Every banking customer dreads the day they slide, accidentally or otherwise, into an unplanned overdraft. This is where fees and fines can accumulate and cause even more financial misery for a consumer. However, savings app Chip might have a solution. It just needs a banking licence. Patrick Brusnahan investigates

In 2016, 2.1 million people used their overdraft every month of the year, according to industry figures. Half of financial charity StepChange’s clients have overdrafts and own an average of £1,722 ($2,297) each.

There is clearly an issue here and startup Chip thinks it might have the answer.

Chip was launched in October 2016 and utilises artificial intelligence (AI) to monitor spending and help consumers save. However, its ambitions are greater and it plans to tackle the overdraft.

Speaking to RBI, Chip CEO Simon Rabin says: “Our first revenue feature we’re launching next year is our overdraft product. It adds onto a current account, analyses when they get overdrawn and instantly loads money into their current account. This prevents them from becoming overdrawn at a lower rate than their bank is charging.

“In order to do that, we need a deposit licence. We basically take over the function of the overdraft.”

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Chip entering banking

Why does Chip want to enter banking? It is a very competitive, and increasingly congested, field.

In addition, Chip seems to be doing fine on the outside of banking. Having acquired 25,000 users, and claiming to save consumers £1m a month, why make this move?

Rabin adds: “What we’ve learned over the last year is that we’ve done really well in terms of onboarding accounts and getting people to sign up to it. However, at the end of the day, we need to be a viable business with a strong commercial model.

“What we realised is that if you are not a bank, then all you can really do is resell existing products that are already out there in the market. You can give your customers something they can find elsewhere that is not original, new or different. There’s no value to that.

“If you want to create something that is genuinely different for the customer and solving problems, then you need the flexibility to manage your own balance sheet. To do that, you need a deposit licence.”

To gain funds, Chip has started a crowdfunding campaign. In pre-registration, 1,700 users spent over £500,000 in 24 hours to support the project. After going public on Crowdcube, the campaign reached £700,000. At time of writing, the total is £815,360 raised; 135% of its goal.

The demand is seemingly there, but with a multitude of new entrants, such as Monzo, Starling, Atom, and everyone else, is there space for Chip?

Rabin says: “The space is getting very crowded. What I think makes Chip unique is we don’t seek to own the customer through the current account.

“All the other banks want to own the customer relationship through their current account. We see Chip as a ‘plug in bank’ that would go on top of your existing accounts and optimise your financial life. It fits into this marketplace model that everyone is moving into.”

Lloyds Banking Group threw out unauthorised overdraft fees for all of its brands in November of this year, replacing it with a 1p charge per every £7 overdrawn per day. Is this really as good as it sounds?

“Halifax changed the structure from 12% interest charge plus a £20 fee for using your overdraft and 50p a day,” Rabin explains.

“That totalled somewhere around 30% APR. To make it simpler, they are charging 1p per £7 per day. If you work that out, if you are £7 overdrawn for a year, you are being charged 365p on your £7, which is about 50% APR, so they’ve raised it.”

So this is the perfect time to tackle overdrafts?

“Absolutely,” Rabin adds. “The press are bringing more attention to overdrafts and there’s a bit more education around it. FIs are being forced by the FCA to be more transparent about it and their charges, which is a positive.”

With the splurge of support and a dedicated user base, is there room to expand and take a decent chunk of the market?

Rabin concludes: “Our goal is to reach 800,000 connected Chip users in three years. We’ve got the plan to do it, which is part of the reason we’re raising this money.”