Challenger banks already had trust issues. Then came the service interruptions.
Digital-only banks were supposed to be above the glitches that bedevil traditional banks relying on core technology. But a major outage at a third-party provider that affected two challengers demonstrated that even digital-first banks are vulnerable to service interruptions.
Service interruptions last week at Chime and Varo Money were caused by an “operational incident” at the payments processor Galileo, as the processor put it.
Digital-only banks are built on new cloud-based technology and boast streamlined user experiences, but analysts note that depending on third parties for services can be risky.
"No financial institution worldwide, small or large, digital only or not, is immune to these problems," said David Albertazzi, research director of retail banking and payments at Aite Group. "The reasons tend to vary, ranging from a planned maintenance or update that goes wrong to something more severe, including outages at third-party service providers."
Chime took the brunt of the outage as customers last Wednesday tweeted complaints about declined debit card transactions, inability to withdraw cash at ATMs and the failure of the bank’s mobile app to deliver notifications about certain types of transactions.
Chime told American Banker it wasn’t until early Saturday morning that all of its services were “fully up and running."
Varo experienced a minor disruption in processing that resulted in short delays for some of its customers.
Chime and Varo both use Galileo for different services as the Salt Lake City company in recent years has morphed into an application programming interface provider for a variety of fintechs.
When asked why there was no service interruption at Varo, Colin Walsh, its CEO, said that “this particular incident was very much something between Galileo and Chime.”
“We operate on a different instance of the Galileo platform that was not impacted,” he said.
Galileo has yet to publicly pinpoint what caused the incident. The company did not respond to a request for comment for additional details related to the service disruption.
Chime declined to make executives available for this story.
“Right now our entire senior leadership team is heads-down focused on reaching out to members who were negatively affected by the service disruption and as a company we’re focused on efforts to do right by our members,” a Chime spokeswoman told American Banker.
Yet even before the recent outages, consumers had concerns about digital-only banks. A recent study by Kantar, a consulting firm in London, found that European and U.S. consumers have trust issues with challenger banks. Only 19% of consumers completely trust the challengers they use, while 47% completely trust traditional banks.
Kantar found only 2% of the 300 American consumers it surveyed had switched to a challenger bank.
While that likely has to do more with U.S. consumers having more banking options than elsewhere globally, it can be a concern for established challengers and those entering the market like Monzo, N26 and Revolut.
“It’s really not a revolution now, is it?” Reg van Steen, the lead author of the report, said in an interview, referring to low consumer adoption of U.S. challengers.
Van Steen said U.S. challengers, and those entering the market, need to solidify trust in their services.
“If you want to build a new brand in the finance category, you have to be out there all the time,” van Steen said. “People have to be acquainted with you, and it’s about brand building and building trust.”
“If you don’t have any trust, or sufficient trust, you don’t grow and it’s certainly not going to be a revolution in banking.”
"We are seeing incumbent technology vendors looking to create fintech ecosystems comprised of multiple offerings that they can more quickly and easily roll out their end users," he said. "With the explosive growth of these fintech providers, it is critical that they fully vet their entire ecosystem and test for scalability, redundancy and business resumption."
Walsh has emphasized building trust with Varo customers as the fintech pursues a banking charter.
“I’ve said all along that the biggest currency that we trade in is trust,” Walsh said. “In particular as a digital bank, you’re making sure the experience is working and it’s running safely and reliably.”
If the recent outages were a problem, some competitors said the firms involved at least handled the situation appropriately.
“Chime didn’t shy away from the fact that they were dealing with issues,” said Marek Forysiak, CEO of the digital-only bank Moven. “Be transparent. Communicate when these types of events happen. You have to take responsibility for the fact that I’m a custodian of your money."