Bank of America – Challenger Bank Chime Reaches The 12 Million Customer Mark

OBSERVATIONS FROM THE FINTECH SNARK TANK

A recent study from Cornerstone Advisors and StrategyCorps estimates that 12 million US consumers are now customers of online bank Chime.

Oddly, it’s been a while since Chime itself announced its customer count after releasing press releases heralding multi-million increases every couple of months the past few years. The last announcement was a year ago, when it said it had 8 million customers.

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I have no idea why it would have stopped the announcements as it—and other challenger banks—grew their customer base by 50% through the pandemic.

Fifty percent growth on 8 million customers is a whole lot more new customers than growing 50% from a base of one million or 500,000 customers, however, and Chime is now dominating the challenger bank space by a wide margin.

Challenger Banks’ Growth as Primary Bank

Not all challenger bank customers consider the fintechs they do business with their primary provider, but an alarmingly large—and increasing—number of people do.

In January 2020, just 4% of Gen Zers and Millennials considered a checking account from a challenger bank their primary account. By December 2020, that percentage had grown to 15%.

Across all US consumers, 11% consider a digital bank their primary institution. The digital banks have, in the aggregate, 17% share of secondary accounts and 30% of consumers’ third accounts.

Megabanks Were the Big Losers in 2020

The big losers in 2020—in terms of share of consumers who consider them their primary institutions—were the megabanks (Bank of America, JPMorgan Chase

JPM
, and Wells Fargo

WFC
). Their share of primary bank customers dropped nearly seven percentage points between January and December of 2020.

With roughly two-thirds of its customers considering the company their primary bank, Chime’s nearly 8 million primary customers effectively makes the challenger bank the fifth largest bank in the country (in terms of primary customers, that is—certainly not in terms of assets, deposits, or revenue).

Other challenger banks don’t have nearly as high a percentage. Just half of Varo’s customers considers the fintech their primary bank, and across the rest of the digital bank landscape, the percentage is similar to Varo’s.

Chime’s Featurization Strategy

Conventional wisdom—and even some of the challenger banks’ own advertising—holds that fintechs win customers because they provide a superior customer experience and have better mobile banking tools.

It’s more than that.

Chime competes with a “featurization” strategy. The fintech certainly offers a good user experience and touts no fees to attract low- to middle-income consumers. But there are three features of the company’s product offering that are key to its success:

1) Early access to money. Nearly a quarter of Chime customers said they chose the fintech as their primary bank because it offers 2-day early access to their direct-deposited paychecks, as well as to government stimulus and tax refund checks.

2) Spot Me. This product feature lets Chime customers make debit card purchases that overdraw on their accounts with no overdraft fees. Chime customers with monthly direct deposits of $500 or more are eligible to enroll. According to Chime’s website, “limits start at $20 and can be increased up to $100 or more, based on factors such as account activity and history.”

3) Credit-builder credit card. Chime’s predominantly low- to middle-income consumers aren’t in the crosshairs of the big credit card issuers’ marketing efforts. According to Cornerstone, 15% of Chime’s primary banking customers either have the card or are on its wait list. To get the card, a customer must have a Chime Spending Account and have set up their direct deposit with Chime.

Improving Financial Health and Performance

These features add up to something important: Perceptions of financial impact.

The Cornerstone studied asked consumers the extent to which their primary bank helps improve the performance and health of their financial life. There was a virtual tie at the top between four providers: USAA, Capital One, Chime, and Bank of America.

There are a certainly a number of reasons why other challenger banks aren’t keeping up with Chime (e.g., marketing). One big factor, though, is that other challenger banks’ customers don’t perceive that those firms have the impact on their financial health and performance to the extent that Chime customers do.

This should be a wake-up call not just for challenger banks but for a lot of banks and credit unions.

It’s not that consumers say their primary bank detracts from financial performance and health. It’s that the biggest chunk of consumers says their primary provider has no impact on their financial health and performance.

This is not good news for the banking industry. In my top trends for 2021 post here on Fintech Zoom I wrote:

“Financial health will be regulated. Look for the new administration to require banks to monitor and improve their customers’ level of financial health. Todd Baker and Corey Stone recently proposed some ideas. The first of their three-stage proposal would require providers to ‘make available to regulators data that regulators can use to analyze and measure changes in customer financial health.’”

What’s Next for the Digital Bank Space?

Chime’s challenger bank competitors may lag in the number of customers and primary status penetration, but there’s a trend in the digital bank space that is diminishing the importance of this gap: Specialization.

New entrants in the space aren’t competing on an alleged “superior customer experience”—they’re competing on specialization or segmentation.

Challenger banks like Bank Boulevard (which caters to black consumers), Daylight (focusing on LGBT consumers), and Panacea Financial (serving physicians) are carving out defensible market niches by focusing on the unique needs of definable segments of the market.

In some respects, challenger banks have become the new “community” bank. It’s just that the communities they serve aren’t geographic communities, but affinity-based communities.

And in other respects, considering the growth in challenger bank customers, it’s the traditional community banks that have become the new “challengers.”