Why Was This Banking App Closing People's Accounts?

This story was originally published on ProPublica by Carson Kessler.

The day after Jonathan Marrero’s federal stimulus payment landed in his bank account, he took his 5-year-old twins out for lunch at an Applebee’s near where he lives in New Jersey. When he went to pay, his only means of payment, a debit card issued by the hot financial technology startup Chime, was declined.

He didn’t understand why. Marrero had checked his account earlier that day and saw a balance of nearly $10,000. With the Applebee’s server standing next to him, he quickly pulled out his phone to check his Chime app, just as he had hundreds of times since he signed up in January.

Marrero couldn’t log in. He immediately checked his email and found a message from Chime that read, “We regret to inform you that we have made the decision to end our relationship with you at this time. Your spending account will be closed on March 18, 2021.”

He had no choice but to call his parents and have them pay the lunch bill. “I was so embarrassed,” said Marrero, a 32-year-old motorcycle technician. “I’m a grown man, and I was tearing up and everything.”

Speaking of the $10,000 that he was suddenly locked out of, he added, “If it was $100, I wouldn’t sweat it. But it was everything I had for my kids.”

Marrero’s grievance is not unusual. Chime, which provides app-based banking services to an estimated 12 million customers, has according to experts been generating a high rate of complaints, with 920 filed at the Consumer Financial Protection Bureau since April 15, 2020.

“For a company that most people have never heard of, I think that’s a lot of complaints,” said Lauren Saunders of the National Consumer Law Center.

Many customers have told the CFPB that they can’t access their money or accounts, and that, among other things, Chime is slow to resolve problems. Of the 920 complaints filed about Chime, 197 were tagged as involving a “closed account.”

The CFPB’s complaints are labeled inconsistently, and many of the other 723 also detail problems involving accounts that were closed against customers’ will. By comparison, Wells Fargo, a bank with six times as many customers and a lengthy recent history of misbehavior in its consumer bank, has 317 CFPB complaints tagged for closed accounts over the same time period.

Marcus, the new online bank created by Goldman Sachs, with 4 million customers, has generated seven such complaints.

Customers have also filed 4,439 complaints against Chime at the Better Business Bureau, compared to 3,281 for Wells Fargo.

Meanwhile, several Facebook groups have sprung up with names like “Chime Bank has FAILED” and “Chime Thieves.” They’ve attracted some 700 members combined. One group has more than 100 posts and comments, almost all of them saying some version of the same thing.

“Chime stole my entire unemployment backpay,” reads one typical post. Another says, “I’m a single mom of 4 kids and they stolen $1400 from me and refuse to give it back and now we are about to be evicted.”

Chime doesn’t look much better on Google, where, according to the site’s “People Also Ask” feature, two of the questions most often posed about Chime are “Is Chime bank a real bank?” and, at various points in recent weeks, “Is Chime a ripoff?” or “Does Chime steal your money?”

Most of the company’s CFPB complaints have been “closed with explanation,” a designation that conveys that Chime has resolved the dispute privately with the customer; the company is in the process of responding to the rest.

As for the BBB complaints, Chime has said on the BBB’s website that it “takes these issues seriously” and that its “top priority is protecting its members.”

Chime portrayed the customer complaints as largely driven by the company’s attempts to crack down on accounts that use fraudulently obtained unemployment insurance or federal stimulus payments.

“As a leader in the US payments ecosystem and as part of our commitment to Chime members, we take seriously our responsibility to detect and prevent fraud,” asserted a statement provided by spokesperson Gabe Madway.

“The past year has seen an extraordinary surge in activity by those seeking to illicitly obtain pandemic-related government funds and defraud US taxpayers. By some credible estimates, $400 billion worth of unemployment fraud alone may have transpired.

We are proud of Chime’s robust anti-fraud efforts, which have returned hundreds of millions of dollars to state and federal agencies during the pandemic. While it’s important for us to fight fraud, our top focus will always be to take care of our members.

And despite our best efforts, we do make mistakes.” The statement also touted Chime as having “proven that basic banking services can be helpful, easy and free.”

It’s easy to see why Chime has caught on. Opening an account takes minutes. Chime’s app is intuitive and easy to use. The service welcomes customers with spotty credit histories and doesn’t require a credit check.

It has no monthly fees and keeps other charges to a minimum. (It takes a small slice of the interchange fees paid by the merchant each time a customer uses a Chime card.) ‘

For customers who sign up for direct deposit, Chime offers two-day interest-free advances on paychecks, IRS refunds or government stimulus checks.

The company has marketed aggressively in both new media and old. The company displays a youthful sensibility online, tweeting out memes on its Twitter feed.

At the same time, its logo is plastered in many locations, including opposite the Nike swoosh on the uniforms of the NBA’s Dallas Mavericks.

Chime is now the largest in a growing subcategory of financial technology, or fintech, companies known as “neobanks” (more on that later) that serve low- to moderate-income individuals underserved by traditional banks.

The neobanks have thrived in the past year, vying with each other to land consumers looking for somewhere to deposit government stimulus payments, according to Jason Mikula, managing director for 312 Global Strategies, a fintech consultancy.

Chime offered new and existing customers a “Stimulus Sweepstakes” that dangled a chance of winning $1,200.

Chime built a base of 8 million customers between its launch in 2013 and 2020, then jumped to 12 million over the past year, according to Cornerstone Advisors.

Many of the new accounts began with deposits from federal stimulus payments, according to a recent analysis by Cornerstone and StrategyCorps, two financial service companies that specialize in consumer research.

All that growth has made Chime, which is based in San Francisco, a hit in Silicon Valley. Venture capitalists have given the company a valuation of $14.5 billion, and the company’s CEO said in late May that Chime might prepare to go public as early as this fall.

For all of Chime’s Silicon Valley tech patina, one thing it’s not is an actual bank. Like others in its category, Chime is a digital interface that hands over the actual banking to, in this instance, two regional institutions, The Bancorp Bank and Stride Bank. Chime customers interact with the Chime app, but Bancorp and Stride, both of which are FDIC-insured, hold their money.

Since Chime is not a bank, that leaves it in a regulatory no man’s land, according to Alex Horowitz, senior research officer for the consumer finance project at the Pew Charitable Trusts. The rules and jurisdiction are murky at best.

“When you have a fintech that is the consumer interface, they don’t have a primary regulator,” he said.

“They’re primarily regulated as a vendor to the existing bank, because banks are required to manage their vendors and they’re responsible for third-party relationships. But it’s still a step removed.”

Bancorp and Stride have an obligation to police Chime, according to Mikula. “The regulatory treatment should not be any different than if I myself went directly into Stride and opened up a demand deposit account or checking account,” Mikula said.

“There should be no different threshold because Chime is a fintech.” (Bancorp and Stride did not respond to requests for comment.)

The legal environment may be murky, but Chime has already attracted the attention of state regulators.

In late 2019, the California Department of Financial Protection and Innovation received complaints about an outage in Chime’s system that prevented consumers from accessing accounts and left many unable to pay their bills.

The agency investigated and found a different violation: It concluded that Chime had violated state law by describing itself as a bank on its website and elsewhere.

“DFPI found this was likely to confuse consumers into thinking Chime was an online bank,” the agency said in a statement to ProPublica. “Chime itself is not licensed or insured as a bank.”

DFPI and Chime agreed to an administrative settlement in late March.

Chime neither admitted to nor denied the findings but agreed to take a detailed series of actions on its website and promotional materials to make clear that it is not a bank. (A similar agreement was also reached with regulators in Illinois.)

Even after the settlement, as of early July, Chime’s homepage offered mixed messages. At the top, it stated, in large letters, “Banking that has your back.”

A bit lower, below the “get started” button, in much smaller type, were the words, “Chime is a financial technology company, not a bank.”

The word “banking” is much more prominent on Chime’s home page than the words “not a bank.”

Chime told ProPublica that it is in compliance with the settlement agreement and that all of the necessary changes have been made.

California has also responded more broadly to the rise of fintech companies. On Jan. 1, a new law, the California Consumer Financial Protection Law, took effect.

It gives the state new authority over providers of financial products and services. (The March settlement with Chime was based on preexisting statutes.)

“The purpose of the new law was to clarify that if you’re meeting the definition of being in the business of providing consumer financial products and services, then yes, DFPI has jurisdiction over you,” said Suzanne Martindale, senior deputy commissioner of the agency’s Consumer Financial Protection Division.

“We can supervise, we can draft regulation, and we also have authority to stop unfair, deceptive and abusive acts and practices and can enforce any state or federal consumer financial law.”

Martindale did not comment directly on the complaints about account closures, but said, “We continue to monitor for compliance.” She said that if regulators uncovered “new activities that suggest there may be a violation or there may be a deceptive misrepresentation,” then “we may have to take a look.”

Many of the complaints about Chime relate to the same things that spurred the company’s growth over the past year: government payments for stimulus aid, PPP, unemployment insurance and tax refunds.

Indeed, many account closures occurred directly after a government deposit, according to customers interviewed by ProPublica and the CFPB complaints.

That meant Chime was simultaneously pushing to land new accounts from customers with stimulus checks while trying to vet millions of new accounts for suspicious payments. (There is widespread agreement that fraud involving unemployment-insurance and stimulus claims has been rampant during the pandemic, though estimates of its scope have varied wildly.)

Banks and neobanks are expected to take action if they see signs of suspicious activity, typically by filing a report with federal authorities, according to Mikula.

Chime’s approach involves three levels of potential action. If Chime decides that the evidence of fraud is conclusive, it typically closes the relevant account and returns the money to the government if the account was opened with a check from the government.

If Chime sees what it considers suspicious behavior — but can’t conclusively determine that fraud has occurred — it can still terminate the account, but then typically returns the funds to the account holder.

Finally, Chime says that if its investigation confirms that a payment was legitimate, it unfreezes the account.

In reporting for this article, ProPublica interviewed 13 current or former Chime customers who claimed the company had wrongly frozen their funds or closed their accounts. ProPublica discussed the details with the company.

Chime confirmed that five of the anecdotes were well-founded; the company acknowledged making mistakes and returned each customers’ funds. In two other instances, the company was able to provide documentary evidence of fraud and said it had not returned the customers’ funds.

That left six complaints, and there the situation was much murkier and raised questions about the company’s approach. In its statement, Chime asserted that those six “did in fact involve fraud and/or violations of our terms.”

Yet the evidence of misbehavior that Chime cited in conversations with ProPublica generally consisted of the same act that its marketing encouraged: Opening a new account using a federal stimulus check or a payment from unemployment insurance.

In those instances, Chime said, it or its bank partners had closed the accounts but returned the funds to customers.

Inadequate compliance management may be partially to blame for Chime’s problems, said former CFPB staff member Chris Peterson, who is now a law professor at the University of Utah.

“As fintech businesses start to move into banking services,” he said, “they have to have adequate resources to monitor problems that emerge in their financial services” and then resolve them.

The sudden account closures have put financially vulnerable customers under stress.

That’s the situation Michelle Robertson, 52, found herself in. After getting burned by overdraft and minimum balance fees at her traditional bank, Robertson signed up with Chime three years ago.

The pandemic wasn’t easy for Robertson, a computer technician in Richmond, California, who is also a single mother and the full-time caregiver for her elderly father.

A much-needed infusion of cash was set to be deposited into Robertson’s Chime account the week of March 10: a $1,200 stimulus deposit and a $3,500 tax refund. She planned to use the money to catch up on the stack of bills that had been piling up.

But on March 4, after setting up her Chime direct deposit with the IRS, Robertson received an email closing both her spending and savings accounts.

Chime’s email, which Robertson shared with ProPublica, offered almost the same explanation as the company email provided to Marrero: “Following a recent review of your Spending Account, we regret to inform you that we have made the decision to end our relationship with you at this time.”

She was unable to use her debit card, access the money in her accounts or sign in to the mobile app. The email informed Robertson that a check for any remaining balance would be mailed to her within 30 days.

Citing “security reasons,” Chime’s email stated the company couldn’t explain to Robertson why her account was closed. (The company confirmed, in interviews for this article, that it should not have closed Robertson’s account.)

She was directed to a passage in the company’s account agreement that states, “Chime and/or Bank may suspend, freeze, or close your Account for any reason with or without notice” and “Funds on deposit in any Account are subject to hold at the Bank’s discretion until the source of such funds and/or the activity is properly verified.”

Robertson didn’t have much money in the account when it was closed, but the prospect of not knowing the status of her incoming deposits scared her.

“I lost my mind. I couldn't believe it,” she said. “It was very shocking, just for them to tell me that and then not know why and then have all this money that I was really, really counting on.”

What followed was a frustrating roundelay in which Chime directed Robertson to the IRS, and the IRS directed her to Chime.

In one email, Chime told Robertson, “Please note that any Direct Deposits such as your Tax Refund that can be received during the account access restriction, may have been rejected and returned to the sender in the next 1-3 business days so, we encourage you to contact the originator of your deposit to avoid any further delays.”

Robertson’s interaction with Chime’s customer service provided no new answers.

She kept getting emails telling her to “contact the issuer” and stating that no “further information” could be given about the closing of her account. (According to 10 other Chime customers, users are discouraged from contacting customer service via phone or sending multiple emails; they’re told that doing so could “cause the review time to be extended,” as one Chime email put it.)

With more than two months having passed with no access to her money, the consequences grew dire for Robertson. Unable to pay her bills, she feared eviction from her home, car payments were delayed, her cell phone was shut off, and late-payment fees piled up.

Eventually, in late May, the federal government came through: Robertson received a paper check for her stimulus payment; the tax refund followed a few weeks later. She no longer has a Chime account and has no intention of ever signing back up.

In its statement to ProPublica, Chime said that “for those cases where Chime did make a mistake, including the two highlighted in this story, we sincerely apologize. We have made efforts to make things right with these members.” (Robertson said that, beyond unfreezing her funds, Chime has not contacted her.)

For his part, Jonathan Marrero finally got his account reopened in late May after filing complaints to the CFPB and BBB.

He said Chime (which confirmed to ProPublica that it had erred in closing Marrero’s account) provided no explanation for blocking him from his funds for more than two months beyond telling him there had been suspicious activity in his account. Marrero immediately withdrew all of the remaining funds.

“It’s been torture,” he said.

Update, July 7, 2021: After this article was published, Michelle Robertson emailed ProPublica to say that a Chime executive apologized to her on July 4.'

Photo by Adam Nir on Unsplash