Conventional wisdom—and even some of challenger banks’ own advertising—holds that fintechs are winning customers because they provide a superior customer experience and have better mobile banking tools.
But it’s more than that. Digital banks are competing successfully with two additional strategies: 1) product featurization, and 2) segment specialization.
Chime is a good example of a challenger bank competing with a “featurization” strategy. The fintech certainly offers a good user experience and touts no fees to attract consumers in the low- to middle-income brackets.
But there are three features of the company’s product offering that are key to its success:
- Early access to money. Nearly a quarter of Chime customers said they chose the fintech as their primary bank because it offers two-day early access to their direct-deposited paychecks, as well as to government stimulus and tax refund checks.
- Spot Me. This product feature lets Chime customers make debit card purchases that overdraw on their accounts with no overdraft fees. Chime customers with monthly direct deposits of $500 or more are eligible to enroll. According to Chime’s website, “limits start at $20 and can be increased up to $100 or more by Chime, based on factors such as account activity and history.”
- Credit-builder credit card. Chime’s predominantly low- to middle-income consumers aren’t in the crosshairs of the big credit card issuers’ marketing efforts. According to Cornerstone’s research, 15% of Chime’s primary banking customer base either has the card or is on the waitlist for the card—all within six months of launching the card. To get the card, a consumer must have a Chime Spending Account and have set up their direct deposit with the company.
The second strategy is segment specialization. There are a growing number of challenger banks that focus on serving specific, often narrow, segments of consumers. These fintechs compete by identifying the specific (and often underserved) needs of their target markets.
In some ways, both strategies are similar in that they attract a subset of consumers—not the broad market. As a result, in any one geographic area, they’re not likely to be very large (with perhaps the exception of Chime, because low- to moderate-income consumers are everywhere). The result is that digital banks are chipping away at community-based FIs’ account base without a physical presence in the community.
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