“We were SO close to launching our IPO” is NOT what Chime CEO Chris Britt is saying … [+]
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OBSERVATIONS FROM THE FINTECH SNARK TANK
Barron’s reported last week that Chime, the largest online bank in the US, “may have put its IPO plans on hold.”
This isn’t exactly new news, as Forbes reported back in February that the neobank was delaying its planned IPO in March 2022 amid falling fintech stock valuations.
In an interview with CNBC last week, Britt expressed optimism about Chime’s prospects:
“The market turbulence has not yet reached the average everyday consumer. We’re seeing solid balance sheets, robust transaction activity, people are spending again, going out to restaurants…we’re certainly seeing higher spending on fuel, not surprising.”
When asked by CNBC how Chime makes money, Britt replied:
“[We’re] more of a payment business. Our members use us for their daily expenses and we make a small part of that transaction when the card is used at the point of sale. It’s very consumer oriented.”
Chime’s challenge
Kudos to Mr. Britt for calmly handling the CNBC reporter’s uninformed questions about “lending to consumers with a recession around the corner.”
Chime doesn’t do that, of course, as Britt explained.
However, the challenger bank still faces a major challenge – a customer demographic challenge.
Britt talks a lot about “average, everyday consumers,” but Chime’s customers aren’t really “average.” According to a consumer study by Cornerstone Advisors, compared to other Americans, Chime customers have:
- earn less. On average, US consumers have an annual income of about $65,000. In contrast, Chime clients earn an average of 30% less, or $45,000.
- are less educated. 31% of the US adult population has a bachelor’s degree or higher. However, of Chime’s customer base, only 8% have at least a bachelor’s degree.
- Are in worse financial shape. Cornerstone’s study asked consumers to self-assess their financial health. In the general population, 8% described their financial health as “dismal” and 30% said they were “struggling” (with 48% “getting along” and 14% “successful”). More than half of Chime customers are in bad shape, 12% are in distress and 42% are in trouble.
So while Chime may see more “robust” spending in its client base, the fintech’s client base may not be well positioned to sustain those spending if inflation rages on and a recession looms.
Chime must become the Sam’s Club of the digital economy
What should Chime do to address his challenge? Expand your offering beyond payments and financial services.
One advantage Chime has over many other traditional financial institutions and fintechs is the high level of customer satisfaction.
On a 10-point scale that ranks financial institutions and fintechs based on the value they offer their customers and members, Chime beats credit unions, community banks, megabanks, and other challenger banks — pretty much all but USAA.
Chime scores highly
Source: Cornerstone Advisors
Chime needs to execute on that goodwill by expanding its offering to include other digitally delivered products and services, such as roadside assistance, cell phone damage protection, and identity theft protection, bundled with its payment account.
For 14 different types of services, Cornerstone found that a higher percentage of Chime customers that other US consumers are very interested in getting those services with a checking account from a bank or credit union (or Chime), even if they pay for it you have to pay.
Interested in purchasing non-financial products from Chime
Source: Cornerstone Advisors
After positioning itself as a “fee-free” provider of financial products, providing ancillary products would open a path to revenue generation. Additionally, offering no-deposit/no-credit products and services (I can’t really call them non-financial products) for a fee doesn’t violate fee-free positioning.
In fact, many of Chime’s customers already use — and pay for — many of those 14 products and services, making sales easier for the challenger bank.
Sam’s Club has reinvented itself
Sam’s Club faced a similar challenge a few years ago, with a customer demographic that was heavily biased towards lower- to middle-income consumers. It announced plans to attract more affluent customers in both 2016 and 2018, but that hasn’t been key to its recent success. What worked was reinventing:
- The shopping experience. According to Forbes, the company has created “a 32,000-square-foot store in Texas based on scan-and-go shopping technology” where consumers use their cellphones as a remote control to scan and pay for products and then walk out .
- branches as distribution centers. Merging distribution centers with existing stores as of 2019 – before the pandemic – was a godsend, as the pandemic gave a boost to e-commerce and allowed Sam’s Club to make in-store pickup more efficient.
- Bulk Pricing Algorithms. As the Forbes article states, “The coolest thing about Walmart’s decision to buy Jet.com was the pricing algorithms Jet.com was based on.”
Chime needs a similar reinvention.
While Chime is still growing at a healthy pace, challenger bank Current has added more customers than Chime in 2021, and Square Cash App dominates among African Americans, who make up nearly a quarter of Chime’s customer base.
What’s good for the goose…
A new report by Cornerstone Advisors advises traditional financial institutions to adopt the same strategy.
Banks must create new values in their checking account offerings:
“To maintain deposit account viability, community-based institutions must make up for a declining revenue stream without resorting to penalty fees. The solution: the bundling of value-added services that consumers already have or want in current account offerings and mobile banking apps.”
This process of bundling third-party value-added services into checking account packages is an example of what Cornerstone calls Embedded Fintech.
A financial institution with 100,000 checking accounts could generate nearly $750,000 in additional revenue in the first year of an embedded fintech strategy. As adoption of embedded fintech subscriptions grows to 50% of current accounts in five years, total subscription revenue could grow by more than 700%.
For a free copy of the report Building a Fintech Subscription Engine: How embedded fintech banks and credit unions can help fight the revenue recessionclick here or on the cover photo.
Building a fintech subscription engine
Source: Cornerstone Advisors
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