Forget pens on chains and lollipops at the drive-thru — how about access to your paycheck two days early or the ability to overdraft without a 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 institutions like Bank of America and JP Morgan Chase. Wary millennial and Gen Z consumers, in particular, have been seeking new options.
If you’re among them, here's what you need to know about the major players.
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 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.
Lately, Chime has been promoting its Credit Builder card, a secured card that 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 July, 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 have been blanketing 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 $100) without incurring a penalty. Current works with Choice Financial Group and Metropolitan Commercial 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%."
Launched in 2017, Varo’s website boasts "no hidden fees" and "early direct deposit." 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.”
Eric Taylor, Varo's director of UX research, says the charter gives it "a distinct competitive advantage" over other fintechs.
"We don't have an intermediary bank that gets a cut of every single transaction," he says.
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 and — a big selling point — can safely call itself a bank. Varo has 4 million accounts.
The bank has several income streams, but the primary way Varo makes money is through (yup) interchange fees.
Like the other fintechs, Varo prides itself on early direct deposit, providing people's paychecks available as soon as it receives notification that payroll is being processed. For a typical Friday payday, this can mean getting paid as soon as Wednesday. This method is what enabled Varo, too, to make stimulus checks and child tax credit payments available early.
“As customers need changes, it's very important to have our finger on the pulse," Taylor says.
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."