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Until recently, companies have been loath to go public at a price below their last private valuations. But the stigma is easing. With the market for public listing in the US still shaky, companies looking to take the plunge are starting to reset their expectations.
Case in point: Chime Financial. The neobank is looking to sell shares at between $24 to $26 each. At the top of that range, Chime would have a valuation of $11.2bn on a fully diluted basis. That would represent a steep climbdown from the $25bn valuation the company achieved in a private funding round in 2021.
But even at this reduced valuation — which works out to about 7 times last year’s revenue — Chime seems expensive. While the company, which provides no-fee digital banking services to Americans earning less than $100,000, boasts 8.6mn monthly active users and generated $1.7bn in revenue last year, it has yet to post a full-year profit. PayPal and Block both trade on a multiple of about two times.
Moreover, San Francisco-based Chime’s business model has a quirk. Like other neobanks that have popped around the world in recent years, it offers banking services like checking and high-yield savings accounts to users via partner banks. But unlike traditional banks that rely heavily on interest income, 76 per cent of its revenue last year came from so-called swipe, or interchange, fees. These are collected every time customers use their Chime-branded debit or credit cards.
Under the Durbin Amendment, a legal provision that arose from the 2008 financial crisis, interchange fees on debit cards are capped at 21 cents per transaction plus 0.05 per cent of the transaction amount. But the rule only applies to banks with assets of $10bn or more. Chime has been able to charge more interchange fees because its partner banks — Bancorp Bank and Stride Bank — fall below this threshold.
This regulatory arbitrage is the fuel that has helped power Chime’s growth. Revenue grew on average by 28 per cent in each of the past two years. But it’s not something investors can count on as a permanent feature. Any change to the Durbin Amendment, or if Chime’s partners cross the $10bn asset threshold, could put this at risk.
Efforts to develop other sources of revenue are yielding some results. Platform-related revenue — made up of fees from MyPay, a pay cheque advance service and out-of-network ATM usage — rose 54 per cent last year, albeit from a low base. Still, customer acquisition and retention do not come cheap. Sales and market expenses ate up a third of revenue last year. Total operating expenses amounted to 91 per cent of revenue.
Public investors, while calmer and more receptive to new listings than two months ago, can afford to be picky. That’s an obstacle to companies looking to recoup their peak valuations from a few years ago. For the likes of Chime it may mean that the IPO mood music is dictated more by risks than the potential rewards.