Chime, Varo, Grasshopper executives say digital banks see continued growth

Two of the leading U.S. based challenger banks, each of whom survived one of the most high profile banking outages in recent years, said they have learned from the recent incident and see a continued demand and need for digital banks to take on the incumbent industry. 

The CEOs of Chime and Varo Bank were part of a panel this week at the Money 20/20 conference in at the Venetian Hotel in Las Vegas, where they discussed the rise of digital banks, along with startup business bank Grasshopper. 

Chime and Varo were both impacted by the outage, which left millions of customers temporarily unable to complete debit card transactions, get direct deposits, access ATMs or check balances, with Chime dealing with a longer outage. 

Chime CEO Chris Britt, in likely his highest profile industry appearance since the outage, told attendees at 2020 that the bank feels horrible about the outage, which impacted service for several hours, and recognizes the importance of regaining the trust of customers. 

"On the consumer side, trust is everything," he told attendees at the panel. 

Customer response

Meanwhile, Colin Walsh, co-founder and CEO of Varo Money Inc., said his company has learned the lessons of dealing with such an outage.

"As a digital bank, you can't walk up to a physical location and look someone in the eye," he said, noting one of the limitations that digital banks need to understand when facing such an immediate crisis. "You have to respond quickly, you have to respond empathetically," he said.

Varo offers customers a no-fee online checking account, with free access to Allpoint ATM machines, no minimum balances and FDIC insured deposits through its relationship with Bancorp Bank. 

Varo also allows customers to make deposits at 90,000 retail locations around the country through Green Dot Reload, a service from Green Dot Network, a company that offers customers reloadable prepaid cards that can be used to make purchases. 

The company recently rolled out no-fee overdraft, where customers can overdraw their accounts by up to $50 with no fees or interest if the account holder gets $1,000 in direct deposits per month and makes at least five debit card purchases per month. 

Varo also got preliminary approval in 2018 to become a nationally chartered bank through the Office of the Comptroller of the Currency and is on track to go into effect by 2020. New York State recently won a ruling to block the OCC's efforts to grant national fintech charters, a spokesman for the OCC confirmed that Varo will not be impacted since it applied for a national bank charter and not the special purpose charter that was the subject of the litigation. The firm has also applied with the FDIC for its own insurance to operate as a bank.

Both Chime and Varo work with Galileo Financial Technology, which acts as a processor for both banks, along with several other fintechs in the U.S. and Europe.  

For Chime, the outage was the third such service outage since July, although it is not immediately known whether the cause was the same for all three incidents. Chime is one of the largest and fastest growing fintechs in the world, with about 5 million active customers.  

Changing economics

All of the panelists agreed that digital banking will continue to grow in the U.S. since they are able to provide a more flexible, lower cost alternative that uses modern technology and is not hampered by the legacy technology and overhead costs of massive branch networks and other cost burdens of traditional banks. 

"I think there are just too many customers that are underserved and overcharged by the traditional banks," Walsh said. "I don't think there is any ill will in the banking system, I think the economics just don't work."

"We're addressing a market that's been largely abdicated by the big banks," Judith Erwin, chief executive officer of Grasshopper Bank, said during the panel discussion.

Grasshopper, based in New York, is a startup challenger bank designed to serve the entrepreneurial market and innovation economy. The bank raised $116.2 million in a private placement after previously raising $15 million, which is one of the largest combined funding efforts for a bank in U.S. history, according to the bank.  

Grasshopper Bancorp Inc., the parent of Grasshopper Bank, received approval earlier this year for a charter from the Office of the Comptroller of the Currency, which will allow it to compete on a national level. 

After opening in May with a limited number of customers, Grasshopper went live in mid-June with a cloud-based digital banking platform called Temenos T24 Transact from Switzerland-based software firm Temenos. 

The cloud-based platform will allow Grasshopper to provide a range of services, including loans, deposits and commercial payments for small and medium sized enterprises in the U.S.

New York has an estimated 7,000 high tech startups and more established firms in the market, which is considered a major Silicon East hub for innovative ideas in the northeast U.S. Erwin said that the major commercial banks have largely focused their efforts on addressing the consumer banking market, and that Grasshopper is going to tackle a market that has largely been ignored in favor of large corporate customers. 

"Most banks have only innovated on the consumer side, the commercial side has lagged significantly," she said. 

Cover image: Money 20/20.