Issue #113: A bank by any other name would smell as sweet

Hi y’all —

You know that episode of SpongeBob SquarePants where he can’t remember his name, and we get to see inside his brain? Things are on fire in the background as mini SpongeBobs rummage through filing cabinets, looking frantically for information?

Well, if my brain has filing cabinets, I’m constantly combing through them. When, say, I recognize an actor in a show, I mentally search through every movie I’ve seen until I identify them. When I hear a song in a store, I cannot rest until I’ve tracked it down. Sometimes it takes me weeks to put my finger on it, but other times I’m able to find answers quickly.

It happened the other day while I was watching the music video for Demi Lovato’s “Melon Cake.” I saw Demi whip out a Chime card, and I stopped. Where did I know that from? Why did it feel familiar to me? After about 30 seconds, I figured it out: I knew Chime from last year’s stimulus checks. I wrote about it because it was one of the first banks to deliver the economic impact payments to people’s bank accounts.

I’m seeing these sorts of financial technology startups a lot lately. What’s the deal with Chime, Current and Varo? Why are they blowing up right now?

I called Marco Di Maggio, an associate professor at the Harvard Business School, to get some answers. He told me those three are all considered neobanks. 

Di Maggio said neobanks are rising to meet demand created by shifts in the market — specifically, the fact that people generally don't trust their banks. Wary millennial and Gen Z consumers in particular have been seeking new options, so the neobanks intentionally position themselves as alternatives. 

They're not my parents' bank, and they don't want to be.

Chime, for example, prides itself on its member-first approach to money management.

"We think, fundamentally, our business model is aligned with the interests of the consumer, and that's how we design all of our products," says Aaron Plante, vice president of lending products and banking strategy.

Launched in 2014, Chime boasts no monthly fees and no minimum balance, plus a fee-free overdraft product called SpotMe, which allows certain members to overdraw on debit card purchases up to $200.

Chime isn't without controversy: In July, a ProPublica investigation found it was closing people's accounts and racking up large numbers of consumer complaints. It's also important to recognize that Chime is not a bank — in fact, a court has legally said it cannot describe itself using the word "bank."

As a fintech, its banking services are provided by the Bancorp Bank and Stride Bank; its debit card is a Visa. It makes money primarily through interchange fees, which are paid by merchants (not customers) on card transactions.

Plante says the idea is that Chime is there for me, not out to get me. Its handling of the stimulus checks is a good example of this. Chime made the money available as soon as it got the payment file from the government rather than waiting for the cash to actually arrive. The risk for Chime is "basically meaningless," he says, making the decision to advance members on payments and paychecks a no-brainer.

"The big banks could do this just as easily as Chime does — probably much easier," Plante says. "They choose not to make it available until those dollars arrive."

Moving on. Current’s features also include fee-free overdraft and early direct deposits. CTO Trevor Marshall told me it’s "deposit-agnostic" and generates most of its revenue from interchange fees. (Noticing a trend here?)

Current, too, is an intermediary, not a bank. Current works with Choice Financial Group and Metropolitan Commercial Bank to provide banking services; the Current debit card is a Visa.

Marshall says Current works well for people with multiple jobs or who are on unemployment — the customers big banks may consider second-class citizens.

"There is, with this type of business model, the opportunity to align better with customers," he says. "We're really not suited for and may not ever be suited for the top 1%."

Finally, there’s Varo. Varo also has early direct deposit, offers fee-free overdraft and — you guessed it — makes money from interchange fees. But the main factor that sets Varo apart is its national bank charter, issued in July 2020.

The charter legally allows Varo to operate as a bank. And according to Eric Taylor, Varo's director of UX research, the charter gives it "a distinct competitive advantage" over other fintechs. 

Whereas other institutions have to play "a game of telephone" with their supervising bank every time they want to tweak a feature, Taylor says Varo can move quickly because it's directly regulated. It also means Varo itself is insured by the FDIC. In the year or so since Varo obtained the charter, it's opened 2 million accounts.

The charter is "such a clear differentiator in the overall sustainability of the business," Taylor adds, and should show customers Varo is serious about sticking around.

THE BOTTOM LINE

(but please don't tell me you scrolled past all of my hard work)

Chime, Current and Varo are examples of neobanks, which are alternative financial institutions. They’re all consumer-focused and generally pretty similar, with features aimed at regular, young people as opposed to wealthy, older ones.

So what's the catch? Di Maggio warned me that using a neobank may sound great, but the main reason they're able to offer such perks to customers is that their operations are cheap. Right now they’re expanding, but eventually, Di Maggio predicted, the proverbial other shoe is going to drop.

"They're trying to get as big as possible with customer acquisition with all these nice features," he says. "Then they are going to figure out how to make those customers profitable."

VIA GIPHY

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RECEIPT OF THE WEEK

check out this wild celebrity purchase

VIA INSTAGRAM

Triple triple threat Jennifer Lopez is wearing some seriously expensive outfits while doing her victory lap with actor Ben Affleck. J. Lo donned a $16,800 pair of white gold diamond earrings for the VMAs earlier this month; last week, she lugged a $230,000 Birkin bag into the recording studio. For comparison’s sake, the necklace Affleck gave her for her birthday was only about $3,000. Luckily J. Lo knows love don’t cost a thing.

INTERNET GOLD

five things I'm loving online right now

1	I gotta be honest: This paint is so white that it’s stressing me out. Ditto any and all stories about Vantablack. I just don’t like to think about it, OK?!
2	Let us all take a moment to reflect upon the invention of the smiley emoticon, conceived on Sept. 19, 1982. :-)
3	The account Can You Pet the Dog? is famous on Twitter for answering the highly important question as it applies to video games — Call of Duty, yes; The Division 2; no. Now, it’s actually inspiring game developers to include pettable animals in their releases. “Every single pettable video game dog is equally worthy,” Tristan Cooper, who runs the account, told the Washington Post. “They are all good dogs.” 10/10 agreed.
4	Can’t stop thinking about Lil Nas X’s cover of “Jolene.”
5	This is an obituary, but it’s fascinating background about Lila Gleitman, the famous linguist who fought with Noam Chomsky, put the F-word in the dictionary and liked to say “tooken” because of Judge Judy.

401(K)ITTY CONTRIBUTION

send me cute pictures of your pets, please

VIA LYNNE RIVA

This is Ezra, a cat who is looking toward the future of finance. Ezra is a self-professed fan of meowbanks.

Brb, gotta go listen to “Ripped Pants.”

See you next week.



P.S. I've been behind on emails lately, but I finally caught up! Do you use an alternative banking service? What’s your favorite emoji? Do you think Ben Affleck and Jennifer Lopez are going to get engaged again? Tell me ur secrets at julia.glum@money.com or @SuperJulia on Twitter.

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