Challenger bank Chime—oh wait, I can’t call the fintech a “bank.” Let me start over. Chime, a provider of products and services that look, feel, and probably even smell like banking products—but regulatorily-speaking, aren’t banking products—got some unwanted attention recently when American Banker reported:
“Chime is nearing a deadline to stop implying that it operates as a bank, according to a settlement agreement with California regulators. Chime must revise language to state that customers can open a checking account ‘through’ the company rather than ‘opening a Chime bank account.’ Chime is also required to state in its paid ads that banking services are provided by partners [and] must name those partners.”
What’s next? Require Apple to publicly disclose that some of the components in its iPhone were designed and manufactured by partners lest it mislead the public into thinking that Apple is an “innovative” company?
Or better yet…
How about requiring Apple to stop implying that there’s no bank involved with its Apple Card credit card when Goldman Sachs—a bank—is issuing the card?
In the wildest delusions of the (regulatorily-legitimate) banking community, as a result of Chime’s agreement with regulators, the challenger not-a-bank will: 1) see its rate of customer acquisition slow to zero, and 2) experience huge attrition among its base of 12 million customers.
Of course, none of that is going to happen. Chime’s customers couldn’t care less about any of this.
Chime’s accounts are—and will continue to be—FDIC-insured. Chime’s mobile app uptime is as good as any “real” bank. Chime answers the phone when customers call (or so I would assume). And the money that consumers have in their Chime accounts when they go to bed at night is there when they get up in the morning.
That’s what consumers care about.
This situation begs three questions.
Question #1: Why Do We Have Bank Regulations?
The answer is simple—and it’s not “to create a level playing field.” It’s “to protect someone.”
Regulators often refer to consumers as the protected party, but in the current case, consumers aren’t the protected party—banks are.
That might strike you as misguided and wrong. It’s not. Banks are required to meet certain regulatory requirements for a variety of things, and as a result, deserve regulatory protection for certain things.
The interpretation of the regulations is where the picture gets fuzzy. Pymnts.com quoted Rep. Maxine Waters of California, the Democratic chairwoman of the House Financial Services Committee, as saying:
“New entities, including big tech firms, are receiving unconventional bank charters and offering bank products and services while evading regulations most banks, including community banks, must comply with.”
Nonsense: 1) There’s no such thing as an “unconventional” bank charter; 2) No Big Tech firm has received a bank charter—unconventional or otherwise; and 3) New entities are not evading regulations since they rely on banks who comply with them.
Pymnts.com went on to quote Rep. Patrick McHenry of North Carolina, the ranking Republican on the financial services panel, who said:
“The private sector is innovating to meet the wants and needs of all consumers. We should be encouraging our regulators to seek regulatory requirements that fit these advancements, not hinder them. Banking must evolve with current times.”
Makes you wonder who the “progressive” here is.
Question #2: If Chime Isn’t a Bank, Then What is It?
Here’s Chime CEO Chris Britt’s answer:
“We’re more like a consumer software company than a bank. It’s more a transaction-based, processing-based business model that is highly predictable, highly recurring, and highly profitable.”
Huh? Software companies move fast and break things, release buggy products, and provide mediocre customer service. In addition, Britt’s description of the business model seems to rely heavily on interchange as a revenue source. Chime has to share that with its bank partner, however—which dilutes Chime’s profits.
[Note to Chime’s PR agency: Can you help Chris craft a better description than the one above?]
I asked a few folks in the banking industry what they thought Chime is. According to Chris Nichols, Director of Capital Markets at SouthState Bank:
“It’s a UI layer. A fintech company that specializes in just one aspect of banking for one segment. It’s analogous to aftermarket car customization companies like WCC and Galpin. They sell Fords but they don’t look like Fords or perform like them.”
Bankers’ arguments against Chime often focus on “safety and soundness.” If Chime is simply a UI, how is it negatively harming the underlying product’s safety and soundness? (That’s not meant to be a rhetorical).
Brett King, author of the book Bank 4.0, and founder and Executive Chairman of fintech company Moven isn’t buying Nichol’s description:
“Chime is a bank. Regulation is behind the 8-ball on this. What defines a bank is not a regulatory categorization, but how people use it. What a bank does for people—and how it does it—is evolving. Regulation needs to likewise do so.”
Jason Mikulaja, author of the Fintech Business Weekly newsletter agrees:
“Rather than focusing on enforcing the distinction between ‘bank’ and not a bank, which, while legally important, may be lost on the average consumer, regulators should focus on updating licensing categories and processes to reflect the evolving consumer financial services landscape.”
According to Dara Tarkowski, Managing Partner at Actuate Law:
“Labels matter. Regulators care about what you call yourself, your products and your services. If you use a label—even casually—that a regulator thinks will deceive or mislead a consumer, you are venturing into the land of UDAAP and consent decrees. So if you don’t hold a charter, don’t call yourself a bank. What is the impact on consumers? Probably not all that much. But that’s not the point.”
There’s little impact on consumers because consumers aren’t the intended protected party here—banks are. And it’s hard to see how current regulations are protecting either party by prohibiting Chime from calling itself a bank.
Question #3: How Should Banks Respond?
Chime has 12 million customers. Is it because they’ve flaunted regulations and taken unfair advantage of incumbent institutions?
No. It’s because its products and services meet the needs of its low- to middle-income base of customers—consumers that many banks either overlook or under-prioritize.
And Chime partners with a bank who reaps part of the revenue that Chime generates. Any bank with a charter could have competed for that business—but few did.
Fighting this battle on the regulatory front won’t win the war for banks. To win, they need to innovate and compete.
Ron Shevlin is the Managing Director of Fintech Research at Cornerstone Advisors, where he publishes commissioned research reports on fintech trends and advises both established and startup financial technology companies. Author of the Fintech Snark Tank on Forbes, Ron is ranked among the top fintech influencers globally, and is a frequent keynote speaker at banking and fintech industry events. Want to talk more fintech? Connect on Twitter or LinkedIn.