Chime Ups Rewards to 5% to Win Bigger Deposits and Top Customers

Chime is using a new rewards structure of cash back up to 5% on some of its secured credit cards to move upmarket and attract higher-quality deposits.

Chime plans to offer an additional 1% to 5% cash back in one specific category per quarter, depending on the selected category and capped spending. 

Users must deposit about $3,000 per month via direct deposit to qualify for the top-tier rewards as Chime looks to grow its deposits and become clients’ primary financial partner.

Chime’s addition of cash back to its secured credit card line will position it as a tool to help build credit as well as keep consumers interested.

The new structure indicates that Chime has selected to target higher-income users and focus on building the amount deposited into accounts, versus merely creating a better credit-building product.

For years, most companies have positioned their secured credit cards for consumers to use as a temporary measure for building credit; Chime is attempting to accomplish two things at once by providing users with a more complete financial experience.

This approach is designed to increase deposit inflows, which can improve funding stability and unit economics.

The big question for lenders targeting subprime customers is what comes next? The answer for Chime is to woo prime consumers to become new depositors through the use of cash rewards.

If the subprime consumer earns rewards while building positive credit reporting data through the use of a secured card, they may be willing to spend more money on the secured card or have greater expectations from the next product they purchase.

Once expectations rise, they rarely fall.

How Secured Cards Are Evolving

Chime has changed this paradigm by incorporating rewards as an integral component of its initial product offerings. As opposed to rewarding customers for graduating to a prime card — which requires a credit score — rewards are offered at the outset of the relationship.

This matters because spending habits form early, so if consumers become accustomed to receiving rewards for everyday purchases, they will most certainly continue to value those rewards later.

Furthermore, this also allows the consumer to feel a sense of accomplishment and progress prior to having established sufficient creditworthiness to qualify for an unsecured credit product.

Competition also plays a role here. While some secured cards provide very limited rewards, few currently reward their customers with anything greater than 2% to 3% cash back in specific categories.

To signal to potential consumers that credit-building products do not need to represent a “compromise,” Chime offers rewards of up to 5% in select categories — albeit capped.

While the actual maximum amount of rewards the consumer may receive is capped, the headlining figure does carry significant weight. This sets the consumer’s expectations and fundamentally changes what can be expected when purchasing a “starter” type of card.

What It Means for Chime’s Strategy

This approach allows Chime to attract more stable deposits and improve its funding base, strengthening its overall economics.

By tying rewards to customer direct deposit levels, Chime positions itself to capture a greater share of the financial activity of its users, potentially increasing engagement and growing its balance sheet.

What It Means for Lenders

This also increases the pressure on issuers of basic secured card products for subprime customers.

Most secured card products do not have a reward component. But some customers now compare secured card products based on their rewards and how they provide credit, which makes it hard for some secured card issuers to make non-rewarded products competitive.

Not every issuer offers rewards, but some issuers such as Discover and Capital One already offer some type of reward program.

The profit margin for most issuers remains tight. When issuers add a better reward program, this results in trade-off decisions regarding the cost of retaining existing customers versus acquiring new ones.

The increased pressure for revenue will create challenges for smaller issuers. That’s because maintaining profitability while offering a stronger rewards product is more challenging for small issuers than it is for large ones.

And as issuers compete on their product features, acquisition costs will increase for all issuers. Some lenders may choose to respond by providing a low-end incentive or partnering with other companies to provide incentives. Regardless, the era of solely functional secured cards has come to an end.

The Bigger Shift Toward Life-Cycle Products

This could lead to more competition and better features for the subprime market. But it could also compress margins and force lenders to make harder decisions on pricing and risk.