Children of the financial crisis spark a shift from bank to payment accounts
The banking crisis in 2008 has created a generation of consumers that will always carry some mistrust of traditional banking, making them more agreeable to alternative payment models.
Ultimately, this crowd has not chosen to stuff its money in mattresses or otherwise remove itself from the mainstream financial world. This allows startups to act as an intermediary, working with a bank on the back end but showing a friendlier and more tech-savvy face to the consumer. For such startups, the focus is more typically on payments than on upselling banking products such as personal loans and mortgages.
"This appeals to the millennials that don't trust banks, who grew up during the crisis," said Arjuna Costa, a partner at the Omidyar Network, a Redwood, Calif.-based investment firm that just took part in an $18 million round in Chime, a San Francisco based company that uses payment accounts to encourage savings and general financial health through steep discounts and incentives. It's one of several recent or planned investments in the space for Omidyar.
Founded in 2014, Chime has more than 500,000 accounts and is closing in on $1 billion in payment volume. Chime combines a Visa debit card, mobile apps and a spending account to power payments and other features, such as automatically diverting a portion of each paycheck to a savings account. It also offers social P-to-P transfers. Chime has elements of Simple and Moven, two startups that closely followed the financial crisis; and Venmo, PayPal's social P-to-P app.
"Financial health is a big problem in the U.S.," Costa said. "57% of Americans don't have $1,000 in savings."
Chime aims at a millennial audience and other consumers who wish to avoid debt and gradually build savings. Like other alternative plays such as Brett King's Moven, Chime's calling card is a shot at what it sees as banks' tendencies to "nickel and dime" consumers with myriad fees.
"Big banks make money from misfortune…from overdraft fees, ATM fees, etc." said Chris Britt, CEO and founder of Chime.
Chime does have a relationship with a bank in the background. Bancorp Bank handles deposits, FDIC insurance, and compliance. In the foreground, Chime is the consumer's point of contact and the brand. Chime does not charge monthly fees or overdraft fees, or require a minimum balance. It makes money from Visa, which pays Chime a fee each time a card is used, and a $2.50 fee for ATM transactions that are outside of the MoneyPass network.
"We make money from Visa, and we only make money if the consumer is transacting with the account," Britt said, adding that for Chime, the model relies on usage—the low fees and "cash back" marketing encourage more payments, and thus more fees for Chime.
Britt doesn't consider Simple and Moven to be competitors, setting its sights more on luring consumers from large banks. The "bank alternative" model has faced financial challenges, but Britt said Chime's model, which he said incents people to use the card frequently, would help it succeed.
Omidyar is making a major bet on what it calls "neobanks," with other investments including the U.K.'s Tandem with five more investments in the pipeline this fall in Brazil, India, Pakistan,South Africa and the U.S. Its goal is to spot companies that pair payments with other rudimentary financial services that cover most of what a traditional bank would provide, with a different fee structure."A person doesn't want to use 10 different apps to manage their financial lives," Costa said.
Neobanks are a hot sector for venture capital, partly because of the challengers understand the "user experience" trend better than incumbents and are enjoying a favorable regulatory environment, said David Albertazzi, a senior analyst at Aite Group.
"The flexibility that APIs provide makes it easier to bundle externally sourced products and services into a customer offering. APIs enable the transformation to open banking, allowing third party providers to get access to bank data and services," said Albertazzi, adding this trend is global in nature, and accelerated in Europe by the revised Payment Services Directive (PSD2).
"Open banking requires banks to redesign their IT infrastructure, and re-think their business model," Albertazzi said. "Neobanks are digital by design and have an advantage in this transformation to open banking."