Investors are cheering the announcement that Chime, a neobank, has anounced the acquisition of its partner bank, Stride. Chime Financial (NASDAQ: CHYM) agreed to purchase longtime partner Stride Bank in an all-cash transaction valued at $590 million. At the time of writing, Chime shares have moved up about 5% on a tepid market day.
Chime also updated investors on forward performance, saying the acquisition will be accretive, with over $100 million in “net synergies” from savings and the expansion of new products.
Chime is not alone in seeking to acquire a federally chartered bank or pursuing approval to earn one on their own. The current administration has been supportive of Fintech innovation, and there has been renewed vigor in the digital banking sector for Fintechs to garner a charter, which makes it easier to provide services to their customers while setting a high bar for compliance – something consumers like.
Typically, the biggest win for a neobank in becoming a digital bank is lower financing costs. As a digital bank can choose to hold deposits and use them to provide credit or loans, cost savings can be significant. For neobanks, which must use a chartered bank’s platform or perhaps warehouse or securitization, the savings can add up over time. It is estimated that for every 1% drop in funding cost, return on equity can jump by multiple points.
Of course, it offers cleaner control over product offerings and customization. New features cater to what leadership wants and not what a partner can provide. And then there is less regulatory fragmentation, which can also be a challenge.
If a neobank or Fintech is not considering a bank charter or acquiring a chartered bank, it could risk diminished competition, as it seems now is the time to move, since there is no telling whether the next administration is fintech-friendly or anti-financial innovation.
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