Is The Challenger Bank Really Worth That Much?

OBSERVATIONS FROM THE FINTECH SNARK TANK

According to the Wall Street Journal:

“Chime Financial Inc. raised $750 million in its latest funding round, in a move that values the financial-technology startup at about $25 billion and sets it up for an initial public offering as early as next year.”

The fintech continues its meteoric rise in valuation, growing from a $1.5 billion valuation in early 2019, to $14.5 billion in 2020 when it raised $485 million from funds including Tiger Global and Coatue Management LLC.

Chime’s Featurization Strategy

Chime’s valuation has risen in lockstep with its customer growth, which a July 2021 study from Cornerstone Advisors puts at the 20 million mark.

The fintech has done a lot more than just provide a better mobile banking experience for consumers.

Chime competes with a “featurization” strategy. The fintech certainly offers a good mobile 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.

Is Chime Really Worth $25 Billion?

As a point of comparison, Chime’s $25 billion valuation puts it just behind regional bank Fifth Third’s $26.6 valuation. Fifth Third, however, has roughly 4 million checking account customers in contrast to Chime’s 20 million customers.

The important question to answer is: Who are those Chime customers? According to Cornerstone’s research, Chime’s customer base is significantly different from the overall American population in terms of:

• Age. No big surprise here: 68% of Chime customers are 40 years old or younger. In the broader US population, just a third of adults are Gen Zers or Millennials.
• Race. One-third of Chime customers are Black or African-Americans, who comprise 11% of the rest of the population.
• Income. The average income of Chime customers is $39,000 versus $63,000 for all Americans. Overall, 62% of Chime customers earn less than $35,000 compared to 34% of other consumers.
• Education. Just 16% of Chime customers have a college degree or higher. In contrast, 40% of non-Chime customers have earned a college degree.
• Employment. One in five Chime customers is unemployed, split between 16% who are not employed and looking for employment, and 4% who are unemployed but not looking.
• Financial health. Among all American adults, three in 10 consider their financial health to be “dire” or “struggling.” A little more than half (54%) say they’re “managing” and 16% say they’re “thriving.” Among Chime customers, however, 57% categorize their financial health as dire or struggling, and just 8% are thriving.

For a company that doesn’t charge fees on its financial products, is this the kind of customer base that will support a flow of profits that warrants a $25 billion valuation?

Proponents of the high valuation will argue that Chime will expand and grow its customer base into other segments of the population.

I’m not so sure.

While Chime has grown its overall customer base, the percentage of Gen Zers that consider Chime their primary checking account provider declined between October 2020 and July 2021 according to two Cornerstone Advisors consumer studies.

In that timeframe, other digital banks have increased their share of primary status including:

• PayPal. Five percent of Gen Zers, 6% of Millennials, and 4% of Gen Xers consider PayPal the provider of their primary checking account—roughly equal to Chime’s share of primary status.
• Current. Roughly 1.43 million consumers now call their Current checking account to be their primary account, up from 712,000 in October 2020.
• Dave. Almost 910,000 consumers—nearly 80% of whom are Gen Z or Millennials—named Dave as their primary checking account provider in July 2021. That’s more than double the number from October 2020.
• Square Cash. Nearly 685,000 Americans consider Square Cash to be their primary checking account—even though it’s not a checking account. And Square Cash’s demographics looks very much Chime’s, disproportionately skewed to African-Americans and low-income consumers.

Chime has done an amazing job at customer acquisition and dominates the digital bank space. But I’m not buying Chime at a $25 billion valuation.