Chime Financial, Inc. (CHYM) Earnings Call Transcript & Summary

Good afternoon, everybody. We'll go ahead and get started. Thanks to everybody for joining us here in person at the Morgan Stanley TMT Conference and those joining via the webcast. Very excited this afternoon to speak with Chris Britt, CEO of Chime. Before we get started with Chris, just a couple of things. I'm James Faucette. I'm the senior fintech analyst here at Morgan Stanley. And before we launch into our conversation with Chris, I do have a disclosure I'm supposed to read. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representative. Chris, great to have you here. It's always exciting to -- at least for me to talk to you, I think, the vision and the business you've been building for years now is quite compelling. So maybe you can just though for the benefit of all of us, provide an overview of the business and its strategy from your perspective?

Yes, for sure. Thank you so much for hosting. This is always such a great conference and proud to be here representing the team at Chime. Yes. For those of you in the audience who don't know our business as well, we're really a disruptor in the consumer banking and payments space. And over the past few years, we've made great progress in becoming a destination of choice for consumers who are deciding to switch their primary account relationship. And we started the business with a vision of serving the roughly 200 million Americans that make up to about $100,000 a year and largely live paycheck to paycheck. That's really remains our sweet spot, although we're starting to move a little bit higher on the income spectrum recently. And we go to market with a suite of services that are helpful and easy and free and address the most acute pain points of everyday consumers, helping them make financial progress, avoid fees develop savings, improve their credit. And it's working. The feedback we get from our members is like, 97% of them say that we're helping them make financial progress, and they just love banking with Chime. They're leaving the traditional incumbent banks to switch over to work with us.

So one other thing -- look, there's been a lot of players that have tried to go after this market. I think one of the things that's always resonated with me around Chime has been that for most of your customers and even those that aren't your customers in that target demographic, moving to Chime is almost always the smart financial thing to do for them personally. So that's my impression, though. What do you find in terms of the brand? What resonates with the Chime brand? Or What about the Chime brand resonates with your consumers? And why do people show up at your doorstep if you will, or your virtual doorstep to begin with?

Yes, it's a great question, and a lot of investors and I guess, investors and competitors have always asked a question, like what is the thing? Why [indiscernible].

Right, right, right.

It isn't a thing. It is not a thing. It is a holistic suite of services and probably most importantly, a mission to authentically help people make progress in their lives. So it started off with no fee banking, not a prepaid card, an actual pay account with FDIC insurance and [ REGI ] protection and dispute, provisional credits and disputes and all things you get from a BofA or a Chase account, that sort of thing. It evolved to getting paid early. We kind of invented getting paid 2 days early, taking advantage of how the ACH system, the sort of latency in the system [indiscernible].

Right, right, right.

That was a big one. And then we evolved that over time to do things like making overdraft totally fee-free. And this was a massive industry in the United States with banks just really praying on people that live paycheck to paycheck. And then more recently, things like credit building and larger lines of credit, giving people access to their payroll on demand. We are constantly innovating in ways that make Chime the no-brainer place to develop your primary direct deposit relationship. And that -- if there's any takeaway for investors out there, is that's the difference between Chime and other fintechs. We are not a point solution that just offers a thing or a service. We are the place and a brand that people think of as primary banking. And you can see it in the stats, not our stats. If you look at third-party research on unaided brand awareness, what banks come -- what brands come to mind when you think of online banking. Today, Chime only trails Chase on that regard?

Right, right.

But if you look at account openings, we actually -- third-party research from J.D. Power came out and said that Chime opens up more bank accounts in America every month than any brand in America and about 40% higher than the #2 player, Chase in that regard. So we're expanding market share with a wide range of services, but overall like a brand halo that is trusted and is associated with primary banking relationships.

Love it. So coming off your recent Q4 call, Help us frame the top 2 or 3 priorities for 2026.

Well, we were really excited about the call. That was our third quarter as a public company, third quarter of beating and raisin. We announced 25% top line growth and a 10% adjusted EBITDA margin, incrementally up 50% year-over-year, so -- on the adjusted EBITDA front. So lots of great progress. But going into this year, it's -- first, the thing that's more important than anything is continuing to innovate in consumer products that resonate with consumers so that we can fuel and extend our lead in capturing more market share of primary bank accounts. So last year, we launched Chime Card, which is a new version of our Secured Credit Card that gets you the rewards and higher yield on their savings. We're going to be launching a new more premium tier of service that will provide even more rewards and more APY and a host of services and make Chime the most rewarding place to bank. We announced our plan to get into investment accounts to support Trump accounts, to have joint accounts, custodial accounts for kids. There's a whole list of product initiatives that will drive our growth this year. I'd say the second area is our new channel, the enterprise channel, which is still in its early days but we're planting seeds and early momentum in that area has been very promising, but there's clearly ways to go on that front. That would be sort of the second area of focus. And the third area would be, as I imagine you probably have every company talk about is, how we use AI to create a better experience for our members and to improve the operations of the business. we announced that in Q2, we'll be launching the next evolution of our AI copilot, which we call Jade, which is going to move beyond just being sort of answering customer inquiries, but more proactive in sort of nudging people to make smart financial decisions to move their lives forward. And then we're also deploying AI across the business. We're already very lean and we're -- we've seen the success of AI across the business. We've -- if you look over the past 3 years, we've reduced our operating -- our cost to serve by 30% and improved our average revenue per active, about 25%. So you can expect to see continued momentum on that front while keeping our sort of payroll and employee envelope consistent.

That's great. That's great. So let's go back and kind of when you gave the priorities and places where you're making progress, product velocity, I mean, you can't help but notice the number of new products and new offerings that you're bringing to market. You mentioned that you're expanding the envelope or the TAM, if you will, of customers and where you can deliver value. It seems like a lot of that is being powered by your ChimeCore. Just talk about and remind investors what that is? Its benefits to the company financially and particularly from a product introduction and rollout perspective?

This has been a huge unlock for us, and it's something that we spent a few years working on and we think it's quite a bit differentiated in our sector. When you operate a banking and a payments company, typically, you rely on a third-party processing for ledgers and connections into the networks and so forth. And we embarked an audacious path over the past few years, and we finally reached the conclusion of now operating ChimeCore as our core ledger and across the same platform. That's allowed us to not only reap the benefits of cost saves, but also product velocity and unlock. Just to remind investors, we operate at a cost to serve that is about 1/3 of big money center sort of traditional bank per active checking account member and about 1/5 of a regional bank. So we have a massive cost structure advantage. We estimate that the benefit financially of running our own processing and ledger, 60% cost save. We've realized a good chunk of that already. But more important than the cost save, we're operating a business with about a close to 90% gross margin and sort of 70% transaction margin. More important than the cost benefits, I would argue, is the unlock in terms of product velocity. We don't have to rely on a third party and to get in their queue for a product enhancement or a feature. We run it in-house, I can prioritize what features get launched and prioritized at what cadence. And I appreciate you saying that. I think the market is sort of giving us that feedback as well that they've seen just the second half of last year, launching Chime Card launching Chime+, all the work in the enterprise channel and some of the products that I mentioned earlier that we've sort of teased to come out over the course of Q2 and beyond.

Great. So let's talk about Chime Card. We've been really impressed by that traction to date. And I think this is, in some ways, can get -- like it can be a little bit crowded or confusing because every fintech seems to have their flavor of a card. But your traction in particular, seems incredibly strong. Talk about why you're excited about that opportunity? And any insights you can give to, once again, what attracts a Chime customer to the Chime Card offering?

Sure. Well, when we started the business, it was a checking account and debit card. And the credit card product we have today is actually a Secured Credit Card. So the consumer sets money aside and you can run up a balance on your card that is equal to the amount that you have in the account. So it has the benefits of the consumer to be able to sort of have a credit card but not take on a whole bunch of risk, and we're able to support -- to report that successful repayment of the card each month to the bureaus and it results positive credit score up to about 70 points. But with this latest Chime Card launch that we launched in the second half of last year, we've now made it the most rewarding way to do your everyday spend on a Secured Card. So we've added a couple of percentage points of cash back in rotating categories. The most essential kind of everyday categories...

They're most likely to spend.

Fuel, groceries, utilities, cable, that sort of thing. And it's been a great driver of growth and just another reason to come to Chime to not just think about saving money and getting your financial responsibility on a better track, but also to reap the rewards. And I think we're excited about the impact that we've had on the business as well. So not only does it help the members get a better credit score and get those rewards. But because it's a credit card product, we actually get higher interchange rates, and that allows us to deliver even better benefits back to our member. We reported last quarter that we shifted the percentage of total purchase volume on our Secured Credit Card from 16% of total purchase volume to 21%. So it's a pretty substantial change. And I think something that you should expect to give us a healthy tailwind for actually years to come because when you look at the top of the funnel, people who haven't yet established -- maybe aren't ingrained in the debit card usage behavior, at the top of the funnel, we're seeing over half of our new members take the product, and they're putting about 70% of their spend on that product, which is almost double the interchange of a debit card. So it's pretty exciting when you think about the future cohorts now they can start to stack and become a larger percentage of our member base. It's a pretty attractive tailwind for our business.

No, it's really impressive. And I think when we look at some of the others that have rolled out in the market is that their mix has been decidedly different. So I think a lot of benefit, obviously, to you financially and behaviorally. So if that's where we're at already, what can you do to drive adoption higher? What incremental things can you attach to the card or what would make sense at least?

Yes. We've only had this in market for a few months. So there's clearly optimizations at the top of the funnel. But I would say if you were to sign up new to a Chime account, I know you're an active member for years now.

Yes, yes, yes. For years.

If we're to sign up at the top of the funnel, new, you would be sort of driven down a path. It would be like sort of the suggested path would be to use as your primary way to do year everyday spend. We give everyone the option to get a debit card and some people just want to have that and that we're cool with that. But I think, look, there's more work we could do on the installed base of customers that are using debit cards primarily. There's been a very real trend over the past 2, 3 decades, where main mainstream America prefers to pay with debit cards because they are seeking the control that they would get from a product like that. And that's the great thing about this product because it kind of gives you the control of a debit card, but also gives you the benefits of credit building and rewards. So there's going to be sort of Golden Gate Bridge painting exercise of just trying to remind people that, hey, if you had paid with the Chime Card, you would have gotten rewards on your Chevron purchase or whatever it may be. And then in addition to that, sort of bigger picture, what we're doing is in Q2, we're going to launch a more premium tier of rewards. We haven't given all the details yet, but suffice it to say that there will be even juicier rewards on spending. We're going to give even more control to our member to decide what category or merchants that they want to earn the rewards in, and we're going to give higher yield savings. And just other sort of perks and lifestyle benefits that you might more closely associate with the traditional Amex Card, right?

Right, right, right.

So we're pretty excited about having an offering that will appeal to our existing members who -- some of them can give us more of their deposits. It's going to basically be unlocked if you do more deposits with us, and also appeal to higher-income segment, which we're actually getting great traction with. We've announced now 3 quarters in a row that our fastest-growing segment is for -- among members who make -- who self declare that they make $75,000 [indiscernible].

Right, right, right. So along those same lines, and you mentioned in terms of credit building, et cetera. I'd be remiss if I didn't ask an even if we're looking well into the future, what's your appetite for unsecured credit products, et cetera? That's something that typically we associate with an even higher income bracket.

Yes. I mean, look, we are already moving into unsecured credit as it relates to our -- we basically do cash flow underwriting of our spot, the overdraft service, our MyPay product, as well as our Instant Loans product. And those are becoming bigger and bigger businesses. I mean, MyPay last year, I mean, talk about hitting it out of the park. We went from essentially a standstill product to close to $500 million revenue run rate on a lending product, short-term lending product that is far and away the lowest cost consumer price product in the category, and brought our loss rates from 1.7% down to 1% last quarter. I mean the team, the Risk team absolutely killed it this year. And I'm so excited about that sort of building our muscle in this area, proving that we have the ability to underwrite consumers in our segment really, really well. And I think that's just the beginning. We're going to push more into this installment loan product called Instant Loans for a subset of our member base, it's longer duration loans, 3 to 12 months but still lowest cost in the market. And we certainly see a future where we'll get into things like unsecured lines of credit, and I'm sure, over time, eventually an unsecured credit card as well. We will do it in a Chime like way where there's probably some element of at least to start that, the goal is always primary account relationships. So we'll give it to people that use this for direct deposit and the primary way to their banking everyday banking.

So let's talk about MyPay. I mean I think this is another incredible example. I mean I know personally, some people that operate in essentially the payday lending space. And if you contrast that with MyPay, once again, I think this is an example where for that cohort or constituency of customers using MyPay is a better financial decision in almost all cases. And I think the growth that you talked about really underlines that as a key point. And you just mentioned it, but to repeat it, as part of the last quarter, you talked about how MyPay had reached about a 1% loss rate. It's certainly -- we'd always in our forecast, it anticipated that the loss rates would come down, but they came down a lot faster than we had expected, which was a nice surprise. You've also shared that you're planning to implement some new variable pricing around that product. Talk about like, a, why you think that you were able to drive down the loss rate so quickly? And then secondly, why is that now the right time to introduce some variability to the pricing model there?

We thought it was important to change the pricing. Look, there's clearly a tremendous amount of daylight between how we price our products and our competitors. So we already have that going for us and...

Right. Yes, yes. There's a lot of space.

Yes. We certainly got a lot of investor feedback on that fact as well. But more importantly than just the opportunity to monetize better was improving the customer experience. So the way the product used to work was that it was a flat $2 fee regardless of transaction size. And what you end up with a pricing model like that is you end up having people that take smaller draws, essentially subsidize people that we give larger draws. So the pricing isn't exactly fair, if you will. And we also wanted to make some changes based on some feedback that we heard from members, which they found it a little bit annoying that the way the product works is over the course of the pay period, you get incrementally more access to this short-term line of credit.

Right. Presumably what you've earned, but have yet been paid.

Yes, up to $500. And then -- so you get paid on the 15th of the month, in our case, probably the 13th of the month, we pay early. But you kind of get reset to a low level. And a lot of our members were frustrated that they would be reset down to a low level. So this new pricing allows us to make the product experience better because we don't have to bring it all the way back down. And the progress on risk loss was just smarter -- it's like any risk product, like you get -- you're going to have higher losses and cut them in half as you make more progress and figure out your scoring and underwriting ability. But what I'm most excited about is, look, we got to the 1%. We now have flexibility. It won't be exactly 1%. It will probably be a little higher sometimes and slightly over some time. But what we've really directed the team towards now is -- now that we've proven that we can manage the loss rate, let's focus on maximizing transaction profit dollars. And that means like how to -- this is like 60% transaction margin product already. How do we make the product available to people? How do we think about potentially being more aggressive with certain segments in terms of giving them access to even larger lines. So we'll be flexing on that a little bit, and that may charge it, lead it to go up, the loss rates to go up slightly. But at the end of the day, it's the transaction dollar amount that is most important to us.

Got it. Got it. So let's talk about Chime Enterprise. Chime Enterprise in my mind, should dovetail really nicely with the MyPay product eventually. And the ability for enterprises to offer that to their employee base. And hopefully, and as I envision it, turn into another source of customer acquisition for you. And I know that you've talked about Chime Enterprise being one of your top priorities. Talk about recent progress there and what we should be doing is outside observers and investors as to how to measure and meter that progress?

Yes, it's a good question, and I'm -- it's a relatively new line of business. So I'm always trying to manage investor excitement but also temper it with the reality of the enterprise sales.

Right, right. Well, we can -- I can get excited. Yes, yes, for sure.

We felt the excitement and we get a lot of questions about this, but we can need to be more excited than ever were. Like every Chime product, not only is it going to be the best consumer experience, but it's going to be the lowest cost. We think that combination is a winning formula. It's worked in all of the other areas that we've competed in, and we believe it's going to work in this area as well. Our message has absolutely resonated with the employers that we talk to. We're right in the mix on a number of RFPs. We announced a number of new employers just in the last couple of weeks here. We developed important strategic relationships with Workday and UKG. So we're in the payroll system, which allows us to -- if you're working at an employer that turns on a Chime Enterprise version of MyPay, you don't get capped at $500 and you also don't get charged a fee because we know that you've worked the hours and we know that the direct deposit is coming at Chime. So we'll give you -- there's a cost of capital that we incur, but a very low amount of risk.

Right, right, right.

So it's incredibly compelling product to pitch to employers. They hear and they see from their employee base. I mean a lot of the employers that we pitch or have turned on, chime is already the bank account that 10% or more of their employees already is.

Right, right, right.

So for that population, the experience becomes better. We introduced new people to Chime that maybe have seen an ad or seen our brand somewhere out in the wild, maybe on the Portland Fire or MLS brand partnerships we just announced. And then we also reengaged some members that maybe had a Chime account a few years ago, but for whatever reason, changed their jobs and stopped using it. So feedback has been great, and we expect to have some announcements real soon that. We're thinking of it as like planting seeds and building the pipeline.

And as that grows, help us envision a little bit what that monetization path looks like, right? Like it's -- if you're not charging the employee, if you will, and there's larger limits, but hopefully lower losses, but what's the revenue contribution? How does that come through?

Yes. I think if there's anything that's differentiated Chime over the years is not just our ability to attract a large amount of consumers, but serve them in this primary account capacity of close to 2/3 of people that use us that way. If you think about this channel definitionally, every person that we sign up through this channel is a direct depositor, is a primary account relationship. And so that drives outsized amounts of transaction activity and spend and engagement. So we can monetize not by having to charge a fee on the draw like all of the competitors in the EWA space do, but just by monetizing the everyday transaction activity. So we're seeing much higher levels of monetization right out of the gate in the enterprise channel than we do through the consumer channel, for sure. Yes, it's pretty exciting. And then even beyond that, you think about our offering relative to the competitive landscape, they monetize on one-off transactions a few times while the employees is at that employer. Well, if they leave, it's over. With Chime, if you leave the employer, you still have a Chime account, wherever you work, whether or not they're an enterprise client or not, you can get access to MyPay. It costs a little bit more, and there are a few limits than you get from the enterprise addition of it, but it's still a compelling offering. And so that gives us the opportunity to monetize the relationship and develop longer lasting partnerships with consumers for a longer period of time.

Like it. So we spent the first part of our conversation this afternoon talking about Chime specific things that you're doing, the products that you're doing, how well you're executing, et cetera. But per usual, there's always a wall of worry to be climbed in the market, et cetera. And I would say, right now, most of that wall of worry, at least as it relates to Chime is probably more macro related. So let's hit on a couple of those topics. Let's start with consumer health. It seemed like from your perspective, and you guys have great representation in that core segment of your market and visibility. You noted that, that remained strong in Q4. What are you seeing so far to start this year? And kind of anything that you would call out for better or worse in consumer behavior and spend trends?

Yes, I'd say the wall of worry was even more pronounced in the prior quarter, where I think there's a little baby bathwater situation of people thinking like the consumer was really going sideways. And on that call, we made very clear that we're seeing a resilient consumer. We announced that again in this past call, we see spend up on a per member basis. We see -- and that's across discretionary and nondiscretionary. Most of our spend, just to reset everyone is -- most of our spend is nondiscretionary, which is obviously, a very resilient form of spend and something that lasts for many, many years. But we, again, continue to see a healthy consumer. Average savings account balances are up. Average checking account balances are up. Spend is up. People are doing things. They're using rideshare, they're going out to restaurants. They're indulging. They're paying for the delivery of Instacarts and DoorDashes and all these sorts of things. So we continue to see a healthy customer base despite the skepticism and people thinking that they may be going sideways. I'll also note, we're seeing consistent deposit trends of payroll. And when there are upticks in unemployment, we will see people getting unemployment benefit, and it's obviously something that our economics team looks at all the time, and we have not seen any an uptick. So we still continue to feel optimistic. The -- we're pretty close to full employment here. I know there's a lot of concern around white collar, maybe our jobs, but for the customers that we serve, we have not seen any impact yet.

So -- and to be clear, just to make sure that I caught 2 things that you said there. First, discretionary, you're seeing increase in discretionary spend right now. And then the second thing was that you were seeing increase in balances. And I guess, presumably, that -- like that statement or that data comes from really before we started to get to the biggest part of the tax refund season. This is usually a period of the year where we start to see some of that benefit, but it sounds like that [indiscernible].

It is. It's -- we -- after this meeting, I will go back to the computer and we will hit refresh, and we will look and see how those are coming in. We expect to be another solid tax refund season. Obviously, the one big beautiful bill we expect will allow us to see a little bit of upside. I think the actual timing of tax refunds this year is slightly delayed.

Slightly later, right.

So we don't have 100% full visibility. We're optimistic, but it's a little bit still too early to say like emphatically that this is the all-time best or [indiscernible] a statement like that.

So 2 more topics I want to hit in the last few minutes. Other existential wall of worry element, AI, you mentioned maybe the white collar jobs get displaced, et cetera. But how do you work between any headwind from that versus really getting leverage? And I know you called it out a little earlier, but I'd love a little more detail there.

Yes. I mean we look at the opportunity with AI as a huge tailwind for our business. We are going to be a winner in this incredibly important development that's happened to our economy and to the world. We think of the opportunity to sort of give everyone inside of the company an Iron Man suit, and it give us all super powers. We are already -- I shared some of the stats around cost to serve save and RPAM increase and some of our vision around having a more proactive partner, co-pilot, if you will. All these things are starting to come to life. Right now. And as we think about just the envelope of the company, and we're already operating, we don't need to make some sort of drastic changes. We already -- last quarter on a run rate basis, we're about $1.6 million of revenue per Chime employee, about $1.2 million of gross profit per employee. And we've announced our intention to essentially keep the employee base or at least the envelope of payroll cost essentially flat, while we continue to grow the business. So we're going to see more and more leverage. We're going to see the ability for not just engineers and product folks. Obviously, we'll get a lot of benefit from [indiscernible] but just really across the board. You think about things like compliance reviews and making sure you don't have UDAAP violations and all the things like you still need some element of human involvement, but there's so many ways to make these processes more and more efficient. But I think interesting in our category, at the end of the day, we do still operate in a highly regulated business that requires deep interactions with banks, with regulators. And so it's not something that can just be AI-ed overnight. It takes a long time to get all that stuff right and make sure you're dealing with disputes in a legally compliant way and all these sorts of things. We certainly think that AI can make all those processes more efficient, and we're on the forefront of doing that. We think a heck of a lot faster than probably a traditional bank would be able to.

Got it. Last couple of minutes here. you've charted an aggressive path towards profitability and one I think that investors are excited to watch. What are the drivers for that? What has to happen to get to the level of profitability you think that you can and should be at?

Yes, in our roadshow, we talked about long-term adjusted EBITDA margin of 35%. We haven't really changed it since the acceleration of AI, but we have had questions about that. We're going to keep it at that for now. I think what needs to happen is we need to continue to operate with discipline. We need to keep OpEx costs in line. We need to -- and that's something that we're -- we've been very deliberate about and more than just talking, I think we're doing. We've shown a 50% increase in incremental adjusted EBITDA last year. We're going to show it again this year. And we need to continue to grow the top line of the business. And it's that combination of expanding our active member base, engaging them more, continue to drive RPAM through product attached, but increasingly showing the actual operating leverage in the business. And by using AI and being the sort of asset-light technology company that happens to operate in the bank account business, we think it's an incredible combination that we're seeing a lot of excitement and enthusiasm for.

Great. Well, that's all the time we have. Chris, thank you for being here and being part of the Chime team and joining us here at the Morgan Stanley TMT Conference.

Thanks, James.

And really looking forward to the rest of this year.

Appreciate it.

Thank you.