Chime S-1: Still not the future of banking

Sheltering behind the Durbin moat limits opportunity

Key insights in this post

• Chime filed for an IPO releasing substantial hard data in its S-1

• Chime has scaled to impressive size with its “payments-driven” model

  • 8.6M total customers of which 5.7M are in primary accounts, putting them within the top 20 depositories based on customer count

  • Roughly $7B in deposits, putting them roughly within the top 200 depositories

  • ~$245 revenue per active customer of which 85% is interchange

  • Almost break-even 2024 P&L, with a modest profit in Q1 2025

• Chime is a monoline focused on low-balance consumers where the bulk of revenue comes from Durbin Exempt interchange. This has led to impressive historical growth but future growth is constrained by the model:

  • If it grows big enough to become Durbin-regulated, its revenues would fall by almost half. The threshold is $10B in assets

  • If it competes for high-balance customers, it loses its advantages

    • Higher-balance customers use credit cards not debit cards, where the top issuers dominate and there is no equivalent regulatory moat to Durbin

    • Higher-balance customers already get free checking from incumbents so Chime has no economic advantage for accounts

  • Chime is less efficient than incumbents despite it claims to the contrary:

    • Chime claims to have distinctively better unit economics, but that is a function of one-sided metrics

    • On the standard “efficiency ratio” metric (ER), it not cost competitive:

      • Chime measures over 100% ER and would take 5+ years at current growth rates to get to target ER levels

      • Other purely digital banks (e.g. USAA, Ally) are less efficient on ER that branch-based incumbents

      • Typical large incumbents measure 50-60% on ER

      • Chime’s metric ignores the value of branches for originating new accounts – which is their primary purpose in modern banking

  • Chime has not had notable success in credit and faces better positioned lenders competing in its target segment

    • BNPL lenders help with short-term purchasing at no cost to the borrower; BNPL is distributed by merchants

    • EWA services advance payroll for a short time, typically at no cost to the consumer; EWA is often available through an employer

• In conclusion,

  • Chime can continue to win share among low-balance depositors where its only well-performing competitor is Cash App

  • Diversification levers are limited

    • In higher-balance segments it has no economic advantages – checking is free and credit cards are standard

    • In lending it has better positioned competitors in its core segment (e.g., BNPL, EWA)

  • Its core revenue streams face risks

    • Exempt Interchange may faces pressure from new routing competition unleashed by government actions

    • If upwardly mobile customers switch to credit cards, 85% of account revenue leaves with them — even if Chime keeps the deposit account

Introduction

I had almost finished another piece when the Chime S-1 came out. I couldn’t bear to wait a full week to publish on this, so I rushed to get this commentary out.

To the surprise of none of my regular readers, I am not a big fan of the Neobank model. I had focused my commentary on poor Varo Bank because their bank charter exposed all their data via call reports. Cash App, Money Lion & Dave also publish data, but the deposit data is mixed up with other revenue streams.

Chime operates at higher scale than Varo, and, unlike Cash App and the others, it is mostly a pure-play depository. If anyone can make Neobanking work, it should be Chime. The S-1 reports a ~$13M profit in the first quarter of this year, on $1.5B of Gross Profit (<1%). They also reported a profit in Q1 2024 yet ended last year with an annual loss.

I will detail some S-1 highlights and then evaluate Chime’s strategic prospects.

S-1 highlights: Chime would be a pretty big bank, if it actually was a bank

Chime claims 8.6M active members with about two-thirds of those getting direct deposit (~5.8M).

“We have now earned the trust to serve 67% of our 8.6 million Active Members in a primary account relationship as of March 31, 2025. We define a primary account relationship as a relationship with a member who made 15 or more purchases using their Chime-branded debit or credit cards in the past calendar month or who had at least one qualifying direct deposit of $200 or more through Chime in the past calendar month.”

I like this definition of primacy and it foots to other data sources such as NACHA’s ACH Receive Credits table (direct deposits). Chime uses two Sponsor banks: Bancorp Bank & Stride Bank. Assuming roughly 25 direct deposits per year and that half of Bancorp’s credits and all of Stride’s credits are for Chime, the numbers foot. Chime has over twice the 2.5M direct deposit customers that Cash App claims. Chime may be a top 20 “depository” if measured solely by customer count.

Deposits

Using the same math we did for ACH (half of Bancorp and all of Stride), Chime could have up to $7B of deposits. That would put them somewhere between 175-200 in the list of banks by total deposits. Of course, some of Chime’s deposits are interest-bearing rather than checking and don’t generate much revenue.

Deposits pale in comparison to any top 20 institution because Chime lacks any commercial or small business products and they cater to low-balance consumers. For comparison, Fifth Third’s Q4 2024 call report lists ~$169B in deposits of which ~$42B are non-interest bearing, for roughly the same customer count (based on Receive Credits).

Chime focuses on the low-balance, debit-centric population. The average balance per checking account must be well below $900 after removing savings deposits. Most incumbents will give free checking for a $500 minimum balance (with direct deposit), so you can see why Chime’s population skews so low-balance – customers with just a bit more balance can get free checking pretty much anywhere.

Chime’s key features are no longer unique. For two examples, 5/3 (Momentum Banking) & Capital One (360 Checking) offer no-fee checking accounts with no minimum balance; Chase Secure Banking is free with direct deposit, with no overdraft fees and no minimum balance. Many incumbents now offer 2-day advanced direct deposit – including Chase, Wells Fargo, 5/3 & Capital One. All large banks have competitive mobile apps and web sites. Chime isn’t that differentiated anymore on the deposit side.

Revenue

All-in, Chime generated $245 per customer in 2024 or roughly $20 per month – of which 85% is interchange. That translates to ~$20-25K per year in spend per card, which is higher than the ~$17K average reported by the Pulse Debit Issuer study – but in the ball park. The remaining 15% of revenue is the net revenue they earn on Savings accounts, off-us ATM Surcharge fees, and income from lending products.

Chime economics are 85% dependent on interchange. If its customers ever get credit worthy enough to qualify for a credit card, 85% of Chime’s revenue leaves with them – even if they keep Chime as their primary depository.

Chime calls out that 70% of card purchases are at supermarkets, gas stations, drug stores, utilities etc. They accurately claim that these non-discretionary categories won’t go away under adverse macro conditions. But this also speaks to the relative low income of its depositors: they don’t have much discretionary spend capacity.

Chime captures 100% of cardable spend for its customers – there is nothing else to add in. The implication is that Chime’s growth levers are more customers (which requires more marketing spend) or additional products, most of which entail credit risk. In the credit card world you can lure spend from other credit cards, but most debit-centric customers have only one debit card.

Chime has improved its “attachment” to 3.3 products per customer. That counts the underlying checking account and the debit card as 2 products. Next most popular are a savings account, their “Pay anyone” P2P service and free SpotMe advances – P2P and SpotMe earn no revenue. In other words, most Chime customers just use the basics and only the cards generates meaningful revenue. Still, the extra products create engagement which may anchor the customer to Chime.

One other revenue source is interest income (“other income, net”) from investing deposit balances. As rates come down, so will this revenue source. In fact, it shrank by half between the Q1 24 ($10.5M) and Q1 25 ($5.4M). This income is meaningful relative to profits as it incurs no offsetting expenses.

Expenses

Most expense categories are scaling slower than revenue. In 2024, most line items grew half as fast as revenue with one key exception: Transaction & Risk Losses – which grew about 20% faster than revenue. This is a relatively small component of the expense base, but material relative to the increase in lending.

Conclusion on the numbers

Chime is showing positive operating leverage and digging out from historical losses. However, it’s growth is constrained by it’s business model, as I will show in the remainder of this post.

Strategic prospects

I will assess the S-1 against my strategic critique of the Neobank model as outlined in this post:

1. Neobanks sit behind a moat created by the Durbin amendment; on the same account they earn about ~50% more payments revenue than an incumbent bank. If they ever grow big enough to become Durbin-regulated, revenue would crater

2. Neobanks cannot move upmarket:

   1. Higher income customers spend on Credit Cards, not debit

   2. Higher income customers get free checking from incumbents

3. Neobanks are not more cost efficient on an apples-to-apples basis; Chime’s “Efficiency Ratio” is over 100% today whereas incumbents range from 50-60%

4. Chime has competition on the lending side as Pay-in-4 and EWA both appeal to the same debit-centric population and are better positioned in the purchase path

1. Dependence on Durbin Exempt interchange

Chime faces growth challenges for its “payments driven business model”.

• It cannot afford for its banking partners to grow past the Durbin $10B threshold

• It is vulnerable to interchange pressure from competitive routing triggered by the Durbin Amendment

• It cannot increase spend per customer as debit-centric consumers generally have only one debit card and already use it for everything “cardable”

Durbin threshold

The Durbin amendment set a $10B asset ceiling for depositories to benefit from higher, “Exempt” interchange. Chime uses two Exempt bank sponsors so that neither of them risk breaching the threshold. It likely would add a third if its balances ever grew big enough to need one.

However, the Durbin amendment has a non-circumvention clause (235.6a ) precisely to limit large entities from engineering around the cap:

“(a) Prohibition of circumvention or evasion. No person shall circumvent or evade the interchange transaction fee restrictions…”

I am not a lawyer, a regulator or a compliance professional; but, what Chime is doing could amount to circumvention eventually. It’s not clear if Chime has enough volume to make it worthwhile for anyone to litigate this; at present their aggregate assets seem to be under $10B, so even if they moved everything to Stride, Stride would likely still be under the threshold. If they went to Bancorp, it may be a closer call.

If I understand the regulatory gibberish, the responsible parties are Bancorp and Stride rather than Chime itself.

If this analysis is a fair reading of the regulation, Chime can’t grow too big without cratering its interchange revenue. The regulated Durbin rate is 22¢ + 5bps, whereas the average Exempt rate delivers almost twice as much revenue per average transaction.

Routing pressure

The Durbin Amendment requires every debit card to carry at least two unaffiliated networks. Usually this works out as a Signature Network (i.e., Visa or MasterCard) and one or more PIN Networks (i.e., Interlink/Visa, Maestro/MasterCard, STAR, Pulse, NYCE). Most debit cards have at least 3 networks. This gives merchants and merchant acquirers the power to route transactions to the least expensive network on the card.

Large merchants have used this power to negotiate lower Exempt interchange rates. And the largest merchants are clustered in the non-discretionary categories where Chime customers concentrate 70% of their spend. I have seen situations where Exempt IC became lower than regulated IC. At the biggest merchants, the Exempt premium isn’t always a premium.

Chime acknowledges this as a Risk: “… interchange … depends on a number of factors, including .. whether such merchants have negotiated discounted rates with card networks”.

Routing economics are under new pressure on two fronts:

• The Fed is opening eCommerce routing. Today, all Card Not Present (CNP) transactions settle on the Signature Network. The Fed is pressuring the networks to open CNP to PIN networks so that CNP merchants have the same leverage as CP merchants

• The DOJ still has an antitrust lawsuit outstanding against Visa for anti-competitive behavior in debit routing. The new administration has not withdrawn that suit. The outcome could be more competition in debit routing

These actions, if successful, would put downward pressure on Exempt interchange, which would directly impact 85% of Chime revenue.

Limits to interchange ARPU

Most credit cardholders have more than one card; they are incented by each issuer to use that issuer’s card for more purchases.

Debit is different. Most low-balance consumers, have only one primary checking account – which is where they get direct deposit, pay their bills, & use the attached debit card. That debit card has no spend competition – consumers use the card for everything. Chime’s disclosures support this: “The [25%] increase in Purchase Volume was driven … by a … 21%, increase in Active Members for 2024.” Since inflation was almost 3% in this period, real growth in purchase volume per card was ~1%.

One way to increase cards spend would be to get cardholders to register their cards for recurring billing at utilities, telcos, rental agents, etc. The challenge to this is surcharging or ACH discounts. Billers are incenting customer to use direct debits (“pay-by-bank”). Where this happens, using a debit card may cost their cardholder more. The interchange is also capped is some categories. The "merchant settlement" being negotiated with the networks may accelerate the use of these steering tactics once finalized.

There just isn’t much white space spending to transition onto Chime cards. That leaves getting more customers as the main way to increase interchange.

2. Up-market is blocked

Chime is optimized for the low-balance, debit-centric consumer. That is a big market, although crowded and low ARPU. Therefore, moving up-market could be attractive. The issue is that none of Chime’s advantages survive into higher-balance segments:

• Most incumbent banks offer free checking above a $500 minimum balance with direct deposit. Chime is not cheaper than free

• Most consumers at higher income levels qualify for credit cards, depriving Chime of debit revenue. Chime does not have a competitive credit card

• Most incumbents’ digital channels work just as well as Chime’s; Incumbent’s also have Zelle built into their channel systems

The S-1 makes a major point that “Everyday Americans earning up to $100,000 annually are estimated to account for less than 35% of consumer deposits yet over 75% of debit card transaction volume”. This metric overstates the opportunity:

• About half of American households are dual-income – even if both incomes are below $100K the combined income is above. Median household income is over $80K. Anyone at that income level can maintain a $500 minimum balance to earn free checking from an incumbent

• Debit spend is concentrated at the lower end of that income threshold. If Chime moves up-market it might get higher deposit balances, but would likely lose all the debit spending to credit cards. According to the Fed’s Economic Well-being of US Households report (2023):

  • 98% of households with over $100K+ in family income own credit cards

  • 89% of households in $50-99K segment own credit cards

  • Lower income categories ranged from 46-79% credit card ownership

• 75%+ of credit card spend is concentrated in the biggest issuers. Even most big banks have trouble building a meaningful credit card business – Chime would face similar challenges if it tried

3. Neobanks are not more cost-effective

Banks calculate an “Efficiency Ratio” (ER) to judge cost effectiveness. The formula is: Non-interest Expense / (Net Interest Margin + Non-Interest Income). The most cost-effective banks approach 50% on that measure but most big banks are in the 50-60% range – depending on their business mix. Some lines of business are just inherently more cost-efficient.

Chime’s efficiency ratio Is over 100%: They spend more than they make. They are still scaling and they claim low unit economics; but they keep saying incumbent banks are inefficient due to older technology and physical branch networks. They claim Neobanks are inherently more cost effective.

I calculated how long it would take Chime to get to a 50% efficiency ratio. Assuming revenue grows at current rates and expenses grow half as fast, it will take them ~5 years to get to a low-50s efficiency ratio. So, the case won’t be proven for at least 5 years.

The argument is that branches are expensive and increasingly empty. If a bank just goes all-digital, its costs fall but revenue is un-impacted. Good theory – no evidence. Two of the biggest digital-only incumbents have high ERs: USAA at 75%+ and Ally Bank at 65%+. A remote only model is not efficient for them as measured by ER.

The key is that branches are sales centers, not just service centers. They have a “billboard” effect that advertises consumer banking services. For example, Chime discloses $520M in 2024 marketing expense, or 35% of gross profit. The equivalent 2024 number for PNC Bank, was $337M or ~2% of revenue. PNC’s ER is ~60% with 2200 branches that raise $420B in deposits. Which model is better?

My calculation to get to 50% ER assumed marketing expenses grew half as fast as revenue. But if marketing spend has diminishing returns, Chime will have to grow that spend faster than historically to sustain growth rates. That will deteriorate ER. Chime claims referrals are an increasing source of new clients, and that will offset the need for marketing spend. Maybe.

There are nuances to how Chime reports revenue and expense that confound the ER calculation. For example, all their savings accounts seem to be serviced by their BIN-Sponsors with a revenue share passed to Chime. That is 0% ER revenue, but it also means they are giving up margin to the sponsors. Savings accounts are inherently low ER anyway, but this is different accounting than an incumbent bank. There are similar issues around ATM processing costs and other services.

Chime makes a claim that its cost to serve is multiples below incumbents, but the comparison is self-serving:

“Chime’s average cost-to-serve a retail deposit customer is defined as the sum of cost of revenue and operating expenses, excluding transaction and risk losses associated with the liquidity products offered through our platform, customer acquisition expenses, depreciation and amortization relating to operating expenses, and stock-based compensation, divided by the average of the number of Active Members …”

I highlighted the parts of this math I take issue with:

• Customer acquisition expenses. Chime excludes its marketing spend but didn’t exclude the branch expenses associated with incumbent origination. These days, that is most of it. This should be enough to dismiss the comparison

• Stock-based compensation. Fintechs famously pay their staff less than incumbents but make up for it with equity. The staff get a windfall when there is a liquidity event, like an IPO. By eliminating stock-based compensation, Chime is comparing apples-and-oranges. Presumably, after the staff gets rich in the IPO, Chime’s comp expenses will rise to market levels

• Denominator of “Average Members”. This assumes every customer should get exactly the same support. That may be true at Chime where customers generate ~$245/year in revenue but, affluent customers generate far more than that for incumbents. Most servicing is digital today at incumbents, but the best customers get some human support. That is a strategy choice, not a measure of inefficiency

Efficiency ratio measures how well an FI translates expense into revenue. It is a better measure than Chime’s one-sided analysis.

My conclusion is that Neobanking is only efficient if you have an alternative way to source customers. USAA & Navy Federal do it via an armed forces affinity. Cash App does it via P2P virality. Incumbents do it via branch convenience. Chime has to do it with expensive marketing spend.

4. Lending is very competitive

Chime claims they have 3.3 products sold per average active member, but two of those are the underlying account and the debit card. The next two most popular were savings (69%) and Pay Anyone (54%) — their free P2P service. So the bulk of customers likely get to 3+ without using a credit product at all.

The credit offerings are usually free but unlike debit cards, the credit products often have direct competition within the target segment:

• Spot Me (49% attachment). A free service that advances up to a few hundred dollars to cover a cash flow gap. Repayment is deducted from the next direct deposit. To a degree, this completes with BNPL offerings which spread out purchases of several periods. BNPL is free to the consumer as well.

• “Credit Builder” secured credit card (37% attachment), is an interchange arbitrage product that magically gets credit card interchange for debit transactions, to Chime’s benefit. It claims to raise credit scores by 30bps over time. If it works at building credit, it likely accelerates the revenue drain to a competitive credit card. Those cards would likely come from a large issuer like Capital One as Chime has no card that offers actual credit

• MyPay is a payroll advance service (36% attachment). This competes with Earned Wage Access (EWA) which is usually available from an employer for free

I had trouble discerning the credit costs for these products, but they are discussed on page 103 of the S-1 (footnote 1), for those of you with an appetite to understand it. It looked to me like losses are high relative to the 15% of revenue Chime earns from sources other than interchange — but that could misread the results.

Chime credit products compete with Pay-in-4 offerings, that charge no interest, and EWA products that usually charge no fees. Both of those are better positioned in the purchase path – EWA from an employer and Pay-in-4 from a merchant. Many banks also offer Advances for a fee. Chime credit products face a competitive market.

Overall conclusions

Chime is making progress but, has challenging growth options. As other Neobanks fade (e.g., poor Varo), it should be able to pick up share in its core, low-balance segment. But that segment is much smaller than Chime suggests. The S-1 focuses on those individuals earning under $100K per year, but the real target is households below $50K per year.

It is an unfair fight in that segment. The government took half the debit interchange away from big incumbents -- they need to rely on explicit fees or higher balance customers to make up the difference. In other words, the same customer Chime earns $245 on, JPM would earn less than $150 on before fees – solely due to the Durbin cap. Chime is an arbitrage on this un-level playing field that Congress created. They have free rein in this segment while competitors have one hand tied behind their backs.

Above that level consumers migrate to unsecured credit cards, which Chime doesn’t have, and are eligible for free checking at incumbent banks, which Chime doesn’t acknowledge. Many incumbents match Chime’s formula of strong digital servicing, low/no fees, 2-day early payroll and “advances”.

Chime also faces high-growth competition on the lending front – with Pay-in-4 competing with Chime Instant Loans and EWA competing with Chime MyPay advances. Cash App is a well-funded Fintech competitor that has both a viral, P2P origination channel and a captive Pay-in-4 lender (AfterPay).

The model also faces threats to interchange, its main source of revenue. Finally, it needs to sustain high marketing spend to keep growing – and that will compress profits.

Given these headwinds, the jury is still out on Chime. It needs at least another 5 years to prove its model is more efficient, increase penetration of credit products, or move upmarket. I am doubtful on all these fronts.