Chime, Challenger Banks And The Challenges Of (Lofty) Valuations

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On a day that saw a stock market rout – particularly on the tech-heavy NASDAQ, which was down a percent – in at least some areas of finance, investors remain sanguine.

Perhaps “overly optimistic” might be the mindset that marks private markets. And within FinTech, that most incandescent of sectors, things might look a bit, well, frothy.

Say what you might about the bifurcation between public markets and economic conditions – where stocks go up even as unemployment remains high and consumer spending may be sputtering. Generally speaking, investors are looking ahead for an earnings rebound, for a vaccine, for some semblance of normalcy to return to everyday life.

What shall we make of private fundraising rounds that make valuation leaps, tacking on billions of dollars with each new capital raise? News about Chime‘s latest funding round might give pause when comparing the tech-savvy upstart’s valuation against some traditional banking players. That’s especially true when looking at Chime’s model, which, though underpinned by some significant tailwinds wrought by the pandemic, rests on debit and prepaid cards, and on user interfaces … and, for would-be investors anticipating an IPO, an implied bet that challenger banks will dislodge incumbents.

This week, Chime, focused on banking via mobile apps, held a $485 million series F funding round that valued the company at $14.5 billion, as CNBC reported. That eye-popping number is a rough doubling in valuation from the end of last year, and multiples above the $1.5 billion garnered only 18 months ago.

CNBC noted that the company will be “IPO-ready” within the next year, as projected by Chime CEO Chris Britt.

With the $14.5 billion valuation, Chime passes Robinhood, valued at about $11 billion, as the most highly valued (private) startup. But in absolute terms, it also passes at least some of the smaller banking players like Commerce Bank (with a market cap of about $6 billion at this writing). Regional players like BankUnited have even smaller market caps (at about $2 billion).

Now: Market caps are a simple, loose shorthand for how much it would take to acquire a company (without necessarily taking into account capital structure). On a dollar-for-dollar basis, investors are willing to pay more for the challenger bank than the stalwart.

Also, in terms of pure valuation, to get a sense of the enthusiasm: CNBC said at the end of last year that Chime’s sales were likely around $300 million, tied to swipe fees on debit cards. We won’t know specific details until the S-1 that would precede an IPO. It’s safe to assume that $300 million top line has grown, perhaps even hugely, during the pandemic.

But no matter how you slice it, the top-line multiple has been lofty, too. At a $5.9 billion valuation, investors were willing to pay roughly 20x sales; that metric is now about 5x, according to Seeking Alpha. For the record, banks are more traditionally valued on metrics like price to book, yield and so on. That granular level of detail would come with a move toward a public listing.

Chime’s multi-billion-dollar leaps come in tandem with the great digital shifts that have been especially prevalent these days. And CNBC notes that, conversely, the KBW Bank Index is down by roughly a third.

The public markets are less excited about the traditional FIs – the private money indicates promise in digital banking, and decidedly less rosy days ahead for the traditional financial players (who are burdened by legacy tech and have relatively higher exposure to legacy financial/credit products that may be pressured by rocky economic landscapes).

The online-only bank lets customers deposit and save money on its platform and spend using a no-fee debit card. Chime earns revenue from debit card transaction fees paid by merchants. Accounts are FDIC-insured through a partnership with Bancorp Bank. The partnership model is an increasingly popular setup for financial technology startups that don’t have their own bank charters.

The question is what investors pay for beyond growth – albeit, impressive growth. As reported by PYMNTS in late June, Chime debuted its Chime Credit Builder Visa Credit Card, which lets users transfer funds to a secured account (which effectively limits what can be spent). As COVID-19 hit, Chime’s users were able to tap into $200 cash advances. The company said earlier this year that it had more than eight million accounts in place, as reported by the Los Angeles Times. Its model to build online presence comes through deposit and spending activity (the latter through, for example, debit cards) and the transaction fees are paid by merchants.

For a model significantly predicated on transaction fees and debit spending, there are signs that consumer spending may be hampered by a falloff in stimulus checks, and as worries over the economy persist (August’s data was muted). Challenger banks also face the challenges of an increasingly crowded field (and the challenge of offering the higher rates on deposits that lure consumers), where product differentiation – via UX – is key. And as Robinhood has shown, keeping the tech up and running is critical.

For the tech-savvy upstarts – the challengers – after the initial excitement of landing funding and going (beyond) unicorn status, growing into those valuations may be a challenge, too.

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