An uncomfortable fact of personal finance is that you don’t necessarily “pay for what you get”. When a bank offers “Free Checking”, it means “we won’t charge you a monthly fee but we’ll get our money from overdraft charges, ATM fees, and more”. For example, US banks charged their customers over $11 billion in overdraft charges in 2019. Many people had zero overdrafts, while 80% of the overdraft fees were paid by just 9% of account holders. A minority of users often ends up subsidizing the perks for everyone else. This extends to everything from no-annual-fee credit cards to free-trade stock brokers.
Fintech banks like Chime are growing in popularity with their lower cost structure and user-friendly apps. Chime doesn’t charge overdraft fees at all! But despite their claim of “no hidden bank fees” and heavy use of emojis, these are still profit-seeking businesses. This Axios article provides some interesting numbers:
- Chime made an average of $208 per user per year (annual gross revenue) as of June 2020.
- The majority of Chime’s revenue was through debit card interchange fees. Chime does not offer any cash back on its debit card. Whenever you use their debit card, Chime keeps whatever transaction fees it generates. Given that other debit card programs offer up to 1% cash back, I can only estimate that Chime can end up making a little more than 1% of purchases overall.*
- ~20% of Chime’s revenue was from their $2.50 fees for every out-of-network ATM cash withdrawal. This fee in on top of whatever is charged to you by the ATM owner itself. According to the article, Chime only pays about 10 cents to the ATM owner and the rest is profit.
This is not to criticize Chime, as they provide a useful and valuable service to many people who might otherwise not qualify for a traditional bank account, all without charging monthly fees. A lot of people basically use Chime to get their electronic direct deposit as opposed to the traditional paper check, and then spend it right away. Chime’s business model is well-suited for that customer, who previously may have paid a check-cashing service. I have an account with Chime myself (my review + $75 easy bonus) and I can understand why they have become so popular.
My point is that understanding how financial services make money can help you adjust your behavior and/or comparison shop. For banking apps, watch out for overdraft charges and ATM fees adding up despite no monthly fees, as well as spending too much on debit cards when you could be earning better rewards elsewhere. For credit cards, don’t focus on earning frequent flier miles when your debt balance is growing exponentially at 18% interest. For brokerage accounts, those free trades are partially offset by paying nearly no interest on your idle cash.
* Large banks have their debit card interchange fees regulated, but Chime (Stride Bank) is on the exempt list of smaller issuers. Durbin fee limits only apply to large banks with $10 billion in assets and above. The Federal Reserve shows average fee is 1.4% for exempt transactions and 0.54% for covered transactions for debit cards. But both Bancorp and Stride Bank (the two banks behind Chime) are on the exempt list of smaller bank issuers.
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Not to protect Chime (I’m not even a user) but your articles generally are more accurate.
First, typical debit interchange fees are 0.3%. And afaik there’s no 1% cash back debit cards. After Durbin Amendment they became extinct and not sustainable.
Second, I disagree that folks paying overdraft fees subsidize other people’s “free” checking accounts. It’s easy to make the bank to decline a transaction that causes overdraft. Also at least big banks require some form of commitment to make an account fee-free, usually in the form of direct deposit or money tied in.
Thanks for your comment. It’s true that after Durbin there are much less cash back debit card programs, goodbye to the 2% cash back from Peerstreet for example. But Discover Debit, Axos Bank, and Radius Bank all offer 1% cash back on their debit cards, with varied limits. The highest rates mean the thinnest margins. Just as the highest cash back on credit cards maxes out at about 2%, I just used that as a common-sense guide to the profit level.
My understanding is that the debit card fee is now closer to a flat 24 cents per purchase. If your average purchase amount is $24, that’s 1%. Chime targets the underbanked, so their average purchase amount is likely lower than the overall national average. This would also explain why things like rewards checking account require 12+ debit card transactions per month. If you end up making 30 transactions per month, that is close to $7.50 a month in fees.
80% of the overdraft fees were paid by just 9% of account holders. If you were to look at total bank fees, what if it was 20% of the account holders paying 80% of the bank fees? Would that considered as subsidized?
Here is an interesting follow-up (well, to nerds like me). Durbin fee limits only apply to large banks with $10 billion in assets and above. The Federal Reserve shows average fee is 1.4% for exempt transactions and 0.54% for covered transactions for debit cards. But both Bancorp and Stride Bank (the two banks behind Chime) are on the exempt list of smaller bank issuers.
https://www.federalreserve.gov/paymentsystems/regii-average-interchange-fee.htm
https://www.federalreserve.gov/paymentsystems/regii-interchange-fee-standards.htm
Thanks Jonathan.
Actually very interesting observation I did not know about and that easily explains why big banks had to introduce minimum account balances or direct deposit requirements while small banks and CUs could keep actual free accounts.
Still chuckle that this is the same outfit that was behind the Chime Card circa 2015/2014. They offered spending offers for various stores/services similar to American Express offers. As the venture capital money ran out they largely abandoned their users and pivoted to whatever they are today.