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

Yes, those are all real contributors and you're right. I think the success that we've had in developing primary recurring deposit relationships has really allowed us to stand out as a business and really enable these other product areas that have been so critical to growth, right? We -- all this lending and credit that we do to our members, it's for primary accounts, right? And the -- I think last quarter, we originated over $11 billion of lending, but these are products that the turns on them are like 7 days, 10 days. So it's very, very highly efficient. And we operate them as we've disclosed, our iPay, for example, is a less than 1% loss rate. And the only reason that we can do that is because we have these recurring direct deposit relationships. So that's how we make sure that we are in a position where we're at the top of the repayment stack. And it's a win-win. Consumers love that flexibility. So many people in our country live paycheck to paycheck. I mean even, say, 50% of people over $100,000 with paycheck to paycheck. So we're able to do that really well, and it's a huge win for our members. I think when we first IPO-ed, there were a lot of questions around this early engagement strategy and it does it -- and we would tell the story of like we want to like create a bigger pond efficient. So we want to make more reasons for people to engage with us even in a lightweight way and give us a better chance over time to eventually convert them because not everyone is going to get married on the first date. Some people want to try before they buy or whatever you want to say. And last quarter, we saw our highest number in absolute terms of later-stage direct deposit conversions. And so we think that strategy is -- has worked really well for us. And we also monetize those relationships before they do direct deposits. So because we do things like outbound transfers and impound and so forth, so there are ways to be able to use the product without doing direct deposit. And then, yes, look, the other incredibly exciting development for our business related to direct deposit is the success and the sort of seeds that we're planting related to enterprise. We announced a huge deal with Allied as one of our like first sort of major marquee enterprise deals where employees from Allied will now be given the opportunity when they set up their payroll or even if they're already an active employee to get access to their payroll on demand every day for free. All you have to do is sign up for a Chime account. And there's no limit either. Our direct-to-consumer, MyPay has historically stopped at 500 -- we're doing some tests with up to 1,000 now, which have been successful so far, but we'll be able to give the Allied employees no matter what they make full access to their pay every day. And so you should expect to see really more focused on that area as well to complement the direct-to-consumer channel because you think about the opportunity. These are people who -- 100% of the people that sign up through this channel get recurring direct deposit. And even if they are more transient or if they leave that job, they can keep the Chime account and get the consumer version of MyPay, if their next job or whatever. And so -- and the other thing is a lot of these employers that we sign up, they just naturally have a lot of turnover. So it's almost like an evergreen channel, that's not just a static employee base that's always there. There's some of these partners that we sign up with might have 30% turnover in a year of their employee base. So it's like this evergreen channel. And we're going to keep plugging it in. And it's really complementary because you go through these enterprise channels. And it's not entirely an enterprise sale because even though the payroll person or HR might be highlighting it, they say, yes, of course, I know Chime, I see them on TV or my coworkers already uses it or my family member. And so the power of the brand actually really helps to close that deal sometimes as well.

Yes. That makes sense. On -- I think Chime Prime is one of the drivers that we just talked about has come up several times across the conversation so far. So this is the premium membership here. It's been a standout out of the gate. I think it was clearly one of the biggest positive surprises at earnings. What's your vision for what that product can be over time? And how big part of the user base Chime Prime members could be?

It's already a pretty substantial portion of the user base. I mean, I think Chime Prime is the future of Chime. We're going to continue to add products and services to that bundle that make it awesome when you use Chime for your everyday transactions. If anything, I think there's probably more work for us to do to open up Chime Prime to others who may not get traditional direct deposit, for example, but do want to use Chime as the primary way that they run their small business or have other side hustle, that sort of thing. So we're doing more work to figure out how to make sure that we're doing sort of proper risk assessment to pull even more members into that more premium tier. We talked about this line of credit that we're going to be rolling out. We now have investment services. We've got managed investments that are free to people that are on Prime. And over time, we're going to continue to add more and more pieces to that puzzle. We talked about launching joint accounts later this year. And we will continue to make additional perks. We have travel concierge, we have priority pass if you're in Chime Prime, which people really love priority pass. Like most of our customers are not paying $800 a year for sapphires and gold cards and all these sorts of things, right? But the ability to walk into the airport, maybe they're not traveling too much to walk in there and get access to priority pass for free because they bank with Chime, it's pretty cool. It's pretty powerful. And you can see it on Reddit and you can see people posting about it and sort of like bragging that they've got a little extra swag because they're.

I think TAM expansion was kind of a theme of your answer there. You've also talked about kind of going upmarket in the income spectrum. Historically, you've talked about consumers making under $100,000. How does the product set need to evolve to go after a higher income demographic? And then maybe if you could just address head on. So the concern that we hear from investors sometimes around graduation risk from the Chime platform or maybe growing out of the product set.

Yes. As it relates to graduation, we look at this regularly, and we don't see any difference. In fact, we see higher retention rates for people at the higher income levels. So the graduation risk is we actually don't observe it. It's kind of like a lot of pundits or investors ask like about the state of the consumer and doom and gloom. It's like we don't see it in the data. So that's what I think should really tell the story. But when we ask our members about their feelings about Chime, over the long term, we have over 75% of them tell us that they intend to be a Chime member for life. So we feel pretty good about that. I'd rather that be in the 90s, but we feel like it's not a bad place to be. I think eventually, the way that we're really going to differentiate, especially relative to some of the incumbents, they're slower. They have high cost structures. They're very siloed, so you don't necessarily feel like everything is integrated. We run this company a single member experience that's customized to their and personalized for their journey. So I think making sure that -- and that's not just a throwaway line. Like I mean, actually, how do we make sure that we're offering you the right products with the right limits and sort of settings, if you will, based on the risk profile that this consumer has. We obviously -- we need to take -- be a little tighter sometimes on limits and policies. If it's a relationship that we're just getting started with, but there's ways to get signals to determine, wow, this person is likely to expect a higher tier of service, a higher ATM limit, more flexibility around money movements, clearing mobile check deposits faster, which we do incredibly fast. I mean I do mobile checks into Chime and they get cleared in a minute or 2. It doesn't work like that at other -- and it's not just because I'm the CEO. It's because I'm highly engaged. And so there's so much -- one of the things I think is underappreciated about this category. I think a lot of people are like, "Oh, number of -- you guys remember 5 years ago, and it's like every company is going to be a bank and everyone -- there's all these like banking as a service and you're going to get it through every different service product." I don't believe that at all. I mean getting this right requires sweating the details, all the limits, all the policies, all the experiences when you run doom friction or you have a dispute. There's no reason that you have to bank it or pay through Amex to get world-class experience when you have a dispute or something. You can get it through Chime as well. We just have to continue to make sure that we're leveraging, harnessing the data to be able to make informed decisions on how to make sure that when you're banking with Chime, you feel like it's awesome and really makes sense relative to the options that you have. And I think it's right there at our fingertips to execute that way.

Yes. Okay. I wanted to move to instant loans. Originations were up 70% sequentially to about $300 million. It sounds like that has continued into the third quarter. Can you talk about where you are in scaling eligibility and borrowing limits for this product? And what your approach is to managing credit risk.

Yes. Let me start with credit risk, which is the first thing, and I'm really proud of the team and the risk team that we have and our whole lending and credit operation. These are loans that are underwritten again, by direct deposit is the way that you get eligibility. We allow for up to a few thousand dollar loan like any lending book, we find that the repeat borrowers are the areas where you can really make the relationship work really well financially. So we're continuing to scale this, and we feel really good about the progress that we've made so far. The eligibility today is primarily just for our Chime Prime members in the states that we actually are able to offer this product in, which is maybe 80%, 85% of the country, if you will. So we feel really good about that product as a growth vector. And it is actually -- when you look at the Net Promoter Score of all of our products, it is the #1 Net Promoter Score product across Chime, which is already a well-loved company, as you all know. So we feel really good about the opportunity to invest. And then when you get those repeat loans, you're just locking in consumer engagement and love because of how seamless and easy and the attractive terms that we have for members that use it.

Right. Okay. Sticking with the theme of new products, the acceleration of product velocity over the past 2 years has been really significant. When you think about the benefits of having your own tech stack, Chime Core as well as some of the benefits from AI on engineering productivity, what impacts have these factors had on Chime's ability to roll out new products?

Yes. I mean, honestly, the success that we've had and the unlock that we've been able to achieve by owning our core in Chime Core, was part of what influenced our decision to do the deal with the bank. We can move so much faster when we are the ones that can ultimately make the decision on how we're going to prioritize initiatives and make final calls on the approach that we're going to take to building products. So I feel like the progress that we'll be able to make related to product development has been incredible, and I think the bank is going to really help unlock that. And you think about the services that we built with Chime Prime and investing and now with the joint accounts that we're rolling out, I think all of these are really an unlock from Prime -- and I'm sorry, from Chime Core. And I think we're in an age in an era with AI that you really need to be completely vertically integrated if you're going to be able to take full advantage of the data that you have. And we're in a position where we have such a privileged position with the data. And that's why I'm so excited about Jade, our financial assistant, because not only is it going to allow -- and it already does allow people to sort of look back historically and see that you're spending too much money at this or that. But it gives you insights, but it can also help you take action. And I think that's going to be a real differentiator relative to -- certainly relative to incumbent players. But also maybe just leveling up a bit, when I think about the impact on AI and financial services, I believe that we have a unique opportunity because of the trust that we've earned with our member base who are already using us as their primary account. They're in the app 5x a day. They're doing 50-plus transactions a month. You're going to want your agent that takes action for you to most importantly be trusted. And I think we've earned outside trust among our member base. And I think that's going to be quite a bit differentiated in some of the other service providers that are popping up. Obviously, information and insights about money management is going to be free, and it's going to be available everywhere. But having a bank account that is -- that can power actually actions that move you towards financial progress will be a real differentiator for us going forward. We do basic stuff right now, like give you insights and allow you to unsubscribe if we see that you're paying for Netflix twice or whatever it is, we'll do that all on your behalf, but we think there's a lot more that Jade should be able to do for our members to help them make financial progress within Chime and maybe in certain situations outside of Chime.

Makes sense. I've got a couple of minutes left here. I'm going to jump around here. But I want to talk a little bit about how AI is shaping the actual operations of the business. You announced about a 10% workforce reduction, and it was described as doing it from a position of strength, the goal of kind of flatter, faster. Talk about what changed internally? What made this the right moment and how much of this is sort of AI-enabled organizational design changes versus just an aim to streamline the business?

Yes. I mean we are seeing teams that are -- the best teams are smaller teams that work in a flatter organization with clearer accountability. And we see it in how our technology and product teams are getting their work done. The teams are literally half the size of what they used to be and able to do just as much as the old team. So I wouldn't I wouldn't attribute the risk entirely to AI, but certainly, that was a part of it. It was more around accountability, just the natural progress of that all companies do to make sure that as they grow and they scale, that they don't become bureaucratic and smaller teams can run through walls to get stuff done and don't feel like they have to go to a committee before going to the other committee and then do the cross coordination with all the things. We just -- the biggest thing for us at this point in time is retaining that entrepreneurial spirit. We've had great success, but we're only scratching the surface. We want to be the #1 provider of bank accounts in America. And we think if we stay on this current growth path, if that is something that we can achieve over the next 4 or 5 years.

Got it. Makes sense. Got just a couple of seconds left here. I'll just squeeze one more in. Final 1 is just on unit economics. You guys have consistently cited very attractive LTV to CAC in the business. I think calling out 9x most recently. That's a very high unit economic number to sight. Talk about the sustainability of those economics over the long term and how you think about potential improvements to it?

Yes, we feel really good. If you look back at the all the time leading up to our IPO, there was never -- I mean no one had a metric, no one had a goal of like, hey, where is the sort of like revenue production department. It wasn't about our PAM was about developing deep member relationships that would sustain for years and years. So I would say we're still very early in our monetization journey. Again, not because it's funny. The first question I had yesterday was around, oh, now you're going to become a traditional bank and charge a bunch of fees. Like to that's actually not the strategy. The strategy remains the same, asset-light, payments driven and consumer friendly. But I just think there's a great opportunity for us to, over time, continue to monetize relationships in a member aligned way. I mentioned double the RPAMs for our Chime Prime segment. So that just opens up a whole new world for us, right? If you're suddenly acquiring people at the top of the funnel that have doubled the RPAM, well, there's more that we can invest into those relationships. And it will be a learning phase for us, but we feel really, really good and really confident about what this next chapter can be as we continue to monetize and yes, with healthy LTV to CAC, there's a lot of runway that we can go to from here.

Sure. That's a good place to leave it. Chris, thank you for joining. Great conversation. Congrats on the acquisition.

Thank you very much.