Chime IPO, Gross Margin, and Competition
Chime.com filed paperwork for an initial public offering (IPO) on May 13th. Chime is fintech company with a high gross margin, but the firm is not yet profitable.
This discussion explains Chime’s business, how the gross margin compares to other industries, and the challenges fintech companies face to reach profitability.
What does Chime do?
Chime provides a number of bank-related services, but Chime is not a bank. Financial Brand explains that:
“The fintech partners with FDIC-insured The Bancorp Bank, N.A., and Stride Bank, N.A., as the banking engines behind the growing family of services that Chime provides customers that it refers to as members.”
The company provides these services:
Chime provides bank accounts with direct deposit and debit cards
The firm offers credit cards and positions customers to improve their credit rating by using credit responsibly.
Chime makes loans that are secured by the borrower’s payroll deposits. Customers can access funds before they receive their paycheck.
The company markets “No overdraft. No minimum balance. No monthly fees.”
“Chime considers its key market — at least, up until now — to be American households with annual income of $100,000 or less, which the company says represent 75% of U.S. households. The main source of income for Chime is a share of interchange fees on its credit and debit card usage.”
Chime earns other income, including out-of-network ATM fees and fees for payroll advance loans.
Chime will use IPO proceeds to add more products (loans and investment products) and go after higher-income earners.
Chime’s gross profit- and why it matters
Gross profit is defined as sales less the cost of sales, and gross profit is a key metric to measure profitability. The cost of sales includes direct labor and direct materials that are spent to deliver a product or service. Think about expenses that are not overhead costs.
Gross profit is a dollar amount, and gross margin is calculated as the percentage of sales.
Chime’s 2024 gross margin was 88%, which is much higher than margins for many other industries. To make comparisons, I’ll refer to the NYU Stern School of Business list of margins by industry. The report is updated frequently.
Pharmaceutical companies have a 70% gross margin, on average. Non-bank financial service companies (money management/investing firms) average about 68%. When you scan the list, you’ll see that 88% is a very high gross margin.
So, why did Chime generate a small loss in 2024? The 2024 net margin (net income / sales) was (2%).
High level of operating expenses
Operating expenses are costs that are not directly tied to producing your product or service. Chime incurs large operating expenses that contributed to the 2024 net loss. Here is Chime’s income statement for the past three years:
Let’s run down some of the operating expenses:
Transaction and risk losses: Chime does not yet focus on high-income customers. When you loan money to clients with less annual income, some people won’t pay you back. Loan defaults generate losses.
Member support and operations: In this digital age, a responsive and experienced customer support staff makes all the difference. If support is poor, customers have many other choices for online banking services (I changed email providers a year ago due to poor support).
Sales and marketing: G2 is an excellent source for software rankings, listing 136 vendors in the digital banking platform category. Competition is fierce, and you have to make a big investment in sales and marketing to get attention.
Chime also makes a big investment in tech, no surprise there. Every business incurs general and administrative costs, and nearly all deal with depreciation and amortization expenses.
Gross profit is not net income
Gross profit less operating expenses gets you to net income. When you generate a large gross margin (as a percentage of sales), that’s only part of the profit story. Business owners must also control operating expenses to earn a profit.