Challenger bank Chime, with its 8 million accounts and $5.8 Billion valuation, has launched a new product that appears to function like a secured credit card, as described in a TechCrunch article. The purpose of this new product is to help Chime’s customers, many of them millennials with little credit history, to successfully create a positive financial foundation. Here’s the description of what the company is rolling out:
To make this work, Chime users first add money to their Chime Spending Account and then charge their everyday purchases — like gas, groceries or subscriptions — using the credit card. At the end of the month, Chime’s Safer Credit Builder feature will automatically pay off the credit card balance from the secured account on time. It then reports the credit card payment to the major credit bureaus, including TransUnion, Experian and Equifax.
The card also has the appeal of a debit card for its lack of fees. It doesn’t include an annual fee, interest or a minimum security deposit, like many of the secured credit cards it competes with.
The company has been thinking about how to better address the credit building needs of its users for some time. In fall 2018, Chime acquired the credit score improvement service Pinch, which had focused on helping young adults build better credit. The startup was best known for a service called PinchRent, which reported on-time rent payments to credit bureaus to help its users increase credit scores.
It’s not entirely clear what happens when an account holder needs to spend more than what is in their checking account. Presumably they will need to pull in funds from other accounts or use a traditional credit card.
This doesn’t look like a new payment creation. It’s a debit card with credit bureau reporting or a delayed debit solution similar to those common in Europe and other parts of the world where a withdrawal from a transaction account is made once a month to pay off all transactions. It does, however, provide some help to those who have not been educated on good financial habits to build a solid credit rating.
Overview by Sarah Grotta, Director, Debit and Alternative Products Advisory Service at Mercator Advisory Group