• Brett Schafer

Square Should Buy Chime

I saw this quote in a Forbes article regarding Chime, the online bank:

“In 2019, it will reach nearly $200 million [in revenue], a fourfold increase over 2018, according to a person familiar with the matter. Now the company plans to expand into other products like credit cards and investment services in its quest to become a full-service digital bank.” 

That is some stellar growth. Chime is one of the hottest fintech startups in the United States and is thought to be valued at $5 billion, if not more. That would give them (assuming the numbers above are correct) a price-to-sales ratio of 25, which is fairly reasonable for a high-margin business growing 300% annually.

This is an indicator that we are finally at the branchless banking inflection. Every year millions of Americans transition to a cashless lifestyle, which makes bank branches and ATMs more and more irrelevant. This levels the playing field for Chime vs. the Bank of Americas of the world. All that matters now is the actual banking product, UI, and customer experience. Chime can be better in all of those categories.

It looks like Chime is doing just fine on its own. However, I believe there is a way they can supersize their growth.

Get Acquired by Square

Square buying Chime would be a match made in heaven. Why? Because Chime has the product Square was going to build anyways.

It has been rumored for years that Square wants to add true checking and savings to its Cash App. Instead of going through the arduous process of applying for FDIC insurance, they should just acquire Chime and supercharge their foray into banking.

This would be a win for Square because, one, they would be acquiring a competitor growing 300% a year, and two, because it would integrate perfectly with the Cash App. Right now you can pay friends, spend money, and invest all in one app. Integrating Chime would officially make the Cash App a one-stop-shop for your personal finance needs.

But why would it be a good idea for Chime to want to be acquired by Square? Well, for starters, they could easily cross-sell their banking products to the 15 million-plus Cash App users. This would allow them to differentiate from other online competitors like Ally and make it easier for Chime to acquire customers.

Another reason they might want to be acquired is the gargantuan amount of money being spent to compete with them. The old-school banks, other startups, and big tech are spending billions to build and get customers for their bank accounts. If Chime is to succeed, they will need to work tirelessly, probably raise a ton more money, and then go through an IPO in order to beat the competition. Getting bought out by Square would give them backing from one of the dominant fintech companies and likely accelerate their user/sales growth.

The only question that remains is whether Square has the funds to buyout Chime. At the end of last quarter, Square had $1.8 billion in cash, which is way below the $5 billion necessary to buyout Chime. On top of that, they already have around $1 billion in long-term debt. Could they add $3 – 4 billion of debt to their liabilities? Probably. But it would definitely make Square a riskier asset.

That being said, I do believe the risk of levering-up (or share dilution, if they chose that route) would be worth it because of the upside Chime presents. It would be a perfect addition to the already fast-growing Cash App, further separating Square and Chime from the competition.

Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.


#Square #Stocks #Acquisition #Investing #banking #CashApp #Chime #Fintech #Finance

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