It was a historic event, to be sure — the first-ever granting of a national banking charter to a fintech challenger bank, but bank and credit union executives may wonder: Will this really make a difference to a market that already is hyper-competitive?
And will the decision by the Office of the Comptroller of the Currency to allow Varo Money, to open Varo Bank, N.A., on Aug. 1, 2020, be more of a threat to other challenger banks that rely — as Varo did up until now — on a partner bank, or to traditional institutions, or both?
With so many forces reworking the fabric of banking, “wait and see” may not be a good management strategy. As evidence, here’s what Acting Comptroller of the Currency Brian Brooks said about the Varo decision: “Granting a national bank charter to Varo marks an evolution in banking and a new generation of banks, born from innovation and built on technology intended to empower consumers and businesses.”
The Financial Brand reached out to several seasoned observers of the banking/fintech scene, including Varo Bank CEO, Colin Walsh, to help both traditional and nontraditional banking players assess the impact of this milestone event. Their responses indicate that far from being a historical footnote, this development could precipitate even more rapid changes in banking.
Walsh has been on a three-year quest to obtain a national bank charter for the money management, payment and mobile banking app he helped found in 2015, Varo Money. The company signed up its first customers in 2016 and applied to OCC for a national bank charter in mid 2017. FDIC approved Varo Bank’s application for deposit insurance in February 2020.
From the start, Walsh — who spent many years at Lloyds Banking Group, Wells Fargo and American Express — has positioned Varo as a bank using modern technology to provide financial services on a more consumer-friendly (no-fee) basis to average consumers.
Varo has relied on The Bancorp Bank to offer deposit accounts right along, but now it will buy its customers’ accounts from its partner, according to Bloomberg.
Will a Charter and Direct Insurance Bring More Customers?
Varo Money has “over two million accounts,” Walsh told the Financial Brand in an interview. “We have seen very strong customer growth all year — exceeding our forecasts. This trend is driven in part because digital banking was tailor-made for a crisis like COVID.”
The CEO says with so many Americans out of work, no-fee banking has strong appeal. So does not having to go into a branch. Neither of those elements is exclusive to Varo, however.
Walsh says that having a national bank charter will boost the fintech’s growth due to two factors working together:
- Moving to its own proprietary, real-time technology stack (running on a Temenos Transact platform, American Banker reports), which will incorporate artificial intelligence and machine-learning capabilities.
- Expanding its feature set and product line beyond the core checking and savings accounts offered today.
In a February 2020 interview, Walsh stated that a charter would allow them to expand with a credit card, loans and additional savings products. Following the charter launch he declined to be more specific, saying that “we’re only a few months away from sharing some exciting news on this.” He did say that they will be phasing in joint accounts, “one of our most requested features.”
Two fintech analysts weighed in on the impact of the national bank charter on Varo’s success.
“It is great to see the regulators recognize how important digital banks and challenger banks are, especially at a time of a pandemic..”
— Sankar Krishnan, Capgemini
“I wouldn’t expect the charter itself to cause a sudden influx of customers,” states Sarah Kocianski, Head of Research at 11:FS. “But over time the reassurance that the bank has its own charter and that therefore customer deposits are directly insured, will likely appeal to the more risk-averse, helping Varo attract a wider range of customers.”
Sankar Krishnan, EVP of Banking for Capgemini, believes that having a new fintech bank subjected to all three federal regulators should enhance Varo’s “intrinsic ability to look at banking from a consumer’s perspective and not charge fees that seem unfair or in poor taste.”
More generally, the Capgemini analyst says that “it is great to see the regulators give this approval as they recognize how important digital banks and challenger banks are, especially at a time of a pandemic.”
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What Are the Pros and Cons for a Fintech Having a Charter?
Cost is both an advantage and a disadvantage for a fintech obtaining a national bank charter. Colin Walshdescribes the advantages in some detail.
“Costs that are variable in the sponsor model can shift to low fixed costs with the charter,” he states. Part of this is due to the technology they’ve built, which allows increasing operating leverage with greater scale. “Relative to fintechs operating with a sponsor-bank model,” Walsh maintains, “the cost advantages are immense.”
And relative to traditional banks, Walsh believes Varo’s cost advantage comes from being an all-digital national bank. Banks spend roughly $0.60 of every expense dollar on fixed overhead, he states. “We don’t have the high overhead costs of physical branches or expensive and inefficient legacy technology.”
Both Krishnan and Kocianski concur that the cost savings are a meaningful advantage. Beyond that, Krishnan points out that direct clearing and settlement of payments and more regulatory rigor — “partnering with the government” as he puts it — are advantages Varo now has from having a bank charter. Neither of which, he adds, mean “losing any of the advantages of a feature-rich fintech.”
Alaina Sparks, U.S. Fintech Leader at Deloitte, maintains that the biggest upside for fintechs getting a banking charter is the reliable cost of capital, which has certainly been an issue highlighted over the past few months. She also mentions the ease of offering an expanded suite of products.
“Compliance issues may prompt stakeholders to question whether a fintech company can maintain its culture as a fast-paced innovator.”
— Alaina Sparks, Deloitte
Concurring, Kocianski says the new charter gives Varo “complete control over its product stack and user journey.” On the other hand, a bank partner could, if it wanted, impose restrictions or requirements on the front-end fintech, she explains, which could hinder its ability to change directions with agility.
There are some downsides. All the independent experts pointed to the cost of compliance as the biggest downside for any fintech becoming a chartered institution.
Paraphrasing her colleague, Jason Bates — Co-Founder of 11:FS and challenger bank Monzo — Sarah Kocianski observes that while “getting a bank license is hard, keeping it is even harder.” Staying on top of regulatory requirements is hugely intensive, and expensive, she states.
Deloitte’s Sparks says the compliance issues “may prompt stakeholders to question whether a fintech company can maintain its culture and brand as a fast-paced innovator.”
Still, Krishnan believes that other than compliance costs, “there is no downside as Varo will be able to differentiate in a very crowded marketplace using the charter for strategic advantage, especially for liquidity.”
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Can Varo Catch Challenger Leader Chime?
Chime is the most successful challenger bank in the U.S. in terms of accounts. Based on a July 2020 survey, Cornerstone Advisors found that Chime had the most consumers stating it was their primary banking account, at 4.3 million. On that basis it would be in among the top ten U.S. banks, the firm states. Just under one million consumers consider Varo Money as their primary bank account, based on the same survey, which trails not only Chime but Dave and Ally Bank.
Chime relies on the sponsor-bank model, using The Bancorp Bank and Stride Bank. Will Varo’s new status help reel in Chime?
Colin Walsh is confident it will.
“The charter will be transformational,” he declares. “The sponsor model has constrained economics and limited product breadth. Varo’s ability to expand its product offering will broaden Varo’s appeal to a far larger market than Chime or other retail fintechs. The charter’s sustainably superior economics,” he adds, “means we have a near term path to profitability and a durably lower-cost business.”
Not everyone contacted is quite so sure. “It will completely depend on whether Varo’s offering outperforms that of Chime, says Sarah Kocianski of 11:FS. “Chime’s customers will have little incentive to switch if it doesn’t, and Chime has already cleaned up in terms of ‘early adopters’.” On the other hand, Capgemini’s Sankar Krishnan notes that Varo’s charter could help in terms of products such as joint accounts and niche products like small business lending that Chime does not offer.
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Will SoFi and Other Challengers Get Their Charters More Quickly?
Based on Varo’s experience in getting its charter — a difficult, expensive and time-consuming proposition (some estimates put the cost at $100 million), Walsh believes his new fintech bank has “at least a three-year lead” over SoFi, Monzo and other challenger banks that have applied, or will apply, for a national bank charter.
“SoFi has a more complex business than Varo as it begins the charter process,” Walsh comments. “Its large lending book in particular will be a big focus for the regulators. Monzo as well will have a slightly different path given that they are U.K. based,” he continues. “There are a few additional hurdles for foreign owned banks.”
“It’s possible that SoFi and other recent applicants will get through the charter journey faster now that the OCC has worked out the process.”
— Sarah Kocianski, 11:FS
That may be the case, but Kocianski notes that “it’s possible that SoFi and other recent applicants will get through the journey faster now that the OCC has worked out the process.”
There’s an indication from OCC itself that that view may be correct. In an interview with Bloomberg about Varo’s new charter, Acting Comptroller Brooks said that the decision “shows that we know how to do this, and that we can look at companies that grew out of tech and incorporate them seamlessly into the banking community.”
Other charter options exist, including state-issued industrial loan company (ILC) charters and OCC’s own “fintech charter.” Regarding the latter, Brooks has indicated it is still very much alive, despite various legal challengers from the banking industry.
Most of those contacted, however, did not regard either as comparable to a full national bank charter.
“During this time of economic uncertainty, both the companies and the regulators will be quite focused on the sustainability of business and operations,” Deloitte’s Sparks observes, “and the fintech charter is more limited at this time.”
On the other hand, Sparks believes many players will be watching closely to see how “product innovation, culture, profitability and market valuation is impacted as fintech companies take advantage of, and are approved for, national charters.”