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Is It Time to Switch Banks? What to Know About ‘Neobank’ Startups Like Chime, Current and Varo | Personal Finance

Is It Time to Switch Banks? What to Know About ‘Neobank’ Startups Like Chime, Current and Varo | Personal Finance
Written by publishing team

Julia Glum

Forget about pens on chains and lollipops when you drive through — how about getting to your paycheck two days in advance or being able to overdraft with no fees?

These modern banking franchises are very popular among fintech companies like Chime, Current, and Varo, which have gone viral in recent years. Often called the new banks, these institutions deliberately position themselves as alternatives to the old, stifling Wells Fargo-type banks of the world. Their mission statements prioritize inclusivity; Their commercials target middle-class Americans who need flexibility about when and how to get paid. Simply put: It’s not your parents’ banks, and they don’t want to.

The emergence of new banks can be attributed to shifts in demand in the retail banking market, says Marco Di Maggio, associate professor at Harvard Business School. Many people no longer trust large, traditional institutions such as Bank of America and JP Morgan Chase. Wary consumers of millennials and Generation Z, in particular, are looking for new options.

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If you are among them, here’s what you need to know about the major players.

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chime

You may have detected the ringing in a file Riverdale The Jonas Brothers episode or music video. But the startup likely crossed your feed in 2020 when the government sent out its initial round of coronavirus stimulus checks — and Chime members got access to their cash early.

Reaching all types of clients is a key goal for Chime, says Aaron Blunt, vice president of lending products and banking strategy.

Launched in 2014, Chime boasts no monthly fees and no minimum balance, as well as a no-fee overdraft product called SpotMe which allows most members to withdraw on debit card purchases up to $200. Features like these make them ideal for Americans who live from paycheck to paycheck, Blunt says.

“Our regular daily client is someone who works from nine to five, gets paid every two weeks, which is a bit smaller than the average bank client,” he says.

Recently, Chime has been promoting its Credit Builder Card, a secure card that helps customers develop a credit history. Credit Builder cards do not require a hard credit check and do not have a pre-determined credit limit, so it does not affect their use.

Chime is not without controversy: In July, an investigation by ProPublica found that she was closing people’s accounts and raising consumer complaints. It’s also important to realize that Chime is a fintech company, not a bank – in fact, a court of law said it couldn’t describe itself using the word “bank”.

As such, its banking services are provided by Bancorp Bank and Stride Bank; Her debit card is Visa. They mainly make money through exchange fees, which merchants pay when you swipe your card in a store or make an online purchase.

The idea, Blunt says, is that Chime is there for you, not out to fetch you. For example, Chime made stimulus money available as soon as it got the file from the government rather than waiting for the money to actually come in.

“The big banks can do it just as easily as Chime does — and it may be much easier,” Blunt says. “They chose not to make it available until those dollars arrived.”

Stream

New York City subway riders will recognize the current name from ads that used to cover trains. “Has anyone missed bank branches during the quarantine? We are resting our case,” one reads. “Banks chewing, “declares else.

The marketing copy may raise the radar of your “fellow kids,” but the distinction is important, says Trevor Marshall, chief technology officer.

“In a bank like Bank of America or Chase, you’re trying to bring in deposits to facilitate other kinds of operations…You’re trying to sell a list of products that you generally make yourself,” he says.

The current one is what Marshall calls “deposit neutral,” meaning that it generates most of its revenue from trading fees, actually monetizing the money flow rather than storing it. (Did you notice a trend here? Big banks face price-control policies with regard to interchange fees when they have more than $10 billion in assets, so they are generally not attractive to large institutions.)

Founded in 2015, current features include faster direct deposit, cashback, fast gas retention, and teen banking. It also offers customers no-fee overdrafts, allowing premium customers who deposit as little as $500 per month to withdraw their account (up to $100) without incurring any penalty. Currently with Choice Financial Group and Metropolitan Commercial Bank; The current debit card is Visa. Access to ATMs through Allpoint.

Marshall says Current works well for people who have multiple jobs or are out of work — customers may overlook the big banks.

“We want to make sure the money is liquid,” he says. “We don’t really fit and may never fit into the top 1%.”

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precautionary

Launched in 2017, Varo prides itself on “no hidden fees” and “early direct deposit”. But the main factor that distinguishes Faro from others is the charter of the National Bank issued in 2020.

The charter allows Varo to operate legally as a bank. When Acting Comptroller at the time Brian B.

Eric Taylor, director of user experience research at Faro, says the charter gives it a “distinguished competitive advantage” over other financial technologies.

“We don’t have an intermediary bank that gets a share of every transaction,” he says.

While other institutions have to play a “phone game” with the supervising bank every time they want to tweak a feature, Taylor says Farrow can move quickly because it is straightforward regulated. It also means that Varo itself is FDIC insured and – a big point of sale – it can safely call itself a bank. Faro has 4 million accounts.

The bank has many sources of income, but the primary way Varo makes money is through exchange fees (yes).

Like other fintech companies, Varo prides itself on early direct deposit, saving people salaries as soon as they receive a notification that payroll is being processed. For a typical Friday, this can mean getting paid as soon as Wednesday. It is this method that also enables Farrow to make stimulus checks and tax credit payments for children early on.

“As clients need changes, it’s very important that we keep an eye on the pulse,” Taylor says.

So what’s the point?

Chime, Current, and Varo might sound great, but the main reason they’re able to offer these perks to customers is because their operations are inexpensive. (As with online banks, they don’t have to pay to keep the lights on at physical branches.) But in the end, Harvard Business School’s Di Maggio predicts, another proverbial shoe will go down. It’s expensive to get clients – hence the subway ads – and blue-collar members don’t necessarily generate much revenue.

“The question is: Is this not a sustainable model, or will there be other products that the new banks will offer [them] profitable? ” He says.

As such, Di Maggio predicts that we may see these financial firms expand into new areas, offer lending products or even charge some of those fees that they claim to hate so much. At this point, the members will have to decide whether to stay or go. Fintech companies hope to achieve the former, especially because they are very simple operations.

However, he says, not all of them will survive.

In the meantime, consumers may want to tread carefully.

“They’re trying to get as much as possible with customer acquisition with all these great features,” he says. “And then they will figure out how to make those clients profitable.”

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