LOS ANGELES — Chime, Cheese and Varo.
Those aren't items you get at the local HomeGoods. They are the names of digital banks that are looking to earn your trust and money.
In the past few years, a new generation of so-called challenger banks—banking startups—have come into the financial services market and are competing with the more established and much larger traditional banks for your banking services.
"The wave of sophistication and technology that we've developed in the past decade, we're seeing a dramatic rise of challenger banks," said Nick Cowell, a senior manager at Deloitte Consulting in New York. "They are digital-first, mobile and cloud-enabled. They are really disrupting the industry."
Fueled by the coronavirus pandemic, shutdown orders that limited people from visiting brick-and-mortar stores and a new round of players in the banking industry offering various incentives, digital banking is evolving the traditional banking sector.
Digital banking is a term that describes online and mobile banking and has picked up steam since the start of the pandemic. Digital banks are part of the overall fintech (financial technology) industry that aims to disrupt the traditional financial services market.
According to a survey by FICO, an analytics company, more than 41% of North American consumers are more likely to bank using digital channels than at traditional brick-and-mortar banks from the previous year.
"In an effort to help stop the spread of the virus, consumers across North America have accelerated their move from brick-and-mortar branches to digital banking channels," said Liz Lasher, vice president at Silicon Valley-based FICO, in a news release. "As a result, consumers' expectations have shifted, placing higher priority on having a seamless and engaging digital experience, which includes establishing account security."
While traditional banks like Bank of America, JP Morgan Chase and Wells Fargo have digital platforms, more people are signing up with challenger banks such as Chime, Cheese and Varo Bank.
Many of these new digital banks are using social media to market themselves as fun, young and hip—unlike the static, traditional institutions.
The new digital banks are also transparent with their fees, which larger traditional banks have struggled with historically, Cowell said.
"They [challenger banks] are playing on a couple of dimensions that traditional banks are struggling to fill," Cowell said. "They are targeting digitally native customers that are either unsatisfied or underserved or unbanked from traditional institutions."
Cheese, which recently raised $3.6 million to up their digital banking services, targets the Asian American immigrant community and can provide a debit card for consumers with no credit history.
Some of the features for Chime, which boasts more than 12 million U.S. customers, include no hidden fees, no monthly fees, fee-free overdrafts up to $100 and early direct deposit.
Varo Bank, which has more than one million customers, also has no monthly fee or minimum balance requirement to have a savings account.
The rise and popularity of digital banking and digital-only banks already have traditional bankers concerned about the future of the banking industry.
JP Morgan Chase CEO Jamie Dimon told shareholders in April that these new fintech companies are "enormous competitive threats."
Dimon said the new digital banks are a form of shadow banking that works under unregulated conditions.
"Banks already compete against a large and powerful shadow banking system," Dimon said. "And they are facing extensive competition from Silicon Valley, both in the form of fintechs and Big Tech companies (Amazon, Apple, Facebook, Google and now Walmart), that is here to stay. As the importance of cloud, AI and digital platforms grows, this competition will become even more formidable. As a result, banks are playing an increasingly smaller role in the financial system."
Cowell said the emergence of digital banks could force traditional banks to up their digital strategies and offer a more competitive banking experience for consumers.
Cowell said for consumers, these days, it doesn't hurt to try a new banking experience.
"There is no cost in experimenting," Cowell said. "A lot of these digital banks allow you to open an account very easily, and from that, you can get an understanding of their unique experiences and the offerings they provide. It's quite easy to sample the menu of different banks out there and the services they provide."