipped to use the card for shopping.
To woo customers who use the card often, Chime requires that they sign up for direct deposit to access key features. If you’d like to access your wages two days earlier than you would with a traditional bank, you must sign up for direct deposit. The same goes if you want to overdraw your Chime account up to $100 without paying any interest or fees. In nearly all its marketing materials, it encourages people to sign up for direct deposit. Chime has processed more than $30 billion in transactions this year, up from $10 billion in 2018, despite an outage last month that prevented customers from making purchases and seeing their balances.
Yet a large hurdle remains: Chime hasn’t proved that it can persuade customers to use multiple products, a “bundling” strategy that’s the cornerstone of traditional banks’ high profitability. Max Friedrich, an analyst at New York investment manager Ark, thinks it will be “challenging” for digital banks to expand into more profitable categories like lending.
Chime plans to launch a new, free feature to help users boost their credit scores next year, says CEO Chris Britt, although he declined to provide details. He also plans to launch a credit card in the first half of 2020 and eventually move into personal loans. After that he’ll launch investment services, such as low-fee exchange-traded funds and retirement services, potentially in 2021. Britt is also considering installment loans, where people can finance purchases in periodic payments.
Chime’s growth is strong, but can it build a profitable, sustainable business? Britt claims Chime could be profitable today if it reduced its marketing budget. He says its gross profit margin is “very high” and “resembles a software company’s.”
Two other important indicators of profitability are how much it costs Chime to acquire a new customer and how much each customer is worth over his or her lifetime. Traditional banks pay $750 to acquire new customers whose lifetime value is about $4,500, according to Dan Rosenbaum, a partner at management consulting firm Oliver Wyman. It costs Chime less than $100 to acquire a customer that signs up for direct deposit, Britt says, and those customers are worth “thousands” if you assume they stick around for 10 years. That’s a good place to be if Britt’s forecast for how much his customers are worth turns out to be accurate.
New York digital bank MoneyLion, which targets customers in the Midwest, pays between $40 and $50 to acquire engaged customers who use at least three of the startup’s products. It says those users are worth between $1,200 and $1,500 if they stay with MoneyLion for two years.
Some think digital bank valuations have gotten out of hand. In recent conversations with venture capitalists, Ark’s Max Friedrich says, “The sentiment was that the valuations for challenger banks were too high, and they expect them to come down.” Chime is reportedly trying to raise new funding at a $5 billion valuation, up from $1.5 billion just eight months ago. Britt won’t comment on the topic, other than to say the company is already “well capitalized” and that “given the strength of the business … there is definitely interest from a lot of prospective investors.”
By Jeff Kauflin