Chime Q2 Earnings: Not that bad

Seasonality hurt, innovation helped

Key Insights in this post

• Chime announced earnings on August 7^th and promptly shed $1B+ in market cap, ending this week under $30 per share from a peak post-IPO price just shy of $37

• The commentary I read suggested that the drop was due to a slowdown in new account growth. QoQ growth was indeed anemic, but YoY growth was robust. This is because Chime’s business is seasonal and Q2 always shows anemic QoQ growth

• The financial outlook is murky as their costs are growing almost as fast as their revenues

• The good news is that some of their innovations are driving revenue growth

  • The Credit Builder secured card shifted some debit spend into credit card at roughly 2x the interchange

  • The MyPay EWA product showed triple-digit revenue growth offset by triple-digit growth in credit losses

    • The loss rates may be declining now

    • The product adds meaningful ARPU despite its fees being optional

• I remain a skeptic on the Neobank model, but Chime’s growth outlook is somewhat positive

  • Seasonal QoQ growth should resume for Q3 (it never stopped for YoY)

  • Their innovations are driving new sources of revenue

  • They can win share from weaker non-banks (GPR, other Neobanks) although they have an equally innovative competitor in Cash App

  • They could win more share from incumbent banks if the Durbin Cap decision is upheld and the Cap is reset to a lower level

Introduction

I had planned to write this commentary as a fourth leg on last week’s post, but Chime published earnings Thursday night and did not have their 10-Q available, so I decided not to rush it. It turned out to be a blessing because that post was already way too long.

The other reason I put it off was I couldn’t decide what I thought about the quarter:

• Most of my Equity Research friends were positive before the earnings release, yet the stock dropped post-release

• The quarter had two big, one-time events that distort the results

  • IPO expenses

  • A one-time $0.9B charge for Stock Based Compensation

• Chime’s business is seasonal and Q2 is always the worst performer

As those of you who have read my posts on Chime know (here & here), I think the Neobank model is over-hyped and will take a long time to start producing meaningful profits. I also don’t appreciate all the anti-incumbent hype in their press. They have developed a high-growth business serving an underserved segment so kudos to them – now be nice to your shareholders!

My analysis below will focus on their operating performance more than their financial performance as my competence is in their strategy, not their valuation.

A general critique of Neobanks

Neobanks in general and Chime in particular win largely because they get Durbin-exempt debit interchange which is roughly 2x the regulated interchange incumbents earn. They use that extra revenue to offer most of their services for free. In other words, Chime can make money on accounts that incumbents would lose money on. Of course, Chime has generally lost money on these accounts too.

For convenience, I summarize the other reasons I am unenthusiastic about Neobanks:

• They generate few deposits given they serve low-balance customers, so they need to fund their lending with securitization and other wholesale methods

• Their revenue is primarily Exempt Debit interchange which is 2x regulated IC — and they use that extra revenue to offer most of their services for free; this price advantage explains their growth as much or more than their Experience.

• The segment doesn’t use many ancillary products, and those they do use often don’t generate much revenue. The lending products have lots of competition and high associated credit costs

• They don’t really have a cost advantage but claim one based on “unit” economics (i.e., marginal revenue less marginal cost)

  • They have very high marketing costs relative to incumbents

  • They do poorly on the standard Efficiency Ratio (NIE / (NIM + Noninterest income)); they are at 100%+ ER whereas most large banks are 50-60%

One recent piece of good news for them is the ruling on the Debit Interchange Cap. If the Fed lowers the cap, incumbents will retreat further from the low-balance segment and Chime will become even more of a magnet for low-balance customers. That may reduce CAC.

Outside of their low-balance, exempt moat they are undifferentiated and uncompetitive. So, while they will continue to fight it out with Cash App for this segment, they eventually run out of TAM.

The next sections will tick through my observations on what happened in the quarter.

Seasonality distorts quarterly growth data

Chime’s YoY Active Member growth was impressive, but their QoQ growth was anemic. This is a result of seasonality. In 2024 & 2023 Q2 also had low Q2 growth:

While Q2 always underperforms on quarterly growth. We should expect re-acceleration QoQ starting with Q3 earnings. In contrast, YoY growth accelerated in Q2 despite a higher base. Presumably, that is good news.

Adjusted EBITDA margin in 2024 peaks in the first two quarters and goes negative in Q3 & Q4.

If the seasonal pattern holds, we should expect declines in the next two quarters with a return to positives in 2026. The overall trend is positive – the quarterly margins in 2025 are slightly above the quarterly margins in 2024.

Purchase volume shows a more moderate version of this, with Q1 & Q4 being the standout quarters:

Purchase volume has steadily increased as more customers are added to the platform. Debit-centric consumers use their card for 100% of spend because it is the only plastic they have. Chime has all their spend from day 1.

What is odd is that purchase volume grew slower than Active Members – 23% YoY in both Q1 & Q2. You might expect a lag before a new customer is fully active, but this seems out of line. Spend per Active Member seems stable historically – until a 2-4% dip YoY for 2025. That dip might explain the gap as some new members may not use the debit card at all. Instead, they may be using savings or lending products only.

Has efficiency improved?

Chime continues to focus on marginal unit economics as its preferred efficiency metric rather than the industry standard Efficiency Ratio. Chime calls its metric: Transaction Margin (TM). TM differs from Efficiency ratio in both the numerator and the denominator:

• Numerator: Chimes uses Transaction Profit in the numerator rather than NIE. Transaction profit is Gross Profit less Transaction & Risk Losses

• Denominator: Chime puts Revenue in the denominator rather than Gross Profit. Gross Profit would reduce the denominator by Cost of Revenue, which is basically a contra-revenue. This would be the equivalent of an incumbent excluding cost of funds and provision from their equivalent lending metric

Note: Chime excludes operations’ cost in the calculation of cost efficiency! Their metric actually measures how much gross revenue is left over after eliminating contras; it does not address operating costs – including Member Services, Marketing and Technology.

Here is my attempt to calculate an Efficiency Ratio (ER) for comparison:

On their chosen metric they are becoming more efficient; on ER, they are losing ground. This likely is due to increased lending which has led to a big increase in Provision – a normal occurrence when growing loans. A typical target ER is 50-60%.

The other key here is Marketing costs. They increased marketing by 15-20% beginning in Q3 2024, but have kept it pretty steady for the last four Quarters. YoY marketing growth is lower than YoY Active Member growth, so CAC should be declining. Good news for them!

For the S-1, I calculated it would take Chime 5 years to achieve a 50% ER. At the time, revenue was growing much faster than expenses. For H1 25, revenue only outgrew NIE by 2%. At that rate, Chime takes a very long time to reach 50-60% ER.

Revenue growth driven by innovation

Chime rightly prides itself on innovation, but the successful ones are often copied. The best example is their pioneering 2-day advance payroll which is now available at other Neobanks and even incumbents like JPM, COF & FITB.

Chime innovations produced two Q2 revenue tailwinds. One has already been copied by others and the other is Chime’s copy of someone else’s innovation:

Credit Builder raises interchange yield

Credit Builder is a secured credit card that funds in real time from the Chime deposit account. This distinguishes it from typical secured cards with a fixed reserve. This mechanism transmutes Exempt debit interchange into credit interchange with no associated credit risk.

The 10-Q footnotes were revealing (edited down for clarity):

“… For the three months ended June 30, 2025 and 2024,

• Interchange-based fees from debit card transactions represented:

  • 50% and 57% of revenue

  • 84% of Purchase Volume in both periods.

• Interchange-based fees from credit card transactions represented

  • 20% and 23% of revenue

  • 16% of Purchase Volume in both periods.”

The Credit Builder product is keeping pace with account growth, but its share of purchase volume is flat. Both “percent of revenue” metrics went down in 2025 because “platform related revenue”, basically lending, grew faster.

If you multiply all this out, Credit Builder revenue grew 37% YoY while debit spend revenue grew only 4%. The revenue per dollar of spend tells the story:

Chime’s Exempt debit IC is roughly twice what a regulated bank would get while Credit Builder is more than twice Exempt IC today. In 2025 IC bps fell for debit but rose for Credit. Possible explanations include:

• Debit: Routing pressure is pushing Exempt IC rates down — particularly at the large Everyday spend verticals where low-balance consumers concentrated their spend (e.g., Big Box, Grocery, QSR etc.)

• Credit: Chime likely nudged cardholders into higher interchange categories. For example, Bill Pay IC rates are higher, so if Chime encourages consumers to use cards to pay bills, average IC will go up. The consumer proposition for Credit Builder is to raise credit scores, and the bureaus focus on on-time bill pay

MyPay is booming

MyPay is Chime’s version of Earned Wage Access. From their web site:

“… MyPay is a line of credit that lets you get up to $500 before payday. There are no mandatory fees, no credit checks, and no interest … Accessing MyPay is totally free, and the money you choose to advance will hit your Chime Checking Account within 24 hours. Need the money sooner? For $2 per advance, you can get it instantly.”

MyPay accounts for much of the “Platform-based Revenue”:

“… for the three and six months ended June 30, 2025 increased $85.8 million, or 113%, and $154.6 million, or 102%, year over year. For the three and six months ended June 30, 2025, the increase was primarily driven by a $69.1 million and $125.8 million increase year over year from the full launch of MyPay in July 2024.” [bolding mine]

All of this revenue is from the optional $2 fee to access advances in real-time. That means the incremental $69M in Q2 represents ~35M advances – on a customer base of 8.7M. That translates to 4 advances per customer per quarter or 1.3 per month (Q2 35M advances / Q2 8.7M customers divided by 3 months). Since not every customer is a user, there are some users doing this on every paycheck.

Credit losses are the challenge. The investor presentation claims losses declined towards “target loss rates of 1%”. The 10-Q provides more detail:

“Transaction and risk losses for the three and six months ended June 30, 2025 increased $63.2 million, or 181%, and $136.4 million, or 192%, year over year. The increase was driven by the full launch of MyPay, which contributed $49.3 million and $103.5 million for the three and six months ended June 30, 2025.”

Chime has a definition for “MyPay Transaction Margin” in the glossary but don’t quote that statistic in the presentation: “MyPay revenue net of MyPay transaction losses, divided by MyPay revenue.” Let’s do the math for them! MyPay Q2 revenue is $69M and the associated losses were $49M, so MyPay TM would be: $69-$49 / $69 or 29%. That compares to an overall Transaction Margin of 69% -- mostly for payments. Note that the MyPay Transaction Margin formula has no operational costs in it.

According to a recent CFPB study, the average EWA advance was $106 in 2022 with the average user making 27 transactions a year. So, the average MyPay user can add almost $27 in additional revenue if Chime can reach the 1% target – ($1 incremental after 1% losses on a ~$100 advance). If losses exceed 2% or average advance is greater than $200, TM is negative.

I am surprised at the uptake given that most big employers now offer EWA at work. It may be that Chime employees work on average at smaller companies that don’t yet have this as an employee benefit. Employers that do may not offer instant payout, which may be material to a low-balance customer.

CAC seems high relative to profit potential

Mercifully, this is the final point I will touch on. Chime has a straightforward chart at the end of its investor presentation that calculates 2024 Lifetime Value divided by CAC at 8.3x. Here is the page:

They are admirably transparent about attrition. Half their customers drop out within 1 year and they have 10% annual churn in subsequent years. The formula is standard but strikes me as missing an NPV, so while the nominal LTV / CAC is correct, it would be lower with a reasonable discount rate.

The other point is that the LTV excludes operating costs, So until they get to much bigger scale, they will likely not be wildly profitable.

The other question is how long the CAC can remain at $218. I can see tailwinds and headwinds on this point. I don’t know how these will play out, but it is worth considering.

• Tailwinds:

  • If the Durbin Cap decision survives appeal, the regulated banks will likely raise account fees, pushing debit-centric customers to exit and move to providers like Chime & Cash App

  • While the TAM is much lower than Chime claims, (“$400B addressable market”) there is still a lot of share to gain from weaker low-balance providers — like smaller Neobanks and GPR cards

• Headwinds

  • Cash App is a meaningful competitor that has already aggregated a big based (57M total customers, 26M debit card users and 2.7M Direct Deposit users). Cash App’s viral P2P network likely gives them lower CAC

  • The debit-centric market is not infinite. Over 80% of Americans have credit cards and even 50% of Americans making less than $25K have at least one. Since Credit Card issuing is so concentrated in the top 5 issuers, any Chime customers that qualify for a credit card will likely take their spending with them. The defectors may keep the deposit account, but Chime will lose all the spend revenue. Chime can’t afford for their clients to get more affluent!

Conclusions

As I write this, Chime stock is down ~10% from the earnings release, shedding ~$1B+ in market Cap. It was originally priced at $27 and is currently hovering below $30. The IPO likely went out too high and we are now getting to more sustainable levels. All the flaws we see now were there before the IPO – and were widely known.

I am still skeptical of the Neobank model, but Chime is executing pretty well in a tough segment:

• Their innovations are driving new sources of revenue

• They are winning share from weaker non-banks (GPR, other Neobanks)

• They might win more share from incumbent banks if the Durbin Cap decision is upheld and the Cap is reset at a lower level

Cash App remains a formidable direct competitor with many of the same advantages plus a viral P2P-based origination channel.

Q2 was not a harbinger of slower growth, just a normal seasonal fluctuation, but Chime’s key challenge is not growth but core economics. They must scale materially before their favorable unit economics deliver positive enterprise economics. The expense base is growing faster than it should if those unit economics are ever going to deliver meaningful earnings.