Forget pens on chains and lollipops at the drive-thru — how about access to your paycheck two days early or the ability to avoid an overdraft fee?
Those modern banking perks are popular among financial technology companies like Chime, Current and Varo, which have exploded in popularity in recent years. Often called neobanks, these institutions intentionally position themselves as alternatives to the stuffy, Wells Fargo-type legacy banks of the world. Their mission statements prioritize inclusivity; their commercials target middle-class Americans who need flexibility over when and how they get paid. Put simply: They're not your parents' banks, and they don't want to be.
The rise of neobanks can be attributed to shifts in demands in the consumer banking market, says Marco Di Maggio, an associate professor at the Harvard Business School. Lots of people no longer trust large, traditional financial institutions like Bank of America and JP Morgan Chase. Wary millennial and Gen Z consumers, in particular, have been seeking new options.
Fortunately, you have options, but you'll need to compare some of the major players before choosing one. Keep reading to learn some of the major differences between Chime, Current and Varo.
Neobanks pros and cons
|•Fee-free access to more than 60,000 ATMs
•SpotMe® overdraft protection up to $200
•Free cash deposits at Walgreens locations
|•Must sign up for direct deposit to use mobile check deposit
|•Overdraft protection up to $200
•Earn points and cash back for using your debit card at specific places
•Free withdrawals at more than 40,000 ATMs
|•$3.50 fee when depositing cash
|•Fee-free access to more than 40,000 ATMs
•Has bank charter
•No overdraft fees
|•Stipulations for earning the highest possible interest rate
You may have spotted Chime in a Riverdale episode or Jonas Brothers music video. But it's more likely that the startup crossed your feed in 2020 when the government sent out its initial round of coronavirus stimulus checks — and Chime members got access to their money early.
Reaching all kinds of customers is a major goal for Chime, 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 that allows most members to overdraw on cash withdrawals and debit card purchases up to $200. Features like these, Plante says, make it ideal for Americans who live paycheck to paycheck.
"Our regular, everyday customer is someone who is working 9 to 5, getting paid every two weeks, and is a little younger than an average bank customer," he says.
Chime also offers a Secured Chime Credit Builder Visa® Credit Card, which helps customers develop a credit history. Credit Builder cards don’t require a hard credit check and don't have a preset credit limit, so they don't impact utilization.
Chime isn't without controversy: In 2021, a ProPublica investigation found it was closing people's accounts and racking up consumer complaints. It's also important to recognize that Chime is a fintech, not a bank — in fact, a court has legally said it cannot describe itself using the word "bank."
As such, 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 when you swipe your card at a store or make an online purchase.
Plante says the idea is that Chime is there for you, not out to get you. For example, Chime made stimulus funds available as soon as it got the file from the government rather than waiting for the cash to actually arrive.
"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."
New York City subway riders will recognize the name Current from the ads that once blanketed the trains. "Did anyone miss bank branches during quarantine? We rest our case," reads one. "Banks are cheugy," proclaims another.
The marketing copy may set off your "fellow kids" radar, but the distinction is important, says chief technology officer Trevor Marshall.
"At a bank like a Bank of America or a Chase, you're trying to bring in deposits to facilitate other types of operations … You're trying to sell a list of products that generally you're manufacturing yourself,” he says.
Current is what Marshall calls "deposit-agnostic," meaning it generates most of its revenue from merchant interchange fees, in effect monetizing the flow of money instead of its storage. (Noticing a trend here? Big banks run into price control policies on interchange fees when they have more than $10 billion in assets, so they're generally not attractive to large institutions.)
Founded in 2015, Current features include faster direct deposit, cash back, quick gas hold removals and teen banking. It also offers customers fee-free overdrafts, allowing premium customers who deposit at least $500 a month to overdraw their accounts (up to $200) without incurring a penalty. Current works with Choice Financial Group and Cross River Bank; the Current debit card is a Visa. ATM access is through Allpoint.
Marshall says Current works well for people with multiple jobs or who are unemployed — customers big banks may overlook.
"We want to make sure money is fluid," he says. "We're really not suited for and may not ever be suited for the top 1%."
Varo’s website boasts "no hidden fees" and "early payday." But the main factor that sets Varo apart is its national bank charter, issued in 2020.
The charter allows Varo to legally operate as a bank. When then-Acting Comptroller of the Currency Brian P. Brooks announced Varo’s charter in a statement, he said the mobile-only bank "represents the evolution of banking.”
Colin Walsh, Varo’s CEO and co-founder, says Varo is increasingly evolving into a holistic money management system “designed for what our customers need.” And who are those customers, exactly? Well, Walsh says Varo is popular among everyday Americans — nurses, delivery drivers, gardeners, housekeepers and more.
The bank charter means Varo is regulated by the government, which he says comes with an element of legitimacy that can give customers peace of mind. It also means Varo itself is insured by the FDIC and — a big selling point — can safely call itself a bank.
“We’re able to give a level of trust and confidence [to] our customers that their money is going to be safe,” he adds.
The bank has several income streams, but among them is (yup) interchange fees.
Varo boasts a “full suite of products,” including a high-yield savings account offering 5% APY on deposits up to $5,000 and a secured credit card (Varo Believe) that can help users build credit. Last year, it added the direct money transfer service Zelle to its mobile banking app.
Walsh says Varo is not only serving folks who live paycheck to paycheck but also capitalizing on generational trends where younger consumers avoid old-school bank branches in favor of digital innovators.
“[With] the combination of the national shift as well as this legacy of both structural and economic inequality, the time is really ripe for these solutions,” Walsh says. “And we're finding that consumers are enthusiastically embracing them.”
Neobanks vs traditional banking
Neobanks are similar to traditional banks in several ways, but they differ widely in several key areas. Here is a breakdown of some of the similarities and differences.
Traditional banks tend to offer checking and savings accounts, as well as loan products, credit cards and financial services. They generally also have various investment products like certificates of deposit (CDs).
Neobanks, meanwhile, usually specialize primarily in online checking accounts and savings accounts.
Both types of financial institutions offer mobile apps. Neobanks usually have partnerships with ATM networks across the country so you can access your money in thousands of in-network locations. Each neobank also provides ways to deposit cash into your account, but some may charge fees.
Typically, you can visit brick-and-mortar branches of traditional banks. Neobanks often offer online services without any physical branches. Instead, they're completely digital, requiring account holders to perform all their banking functions on a computer, tablet or phone.
Each neobank provides various ways to access customer service. You can contact Chime through its mobile app chat feature. You can also reach a customer service agent 24/7 by calling (844) 244-6363.
When banking with Varo, you can contact support 24/7 through its mobile app chat option. You can reach a customer service agent by calling (877) 377-VARO from 8 a.m. to 4:30 p.m. MT Monday through Friday.
You can contact Current through its mobile app chat feature or by emailing firstname.lastname@example.org for 24/7 support. It doesn't have a phone number.
A traditional bank must acquire a banking license to operate, meaning they’re subject to oversight by several entities, including the Federal Reserve and Comptroller of Currency (OCC). Neobanks tend to be less regulated.
There are governing boards that regulate and back up the banking industry, like the Federal Deposit Insurance Corporation, or FDIC. FDIC insurance generally protects up to $250,000 per depositor per bank per ownership category in the event of a bank failure.
But neobanks don't usually offer this FDIC insurance. However, Varo is FDIC-insured because it has a banking charter. Chime provides FDIC insurance through its partnership with two banks. Current also provides “pass through deposit insurance coverage” with the FDIC through its banking partnerships.
Things to consider before opening a neobank account
You can open as many accounts as you'd like, but you should consider several factors:
- Whether you need a physical branch: A neobank likely isn't the right choice if you want to regularly visit physical locations for your banking services.
- What services are offered: If you have minimal banking needs, a neobank may be a good choice for you. If you want a full-service bank, you could benefit from choosing a traditional bank.
- What the rates are: Because they’re operated online, neobanks generally have fewer overhead costs than brick-and-mortar banks, which can lead to higher interest rates on deposits.
- How to access customer service: Both options offer customer service, but neobanks generally only provide this online or over the phone as opposed to in-person bank representatives.
What are the similarities between Varo and Chime?
What are the requirements to open an account on Varo?
What are the requirements to open an account on Chime?
What are the requirements to open an account on Current?
So what's the catch?
Chime, Current and Varo may sound great, but the main reason they're able to offer these perks to customers is that their operations are inexpensive. (Like with online banks, they don't have to pay to keep the lights on at physical branches.) But eventually, Harvard Business School’s Di Maggio predicts, the proverbial other shoe is going to drop. It's expensive for them to acquire customers — hence the subway ads — and blue-collar members don't necessarily generate a ton of revenue.
"The question is: Is it not a sustainable model, or are there going to be other products neobanks are going to offer to make [them] profitable?" he says.
As such, Di Maggio predicts we could see these fintechs expanding into new areas, offering lending products or even charging some of those fees they claim to hate so much. At that point, members will have to decide whether to stay or go. The fintechs are hoping for the former, especially because they're such lean operations.
Still, he says, they won't all survive.
In the meantime, consumers may want to tread carefully.
"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."