The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Stephen Gandel

NEW YORK, June 2 (Reuters Breakingviews) - Like an indie band breaking onto a tired scene, upstarts across a swathe of industries proclaim a bold new way of doing things that will usurp incumbents. In banking, a morass of regulation tied to once-brick-and-mortar businesses faces the rise of digital-first contenders. Chime Financial is part of this wave, prepping for an initial public offering at an $11 billion target valuation that plays the tune of ascendant innovation. Listen a little closer, though, and it sounds like a cover of old regulatory workarounds.

Chime counts 8.6 million active users for its banking-via-app service. It targets people earning under $100,000, eschewing direct fees and instead generating revenue from processing debit card payments. It boosts what it can bring in, though, by partnering with traditional banks.

Financial crisis-era reforms limited debit card charges to merchants at $0.21 per transaction. However, this only applies to issuers with over $10 billion in assets. By partnering with tiny banks, Chime can offer access to customers in return for a share of the outsized fees those small institutions can charge. The company generated $1.3 billion of revenue from $121 billion of customers’ transactions during its past four quarters, a 1.1% effective rate.

Problem is, as Chime grows, its partners are pushing the limit. The Bancorp TBBK.O, its main partner, has swelled to $9.4 billion in assets. Banks surpassing the asset cap charge only 0.47% in fees on average, according to Federal Reserve data. Dropping down to this less-lucrative pace would be a nasty blow for a company that generated only $13 million of profit in the first quarter.

Chime says it can remain within regulatory bounds. Still, growth in transaction revenue slowed to 18% year-over-year in the first quarter versus 24% for 2024.

The company does have another growth path: paycheck advances and other short-term loans. Lending revenue rose 92% in the first quarter. Inevitably, that comes with losses, which Chime forecast at $52 million in the first quarter, up from $30 million three months earlier.

Given these oddities – and a dearth of recent IPOs – Chime’s bankers were smart to target a discount from the $25 billion valuation the company fetched privately two years ago. Peers to its payments business, from credit card giants Visa V.N and MasterCard MA.N to processors like PayPal PYPL.O and Fiserv FI.N, trade at nearly 7 times trailing-twelve-months’ revenue. Lending rivals, like Affirm AFRM.O and FirstCash FCFS.O, are valued at an average of around 3 times. Put it together, and Chime would be worth roughly $10 billion. A 10% premium to the market for genuinely pathbreaking innovation would make sense. The risk is that it ends up being a one-regulatory-hit wonder.

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CONTEXT NEWS

Banking app Chime filed to go public in a U.S. offering on May 13. The company refiled its IPO prospectus on June 2, saying it is looking to price its shares between $24 and $26 apiece, valuing the company on a fully diluted basis at as much as $11.2 billion.

Rival Klarna postponed its planned IPO in early April amid market fallout from President Donald Trump’s tariff announcements, the Wall Street Journal reported.

(Editing by Jonathan Guilford; Production by Pranav Kiran)

((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))