Banks are being aggressively disrupted, and investors may want to keep an eye on a few of the major players.
Chime, a disruptive bank built by a tech company, is aiming at making banking more accessible and easier to use. To that end, it recently raised $200 million in funding. This industry of disruptive banking service is only getting larger and is likely to impact the mega-banks over time.
Disruptive Banks Continue to Rise
For decades, customers have been frustrated by big banks. Not only have big banks been caught in wide scale mortgage scandals, but they are also notorious for hidden fees. Modern customers don’t want to have to pay for ATM withdrawals, monthly service fees, low balance fees, or checks that were bounced to them. They want to be able to bank without fear of hidden charges.
Of course, up until recently the large banks had a monopoly. New technology has made it possible for startups to create secure, FDIC-insured banks that offer more advantages than traditional banks. And that’s led to a proliferation of new banks that are all trying to do something different.
Online banks have the advantage of lower overhead. They can use technology to replace tellers, ATMs, and brick-and-mortar servicing. Even established lenders are now offering services such as an entirely mobile mortgage. Modern customers never have to step foot into a bank to complete even the most complex financial tasks.
The Advantages of Chime Bank
Chime has some unique features that set it apart from other disruptive banks:
- Get paid early: If customers sign up for automatic deposit, they can get paid two days before they would ordinarily be paid. This is likely the most unique feature that Chime has.
- Automatic savings: When customers make payments, their payments are rounded up and the difference is put in a savings account. Customers can also have savings automatically deducted from each paycheck.
- Mobile payments: Chime can send instant payments from account to account through its mobile app, as long as both parties have the mobile app installed.
It’s these unique features that may have made it an interesting bet for its investors. Yet, Chime isn’t without its problems: its core problem is its funding. Chime is a fee-less service and is, ostensibly, funded purely through transaction charges — much like a merchant service rather than a bank. Chime is looking into expanding its product offerings, but as of now, this is its major profit center.
Whether this will prove to be enough funding for the company will depend on how lean the company can remain. With profits that are coming only from a single source, Chime will need to be able to expand while carefully scaling its overhead. As it expands into new products, it will also need to manage its profits and expenses.
It’s also not the only disruptive bank out there. Competitors like SoFi are offering savings rates of above 2%, in addition to full mobile features. In the case of SoFi, it’s able to do this because it brings in profit from its loan services, rather than relying purely on its checking and savings accounts. This is something that Chime may also be able to do if it is able to safely expand its product offerings.
The Future of the Disruptive Bank
It’s inarguable that banks are moving away from brick-and-mortar locations and towards apps. Even the largest of banks are now bolstering their mobile apps to compensate for this. Moving forward, competition is going to continue increasing within the market. Consumers are looking for high interest rates and easier mobile management — and they are willing to forego traditional locations and in-person customer service to get them.
Whether Chime is a good investment depends largely on whether it is able to successfully differentiate itself from the competition. With unique features such as “get paid early,” it’s already taken some positive steps. Chime is currently the largest of the notable disruptive banks, and it appears as though the company is going to be using its new investments to broaden its service packages and expand into the lending market. With all that in mind, it may very well become a major competitor to traditional banking services in the near future.