Challenger banks apply pressure with fee cuts

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While a number of U.S. banks struggle to address consumer dissatisfaction with fees and their mobile bank offerings, challenger banks continue to push new fee-busting features to their apps and tout rapid customer growth.

Chime last week became the latest challenger bank to roll out an enhanced overdraft feature meant to help account holders cover minor shortfalls until their next paycheck.

The San Francisco company introduced an overdraft tool called SpotMe, which enables eligible customers to freely overdraw their accounts by as much as $100 without the penalty of a declined purchase.

Varo Money two weeks ago introduced a similar feature, which allows overdrafts up to $50 before the challenger declines a purchase.

“The notion of someone going negative by as much as $5 or $10, and then charging them $35 or $40 for an overdraft fee, makes no mathematical sense,” Chime CEO Chris Britt said about the company’s view on overdrafts.

The continued focus among challengers to reduce fees through new consumer-friendly app features will pressure traditional banks to follow suit, said Jackson Mueller, the Milken Institute’s fintech lead.

Mueller noted how such features help address the shortcomings of the current automated clearinghouse system, which can sometimes leave consumers in a bind if they are living paycheck to paycheck.

“These are the types of discussions that are happening in parallel to discussions about real-time payments,” he said. “If there’s a deposit on Friday, they might not have access to it until Monday or Tuesday, and they might overdraw.”

It is a scenario Democratic presidential candidate Elizabeth Warren tweeted about over the Labor Day holiday weekend in her effort to point out the shortcomings of the current system. She has proposed a modernization of the U.S. payments system as part of her campaign.

Chime earlier this summer began rolling out SpotMe to a limited number of users. Today, more than 500,000 customers are eligible for the service with more being added daily, according to the company.

Chime also announced it has 5 million accounts, up from 4 million just three months ago.

Chime claims it already has saved its customers some $200 million in would-be overdraft fees had those users been at a traditional bank.

Venture capitalists are betting on challenger banks' ability to draw consumers away from traditional banks: In 17 deals globally, challenger banks raised $649 million in the second quarter. That was up about 8% from 2018.

Like Varo’s enhanced overdraft feature, Chime’s offering has certain qualifications account holders must meet.

Users that receive a payroll direct deposit of at least $500 can sign up for the service. Chime will then assist customers with up to $100 on debit card transactions with no fees or declined purchases. A user’s negative balance is paid back when their next direct deposit hits the account.

Britt said the overdraft coverage begins in the $20 range, and eventually increases to $100 as customers continue to be in good standing with Chime.

“We're prudent about how we roll this out,” Britt said. “We know that there are some bad actors out there. There are a variety of factors that go into eligibility, but it’s mostly based on your status in terms of direct deposit, then tenure of the account, and actual account use.”

Britt said the company will incur some costs associated with essentially providing users with a short-term loan to cover account shortfalls. To that end, it’s enabling customers to leave an optional tip for the service in an effort to “pay it forward” to other users.

“The reality is that you will have some loss from offering a service like this,” Britt said. “If people are really happy with our service, and they want to optionally give us a tip, they can. It helps us offset any potential losses that we get from certain members who maybe take the account negative and then walk away and close the account,” he added.

The new overdraft features from Chime and Varo illustrate another way challengers are attempting to upend the status quo when it comes to traditional banking.

Mueller said banks likely have the ability to offer such a service.

“They have the data to do this,” he said. “They know that people are getting paid on a certain date. If someone overdraws between $50 and $100, the bank knows that person will be able to pay it back when the payroll hits.”

As for Chime’s growth in the past month, Britt said the majority of that is fueled by word-of-mouth for the product.

“The biggest source of growth has been our own members that have been referring friends,” Britt said. “The foundation of marketing at Chime hasn’t been around a clever ad campaign. It starts with a product that aligns with people's best interests and is actually helpful.”

In June at a CB Insights event, Britt said he envisioned a scenario where Chime could hit 25 million accounts in the next several years.

He told American Banker that number is still a strong possibility.

“I think it’s definitely doable,” Britt said. “The rate at which we’re growing accounts is actually faster than we anticipated and we don’t think we’re going to have a problem continuing at the current pace.”

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