Challenger banks have long sold themselves as more consumer-friendly than mainstream banks because they don’t charge overdraft fees, but can they still make that claim now that more banks are dropping or reducing the fee?
These companies typically package together services for low or no fees that only a few traditional banks offer, such as
Neobanks also argue that their overdraft programs remain more customer-friendly. Some, like Current and Chime, let user accounts go negative up to a certain amount without charging any fees. Others, such as Brigit, Dave and FloatMe, push cash advances to users’ external accounts to cover a shortfall for either an optional tip or a monthly subscription fee that bundles in other services.
Banks are gradually
While fintechs may need to evolve their overdraft products over time to keep up, some, such as Brigit, Chime and Dave, still say their offerings are competitive. They point to their transparency, the strengths of all their consumer-friendly offerings combined, or their ability to prevent a user’s external primary account from going negative in the first place.
Bank customers do typically receive higher limits on a broader variety of transaction types if they overdraw, compared to fintechs. Yet the perception among many consumers is that banks’ overdraft policies are punitive or deceptive while neobanks’ 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 issue,” he said. “Even if the actual product and cost are not that radically different, the perception in the market is that banks are ripping consumers off with these fees and neobanks are trying to fix that.”
SpotMe is a fee-free service Chime launched in 2018 that supports this message. It lets customers who receive direct deposits of $200 or more per month overdraw their accounts up to $200. Chime will apply any incoming deposits to the negative balance, so the SpotMe allowance continually replenishes. Customers may leave a tip, which Chime stresses is optional and will not affect their SpotMe service.
“We wanted to make sure our members had a sense of [SpotMe] being 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 also assigns each SpotMe-eligible customer four free “Boosts” each month, worth $5 each, that they can send to other Chime customers to “boost” their SpotMe limits. On social media, people will even offer a “boost for boost,” or trade their $5 boost with someone else, said Plante.
Plante says that SpotMe is one of the top reasons that people are drawn to Chime. “We’ll keep innovating on the product,” he said. “As alternatives become less punitive and more attractive it could make our job a little harder but overall we see this as a really good thing for the consumer.” Plante emphasizes that Chime differentiates itself with a suite of services that help customers manage their financial lives, including its credit builder card and early-paycheck access.
Dave, a banking app provider whose parent company
Dave will let users connect to their external bank accounts through Plaid and then analyze transaction data to warn them about potential shortfalls in these checking accounts. Users can request an advance of up to $250 for Dave to transfer to this account and head off an overdraft. They are invited to leave an optional tip.
“One of our biggest differentiators is you don’t need to have direct deposit or a bank account with Dave to help with your overdraft situation,” said Kyle Beilman, Dave's chief financial officer. He said the company typically 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 can’t request a new cash advance if they are carrying a balance.
Beilman says that users find Dave’s approach to overdraft protection empowering. “Oftentimes people don’t like to take their account to zero or negative to access credit,” he said.
The banking app Brigit takes a similar approach. In its free version, users get budgeting and financial insight tools, including overdraft prediction on external accounts. As part of its paid Brigit Plus plan, users can access the Instant Cash feature to request transfers of up to $250 or opt in to automatic advances to a linked account if Brigit predicts an imminent overdraft.
When asked about the value of customers paying $9.99 per month to access cash advances, the company points to the other benefits bundled into that price, including credit monitoring, identity theft protection and credit building, whereas overdraft fees typically average more than $30 and can occur multiple times.
One advantage of the services that fintechs offer over banks is that they communicate the idea that they want to help customers with liquidity when they need it, but that their overdraft-preventing measures are not meant to be used habitually or accidentally, Johnson at Cornerstone said.
“The big problem with bank products historically is that they made it easy to or in some cases perhaps even encouraged accidental overdrafts, while I think the fintechs are designing their products to be more intentionally used,” said Johnson. “The value proposition offered by fintechs is, we won’t charge you a $35 fee every time you make a mistake.”
At the same time, as banks gradually eliminate overdraft fees, they may offer the more attractive proposition overall, Johnson points out. Challenger banks typically limit overdrafts to a couple hundred dollars and only work for certain transactions, such as debit card withdrawals.
Both Ally Financial and Capital One have eliminated these fees entirely or are planning to do so. Ally Financial proactively waived overdraft fees during the pandemic and said there was
“Fintechs will have to figure out how to offer a competitive product,” said Johnson. “Chime and Current don’t have the same depth or multiproduct relationships with customers that PNC or Capital One have. We will see fintechs trying to expand the overall scope of their relationship with customers and be a true primary bank provider so their business model affords them the ability to increase those overdraft limits or get rid of subscription fees or stop asking for tips.”
