3 FINTECH NEWS STORIES
#1: Chime Is Who I Thought They Were
What happened?
Forbes published a great piece on Chime:
For decades, it’s been a riddle in banking: how do you build a sustainable and profitable business serving low and middle-income consumers? Sixteen years ago, Chris Britt, then chief product officer at Green Dot, believed he’d discovered the answer—direct deposit of paychecks. Green Dot was selling prepaid debit cards to cash-strapped Americans without traditional bank accounts, and Britt saw that customers who had their paychecks automatically deposited into their Green Dot accounts used the card to pay virtually all their expenses. With each debit card swipe, Green Dot pocketed part of the interchange fees–the 1% to 2% charge merchants pay to accept debit and credit cards.
“The people on direct deposit were clearly the whales of the business,” says Britt, 51, the co-founder and CEO of Chime, the nation’s largest digital-only bank with $1.5 billion in annualized revenue and seven million customers using its cards for $8 billion a month in transactions.
So what?
This is one of the few times that Chime has ever disclosed numbers about its business and details on its product roadmap publicly, so let’s start there:
- Seven million customers, most of whom have direct deposit set up.
- In 2023, the company made $1.3 billion in revenue (largely, I’m guessing, off of interchange fees on the $8 billion that its customers spent on its cards per month) but still lost roughly $200 million total.
- Chime claims to have been profitable in Q1 of this year and it still has $900 million in cash from its last fundraise.
- Chime announced its first unsecured lending product – a three- or six-month personal loan of up to $1,000. There’s no credit check required to apply and no late fees, though any missed payments will be reported to the credit bureaus. Each short-term loan has a fixed dollar amount of interest that works out to an annual percentage rate ranging from 6% to 36%.
- Chime eventually wants to expand into retirement accounts and ETFs, but has no plans to follow Cash App and Current into crypto. When asked why, Chris Britt (CEO of Chime) said, “I don’t think aggressively pushing crypto on people who have no other investments is responsible.”.
Overall, this article validates a lot of my feelings about Chime.
In comparison to a lot of its fintech peers, Chime is slow.
Coming from someone like Keith Rabois, that would be a grievous insult. But coming from me? It’s a compliment. Chime has always been methodical about the products and features it introduces to its customers. It doesn’t ship for the sake of shipping. When dealing with lower-income consumers, who are often prey to far too much financial services “innovation”, this is (IMHO) a good thing. Just look at that quote from Britt on crypto. It’s not the responsible thing to do. Yes!!!
The question for Chime is if there’s a profitable business lurking under that well-perceived brand.
With $1.3 billion in revenue, based on its current interchange-centric business model, the answer is obviously yes. Just cut back your marketing expenses and you’re there!
But that’s not the story that the public market, which Chime may soon be joining, wants to hear. They want to hear a more ambitious story of how Chime will become the bank for consumers making less than $100,000 a year (of which there are significantly more than 7 million).
This is where Chime’s new lending product comes in.
I’m not surprised to see that Chime is opting for a fixed-term, fixed-rate personal loan product rather than a credit card. That’s the responsible thing to do! I am slightly dismayed that they didn’t talk at all about their credit builder card, in relation to the installment loan product, and, in fact, are making the installment loan accessible without a credit check (which kinda undermines the supposed value of the credit builder card).
I also worry a bit about timing. Chime is getting into lending at a time when lots of other lenders are tightening their credit boxes. Will Chime be able to get into credit and really crank up profitability while managing risk an continuing to be a responsible partner to their customers?
That’s the question.
#2: Big Merchants vs. Small Merchants
What happened?
Target, Walmart, and other large retailers are unhappy with the settlement that their smaller counterparts negotiated with Visa and Mastercard:
The retailers’ objections tee up what is expected to be a major showdown over the fairness of the settlement, which requires court approval.
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The objectors complained in their filings that Visa and Mastercard would be allowed to resume anticompetitive practices after a five-year pause. Some retailers called the accord’s purported benefits “illusory.”
So what?
Two quick things here.
First, Target and Walmart have a point. While the settlement was reported as a big win for merchants, the details tell a different story.
For example, the settlement would allow merchants to be more proactive in steering their customers’ choices of which payment cards to use, which sounds like a big deal! However, if you read the fine print, you discover some rather debilitating restrictions (emphasis mine):
Merchants are allowed to offer discounts to customers to incentivize them not to use a credit card or debit card or to use a different one than they might otherwise choose. The amount of the discount is uncapped, and the discount can be applied at both a card-type level and an issuer level. However, merchants are required to display the discounted and non-discounted prices next to every single product. They are not allowed to simply mark down/up at the point of sale.
As I am fond of saying around here, Visa and Mastercard aren’t stupid. They know just how much ground they can give to appear to lose while continuing to defend their franchises.
The second part of this that’s interesting to me is this quote from Walmart:
[small local merchants] traded away the interests of large national merchants for relief that is worthless to the members with the most at stake in this litigation.
Despite the validity of their larger point, it’s still pretty ironic for Walmart to accuse smaller merchants of selling them out in this settlement. Walmart, Target, Amazon, and other retail behemoths are famously self-interested when it comes to payment acceptance costs. I don’t remember them offering to pass along some of the savings from their interchange-plus pricing to their smaller peers.
As I wrote about recently, the only way to understand merchants’ strategies when it comes to financial services is to divide the market into Sears and everybody else.
#3: Stored Value … For Whom?
What happened?
A payments infrastructure company raised a Series A:
Ansa, a startup that helps merchants develop and offer branded virtual wallets, has raised a $14 million Series A round of funding, the company has told TechCrunch exclusively.
Founded in 2022 by former Adyen product manager Sophia Goldberg and ex-Affirm software engineer JT Cho, San Francisco-based Ansa is building what it describes as a white-labeled digital wallet infrastructure to help businesses process small payments and offset high credit card fees for smaller transactions.
Or as Goldberg describes it, Ansa is building a “wallet-as-a-service,” or embedded customer balances to let any merchant launch a branded flexible payment instrument.
So what?
I wrote about this news a little bit in last week’s essay in the context of smaller merchants’ growing sophistication when it comes to financial services.
However, there is one thing I didn’t get an opportunity to mention, but that is worth expounding on.
We’re in an age of rebundling in fintech. Mature fintech companies are looking for ways to tie their products together in order to increase their profitability and stickiness.
Take Cash App Boosts, for example.
Boosts (now called Offers) were introduced in 2018. They allow Square merchants to provide rewards, discounts, and cashback to customers who shop in their stores. The catch is that the Boosts are only accessible to consumers who pay with the Cash App debit card.
This is an entirely logical proposition for Block (and a step towards its vision of a united Square/Cash App ecosystem). However, it’s not necessarily ideal for all merchants. After all, if you’re going to fund discounts or rewards for your customers, wouldn’t you want to be able to use that investment to steer them toward a cheaper form of payment (as Ansa’s stored value wallet solution does)?
If you ever find yourself thinking that fintech has been solved or that later-stage fintech companies have won, it’s important to remember that the business decisions that those later-stage companies make will always create openings for new entrants.
2 FINTECH CONTENT RECOMMENDATIONS
#1: Stablecoins are helping create a buyer of second-to-last resort for US Treasurys (by Ayo Omojola) 📚
Really interesting observation from Ayo in this piece – “Stablecoins are turning retail investors/citizens/savers around the world into implicit buyers of US Treasurys.”
The implications of this are fascinating.
#2: The new fintech stack is… open source? (by Matt Brown)
I’d been meaning to dig into the intersection of fintech and open-source software for a while (originally inspired by some crypto observations), but Matt beat me to the punch. Excellent insights, as usual.
1 QUESTION TO PONDER
What creative ideas for Fintech Takes merchandise do you have?
We already have a sweatshirt and a pen, but we need some more ideas. Ideally something clever that can fit onto a t-shirt or a hat (bonus points if you can hit it out of the park with a Bank Nerd Corner-related topic like the BSCA).
