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Chime gets $25B valuation with new funding—we look at the bullish and bearish cases for this figure

The news: Chime has hit a $25 billion valuation as part of a funding round that brought in $750 million, per The Wall Street Journal. The valuation represents a meteoric rise for the US neobank: it reached $1.5 billion in 2019 and then $14.5 billion in 2020. Chris Britt, Chime’s CEO, said the company will use the proceeds for growth, plus adding products and services.

More on this: Chime’s business model is backed by and benefits from interchange fees derived from debit-card transactions, thanks to a provision in the 2010 Dodd-Frank Act that lets smaller banks charge higher fees than their bigger counterparts—Chime takes a cut of the revenue from its partner banks, Stride Bank and Bancorp.

The big takeaway: Chime will now have to work to prove its mettle with respect to its lofty valuation. Here’s a rundown of the case for why it might deserve the $25 billion figure—and why it might not:

The bullish case:

  • Chime has a broad, fast-growing user base. The neobank is getting hundreds of thousands of new accounts each month and counts a user base in the millions, Britt said, per WSJ. It’s also projected to continue raking in customers over the coming years, jumping from 13.1 million US users in 2021 to 22.7 million in 2025, per Insider Intelligence.
  • US consumer spending has been on the rebound from the pandemic-induced economic downtown. An uptick means that Chime can generate more interchange revenue from its customers’ transactions, as they opt to move their cash off the sidelines. While the impact from the delta variant presents a cloudy short-term picture, another hard drop induced by lockdowns is unlikely to occur in the US.
  • Chime is edging toward profitability: It disclosed last September that it was in the black when measured by EBITDA.

The bearish case:

  • Chime has a fairly homogenous revenue mix: Financials obtained by Axios in January show that “most” of its revenue came from interchange fees, though 21% come from out-of-network ATM transactions. The neobank mostly eschews direct fees to consumers, and doesn’t offer lending products. However, it may need to find more sources of revenue if it wants to prove that it’s worth $25 billion.
  • It’s strong in quantity for its user base, but the quality of its customer relationships may be a vulnerability: The proportion of Gen Z users who picked it as their primary bank fell between October 2020 and July 2021, Ron Shevlin noted, citing Cornerstone Advisors data. Additionally 57% of Chime customers are “dire” or “struggling” financially, versus three in 10 US adults, per Shevlin, who also pointed out that the company has an average customer income of just $39,000, far below the national figure of $63,000.