How Chime Removed Traditional Bank Fees and Still Profits

“Nothing comes for free. Nothing. Not even good, especially not good.” — Lyndon B. Johnson

I don’t know Mister President Johnson, Chime seems to be doing some good, and it’s damn near free!

You’ve been there, I’ve been there. The overdraft shit storm. Your balance is running on fumes, but so is your stomach. You see you have enough money in your account to grab a cheap bite, but the next day you’re overdrawn due to an earlier transaction finally hitting your account, and then another transaction hits, and another. Now you owe your bank somewhere between $75 — $102 for spending a fraction of that amount, oy vey.

Traditional banks like your Chase or Wells Fargo rake in big time on overdraft fees, in fact in 2017 American’s paid over $34.3 billion in overdraft fees! That’s a B as in, this episode has been brought to you by the letter B for Buh-billion.

So how is Chime changing the game? What is this start up doing different, and more importantly how are they generating revenue without the traditional banking fee structures?

Overdraft fees? No thank you!

Chime simply does not charge overdraft fees. If you don’t have the money in your account, your charge will simply be declined.

You know what I meme, I mean “mean”

You can’t get hit with an overdraft fee if you’re never allowed to overdraft.

On top of that, if you have direct deposit set-up with your Chime account, with a minimum of $500 in deposits per month, Chime will unlock their SpotMe feature. If your transaction will overdraft your account, Chime will spot you $20 to $100 based on your payback standing with Chime.

If your next charge is for $25, and you only have $5 in your account, Chime will let the transaction go through, and ask you to reimburse your account to cover the $20, with any future transactions being declined. Practical a small interest free loan.

Gotta buy that almond milk. (Source: Chime Press Kit)

In contrast, the same scenario with a traditional bank will let the transaction go through, and then charge you an additional $34 as an overdraft fee. Putting you in the hole for $54. Oh, and if you overdraft again, that’s another fee charged.

I lied, Chime does make money through fees…interchange fees

I’ve been raised to know that if something sounds too good to be true, then it probably is. Now that I’m older, whenever I see something that sounds like a good deal, instead of running away, I investigate. Going through Chime’s website I found this tidbit of information on how Chime makes money:

“Whenever you make a purchase using your Chime Visa®️ Debit Card, Visa collects what’s called an interchange fee from the merchant for processing your payment.

A portion of this interchange fee is then paid out to Chime.

These Visa interchange fees add up as Chime gets a small portion every time you use your Chime card to pay for bills and make purchases.” — Chime

Not a bad idea. To illustrate what Chime is doing see my crudely drawn flowchart below:

Everything is easier to learn when you use adorable stick figures!

When you use your Visa (or MasterCard or American Express card for that matter) at a merchant, the merchant is swiping it through their register or PoS (Point of Sale). The PoS charges the merchant a small fee for using it’s payment processing services. In the diagram above Square is our payment processor, and you can see their fee structure here. It typically ranges from 2.5% + $0.10 to 3.5% +$0.15 per transaction. Square has a deal with Visa to be able to accept Visa debit and credit cards, in exchange for allowing Square to process customer’s Visa debit and credit cards, Square agrees to pay the agreed upon interchange fee to Visa. Visa actually lists all of their various interchange fees here.

So when Visa collects fees from the payment processor, Visa can determine which card was used (in our case a Chime debit card) and then pay the agreed percentage to Chime.

So if you went to a coffee shop and spent $5, and the coffee shop uses Square to process your payment, your coffee shop pays Square $0.23:

($5 x 2.6%) +$0.10 = $0.23

Square then has to pay Visa $0.20:

($5 x 1.9%) +$0.10 = $0.20

From that $0.20 Chime will get a share. We don’t know what the share is as the information is confidential between Chime and Visa.

This may seem like chump change, but Visa has the capacity to process 65,000 transactions per second, and has transacted over $11 trillion in transaction to date (source). So those few cents add up faster than calories during Thanksgiving dinner. That’s a gravy train I’d like to get on board of.

Final Thoughts

So it seems like somethings can be good enough to be true. We just have to take the time to understand how things run in the background to truly understand if a product or service will help or hinder our goals.

My intent for writing this article was two-folds; first I wanted to understand and teach about how interchange fees work, as it didn’t seem like a well known topic. Secondly, when a company or start up is conducting business in a way that is fair and equitable, I believe they deserve the praise for going against the grain. With 5 million users and growing, it seems like this “small” start up is really resonating with people. If you want to give Chime a try yourself, feel free to check them out here. (The link is an affiliate link so I may be compensated if you create an account with Chime).

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