Neobanks say they are insensitive to the overdraft movements of the old guard

Challenger banks have long marketed themselves as being more consumer-friendly than traditional banks because they don’t charge overdraft fees, but can they still make that claim now that more and more banks are lowering or reducing costs ?

These companies usually bundle services for low or no fees that only a few traditional banks offer, such as credit building, early access to paychecks and protection against identity theft.

Neobanks also claim that their overdraft programs remain more user-friendly. Some, like Current and Chime, allow user accounts to go negative up to a certain amount without charging a fee. Others, like Brigit, Dave and FloatMe, push cash advances on users’ external accounts to cover a shortfall for an optional tip or monthly subscription that bundles into other services.

“We wanted to make sure our members had a sense of [overdraft program SpotMe] to be there for them when they needed it most,” said Aaron Plante, vice president of lending products and banking strategy at Chime (left). Kyle Beilman, CFO of banking app Dave (right), explains that one of Dave’s differentiators is that users don’t need to deposit directly with Dave to use his overdraft protection.

Banks are gradually catch up. Bank of America recently reduced its fees from $35 to $10. Capital one and Allied Financial abolished these penalties entirely. Other banks, such as PNC Financial Services Group and Citizens Financial Group, have added mechanisms to help customers avoid accidental overruns.

While fintechs may need to evolve their overdraft products over time to keep pace, some, like Brigit, Chime and Dave, still say their offerings are competitive. They highlight their transparency, the strengths of all of their user-friendly offerings combined, or their ability to prevent a user’s external main account from going negative in the first place.

Bank customers generally receive higher limits on a wider variety of transaction types if they are overdrawn, compared to fintechs. Yet the perception of many consumers is that bank overdraft policies are punitive or misleading while neobank policies are supportive, said Alex Johnson, director of fintech research at Cornerstone Advisors.

“Fintechs have done a good job of positioning banks on the wrong side of the problem,” he said. “Even though the actual product and cost are not that drastically different, the perception in the market is that banks are ripping off consumers with these fees and neobanks are trying to fix it.”

SpotMe is a free Chime service launched in 2018 that supports this message. It allows customers who receive direct deposits of $200 or more per month to withdraw up to $200 from their accounts. Chime will apply all incoming deposits to the negative balance, so the SpotMe allocation is constantly replenishing. Customers can leave a tip, which Chime says is optional and will not affect their SpotMe service.

“We wanted to make sure our members had a sense of [SpotMe] to be there for them when they needed it most,” said Aaron Plante, vice president of lending products and banking strategy at Chime.

As a bonus, Chime is also giving each eligible SpotMe customer four free “Boosts” each month, worth $5 each, which they can send to other Chime customers to “increase” their SpotMe limits. On social media, people will even offer a “nudge for a nudge” or trade their $5 nudge with someone else, Plante said.

Plante says SpotMe is one of the main reasons people are drawn to Chime. “We will continue to innovate on the product,” he said. “As the alternatives become less punitive and more appealing, it might make our job a bit more difficult, but overall we see this as a very good thing for the consumer.” Plante points out that Chime differentiates itself with a suite of services that help customers manage their financial lives, including its credit builder card and access to advance paycheck.

Dave, a banking application provider whose parent company recently went public, took a different approach with its overdraft capabilities.

Dave will allow users to connect to their external bank accounts through Plaid and then analyze transaction data to alert them to any gaps in those current accounts. Users can request an advance of up to $250 for Dave to transfer to this account and avoid an overdraft. They are encouraged to leave an optional tip.

“One of our biggest differentiators is that you don’t need to have direct deposit or a bank account with Dave to help you with your overdraft situation,” said Kyle Beilman, Dave’s chief financial officer. He said the company generally approves 85% to 90% of people who want cash advances for external accounts, and anecdotally, people tend to access cash advances a few times a year. Users cannot request a new cash advance if they have a balance.

Beilman says users find Dave’s approach to overdraft protection empowering. “A lot of times people don’t like to zero or negative their account to access credit,” he said.

The Brigit banking app takes a similar approach. In its free version, users have tools for budgeting and financial information, including overdraft prediction on external accounts. Under its paid Brigit Plus plan, users can access the Instant Cash feature to request transfers of up to $250 or opt for automatic advances to a linked account if Brigit anticipates an imminent overdraft.

Asked about the value of customers paying $9.99 a month to access cash advances, the company points to other benefits of that price, including credit monitoring, identity theft protection, and building loan, while overdraft fees usually average more than $30 and may occur. several times.

One of the advantages of the services offered by fintechs over banks is that they communicate the idea that they want to help customers with cash when they need it, but their overdraft prevention measures are not intended for habitual or accidental use, said Johnson of Cornerstone. .

“Historically, the big problem with banking products is that they facilitate or in some cases even encourage accidental overdrafts, whereas I think fintechs design their products to be used more intentionally,” Johnson said. “The value proposition offered by fintechs is that we won’t charge you a $35 fee every time you make a mistake.”

At the same time, as banks phase out overdraft fees, they can offer the most attractive proposition overall, Johnson points out. Challenger banks typically limit overdrafts to a few hundred dollars and only work for certain transactions, such as debit card withdrawals.

Ally Financial and Capital One have eliminated these fees entirely or plan to do so. Ally Financial proactively waived overdraft fees during the pandemic and said there was no change in customer behavior or usage. A Capital One spokesperson said the bank’s decision was the culmination of many years of movement toward a no-fee model, including the removal of the insufficient funds fee in August.

“Fintechs will have to figure out how to offer a competitive product,” Johnson said. “Chime and Current don’t have the same depth or multi-product customer relationships as PNC or Capital One. We’ll see fintechs trying to broaden the overall scope of their relationship with customers and being a true primary banking provider so that their business model gives them the ability to increase those overdraft limits or get rid of fees. subscription or stop asking for tips.

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