Overdraft fees are high on the list of things consumers dislike most about traditional banks.
So it’s no surprise that mainstream fintechs are now outdoing themselves to provide the best overdraft coverage – for free.
San Francisco-based Chime, the country’s most valuable digital near-bank (with a valuation of $ 14.5 billion), announced on Wednesday that it would double the maximum amount users can withdraw from their accounts by 200 dollars. But in this case, market leader Chime, which offers checking accounts, early direct deposit, debit card, and budgeting tools, is catching up.
A host of digital banking startups offer similar functionality, attracting clients who might find themselves racking up overdraft fees with traditional bank accounts. While fintechs’ overdraft offers are structured in different ways – some automatically advance money before a fee is charged, while others like Chime allow a client to temporarily go into the red – they generally look like to interest-free loans, which are repaid by a customer. next paycheck.
For example, Dave, a $ 1 per month banking app with some 9 million customers, was quickly released with a cash advance feature in 2017. Dave users with a direct deposit history could initially request cash advances. of funds up to $ 75, Dave’s amount increased to $ 200 in February.
Chime launched its own overdraft hedging program, dubbed “SpotMe,” with a maximum limit of $ 100 in 2018. As with competitors, there is a barrier to entry: it is only offered to users who have demonstrated. recurring direct deposits – most often from a paycheck. The service allows these eligible individuals to spend more than in their Chime account, up to their SpotMe limit, which may vary from person to person depending on factors such as income, spending history, and account balance. (Transactions are declined beyond this limit.) When the customer’s next paycheck reaches their Chime account, the business effectively reimburses itself. The customer can also add an optional “tip” for the app problem.
Chime has spotted around $ 2.5 billion since 2018, and strong customer demand has prompted the company to increase the maximum overdraft, says billionaire CEO Chris Britt. About 2.5 million Chime customers have used the service in the past year and 1.5 million have used it in April 2021 alone, according to Britt. Founded in 2012, Chime has been silent on its total client count in recent years, but a February study by Cornerstone Advisors and StrategyCorps valued fintech had 12 million American users, more than all the other so-called challenger banks.
Even physical banks are testing the waters with the popular cash advance model among their digital peers. Fifth Third, a regional bank based in Cincinnati, released a digital banking platform at the end of April that gives customers the option to advance $ 50 or more for a small fee on 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 short-term interest-free loans of up to $ 500 to select customers for a fee of $ 5.
Overdraft fees, typically $ 35 per instance, have made a lot of money for traditional banks. In 2019, banks raised over $ 11 billion in overdraft fee income, according to the Center for Responsible Lending. Critics say fees hit those who can least afford them the most – the Center found that only 9% of account holders pay 84% of fees each year, and this group tends to have balances below 350. $.
Overdraft fees are such a tempting target for fintechs that Brigit, a New York-based startup that raised a $ 35 million Series A in January, basically only protects customers from these charges. Using their cash flow data, Brigit predicts whether a customer will run out of money in their primary bank account and, if necessary, automatically transfers up to $ 250 to their accounts before an overdraft debit occurs. . 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 doesn’t has no intention of offering a checking account or other functionality like Chime or Dave does, says Chime or Dave. CEO Zuben Mathews.
The fintechs have also offered other models. For example, the Earnin advance paycheck app has a “BalanceShield” service that can preemptively cash out up to $ 100 of a user’s income if their bank balance falls below $ 100.
While the cash advance features could help the millions of Americans living paycheck to paycheck, these services have themselves come under scrutiny. In 2019, regulators in 11 states and Puerto Rico launched an investigation into the payday advance industry. “Some of these companies appear to collect usurious or illegal interest rates under the guise of ‘tips’, monthly membership and / or exorbitant additional fees, and may impose abusive overdraft fees on vulnerable low-income consumers,” declared a declaration of the New York Department of Financial Services at the time.
Chime points out that the “tips” that some users pay to SpotMe are completely voluntary and that there are no other fees or interest associated with the service, which Britt says is a profitable business primarily intended to attract customers. new customers. Chime’s debit card is part of Visa’s network, so the company derives most 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 compared to what their income is,” Britt says. “It’s a move that we hope will be helpful to people facing short-term liquidity issues.”