Chris Britt, Chime’s CEO and cofounder. (Photo by Kimberly White/Getty Images for TechCrunch)
by Eliza Haverstock
Overdraft fees are high on the list of things consumers like the least about traditional banks.
So it’s no surprise that consumer fintechs are now one-upping each other to provide the best overdraft coverage—for free.
San Francisco-based Chime, the nation’s most valuable digital quasi-bank (with a $14.5 billion valuation), announced Wednesday that it would double the top amount that users can overdraw their accounts by to $200. But in this case, market leader Chime, which offers checking accounts, early direct deposit, a debit card and budgeting tools, is playing catch-up.
A host of digital banking startups offer similar features, drawing in customers who might find themselves racking up overdraft fees with traditional bank accounts. Though the fintechs’ overdraft offerings are structured in varying ways—some automatically advance money before a charge might hit, while others like Chime allow a customer to temporarily go into the red—they typically resemble interest-free loans, which are repaid from a customer’s next paycheck.
For example, Dave, a $1-per-month banking app with some 9 million customers, was early to market with a cash advance feature in 2017. Dave users with direct deposit history could originally request cash advances of up to $75—an amount Dave upped to $200 in February.
Chime introduced its own overdraft coverage program, dubbed “SpotMe”, with a maximum limit of $100 in 2018. As with competitors, there’s a barrier to entry: it’s offered only to users who have demonstrated recurring direct deposits—most often of a paycheck. The service allows these eligible people to spend more than is in their Chime checking account, up to their SpotMe limit, which can vary person-to-person based on factors like income, spending history and account balance. (Transactions are declined beyond that limit.) When the customer’s next paycheck hits their Chime account, the company effectively pays itself back. The customer can also tack on an optional “tip” for the app’s trouble.
Chime has spotted about $2.5 billion since 2018, and strong customer demand prompted the company to raise the overdraft maximum, says billionaire CEO Chris Britt. About 2.5 million Chime customers used the service in the past year, and 1.5 million used it in April 2021 alone, according to Britt. Founded in 2012, Chime has remained mum on its total customer count in recent years, but a February study from Cornerstone Advisors and StrategyCorps estimated the fintech had 12 million U.S. users, more than any of the other so-called challenger banks.
Even the brick-and-mortar banks are testing the waters with the cash advance model popular among their digital-first peers. Fifth Third, a regional bank based out of Cincinnati, released a digital banking platform in late April that gives customers the ability to advance $50 or more for a small fee against future qualified direct deposits, like their payroll. Fifth Third is also testing an early paycheck feature in Georgia and plans to roll it out nationwide in late June. In December, Bank of America announced plans to offer interest-free short-term loans of up to $500 to some customers, with a $5 fee.
Overdraft fees, typically running $35 per instance, have been big money makers for traditional banks. In 2019, banks raked in more than $11 billion in overdraft fee revenue, according to the Center for Responsible Lending. The fees, critics say, hit hardest those who can least afford them—-the Center found that just 9% of account holders pay 84% of the fees each year and this group tends to carry balances of less than $350.
Overdraft fees are such a tempting target for the fintechs, that Brigit, a New York-based startup that raised a $35 million series A in January, essentially does nothing but protect customers from those fees. Using their cash flow data, Brigit predicts if a customer will run out of money in their primary bank account, and if necessary, automatically transfers up to $250 into their accounts before an overdraft charge hits. The $9.99-per-month app has built its entire business model around automatic overdraft coverage, an on-demand cash advance option and budgeting tools, and it has no intention of offering a checking account or other features the way Chime or Dave do, says CEO Zuben Mathews.
Fintechs have come up with other models too. For example, early paycheck app Earnin has a “BalanceShield” service that can preemptively cash out up to $100 of a user’s earnings if their bank balance dips below $100.
While cash advance features could help the millions of Americans living paycheck to paycheck, these services have themselves come under scrutiny. In 2019, regulators from 11 states and Puerto Rico launched an investigation into the payroll advance industry. “Some of these firms appear to collect usurious or otherwise unlawful interest rates in the guise of ‘tips,’ monthly membership and/or exorbitant additional fees, and may force improper overdraft charges on vulnerable low-income consumers,” said a statement from New York’s financial services department at the time.
Chime points out that the “tips” some users pay for SpotMe are completely voluntary and there are no other fees or interest associated with the service, which Britt says is a breakeven business mainly intended to draw in new customers. Chime’s debit card is in Visa’s network, so the company earns the bulk of its revenue from interchange fees when purchases are made with the card.
“We don’t let people take an account negatively at a huge amount relative to what their income is,” Britt says. “It’s a gesture that we hope is helpful to people who are dealing with some short-term liquidity challenges.”