From Neobank to National Bank: Was Varo’s Quest Worth It?

Bigger neobanks may not feel threatened by the upstart, and traditional institutions may dismiss it as an anomaly, but both may feel increasing competitive heat from Varo. Talent, cash and a diversified income stream are among the reasons why.

Varo Money made history in July 2020 when it became the first fintech to be granted a national banking charter. 18 months later, with four million accounts, Varo is one of the larger players in the neobank space. Yet it trails MoneyLion and Dave — each with around seven million accounts, and has just a quarter of the accounts held by U.S. neobank leader Chime.

All three of those larger competitors use a partner bank model — relying on a chartered institution to provide insured deposit accounts and payment system access.

Some have wondered if Varo’s audacious and arduous three-year mission to become a national bank will enable it to catch and surpass Chime and the others, or whether the effort will prove quixotic. Company executives spell out why they believe Varo will close the gap.

Poised to Grow Rapidly with a Big War Chest

First of all, Varo’s four million accounts represents double the number just prior to obtaining its bank charter. In addition, the company has tripled its revenue. That point is significant because revenue growth is a major concern for neobanks that rely heavily on transaction-based (interchange) revenue, as many do, including Varo.

As a full-fledged national bank, however, Varo has the ability to do much more on its modern tech platform than most neobanks. Since receiving its charter, Varo has added a short-term line of credit and a cashback reward program. A credit building card program is under construction.

Key Difference:

With a bank charter, Varo is master of its product development strategy, not dependent on partner banks.

With hundreds of millions of transactions flowing through its pipelines, Varo is now preparing for exponential growth, according to Chief Risk Officer Philippa Girling. In September 2021, the bank completed a $510 million Series E funding round at a valuation of $2.5 billion, per Techcrunch. That was more than triple the $700 million valuation after its previous fundraising.

CEO Colin Walsh said in a press release at the time that the funding would accelerate Varo’s path to achieving a profitable, transformative and sustainable business designed to advance financial inclusion. “The time is now to bring the best of fintech to the regulated financial system and build an entirely new kind of bank: one where consumers no longer have to choose between a sophisticated digital experience and a trustworthy banking partner,” said Walsh.

Varo CEO Podcast: Varo Becomes the First Nationally Chartered Fintech Bank

Charter Struggle Added Key Skills and Systems

Many fintech executives come from tech backgrounds and shy away from the regulatory environment. Much of Varo’s team, by contrast — including both Walsh and Girling — comes from the banking sector. As a result they leaned headfirst into the regulatory challenge because they understood that regulations “are there for a reason,” Girling tells The Financial Brand.

“Regs are there to protect the consumer, protect the bank and protect the integrity of the financial services system,” she says. Before landing at Varo in 2019, Girling served in a similar capacity at Investors Bank and Capital One. (Walsh’s background includes stints at American Express, Lloyds Banking Group and Wells Fargo.)

Defensive Perimeter:

By tackling banking’s tough risk and systems requirements, Varo has built a moat across which few other neobanks will venture.

Varo ultimately built something more comparable to a mid-tier bank due to the size of the company, the number of customers and the level of transactions. With comprehensive handbooks written about what the company needs and what they will be tested against, getting a charter was like an “open book exam,” Girling says with a touch of exaggeration. Nevertheless, the process was grueling, with an immense amount of work including risk management, backend systems design and engineering.

“There’s no secret to it,” says Girling. “You just have to have the stomach for it. So we did the work, and it dug a pretty deep moat around us. I’ve noticed in the past six months quite a few people backing away from it because they’re not really willing to do that work to get to the other side.”

The Pluses of Operating as a Bank

With the fundamental structure of the bank in place, Varo now has regular interactions with regulators, including an annual safety and soundness exam, plus interim exams to ensure they are actually taking the control environment seriously. While fintechs may see all this as unnecessary hoops to jump through, it has enabled Varo to create a bank and infrastructure that is entirely its own. “You’re not reliant on fees that you have to share with your sponsor bank,” Girling states. “You’re independent. You can make your own decisions. You can design your own products.”

Having its own bank has also offered Varo several operational and funding advantages compared to its competitors, enabling it to offer higher interest rates, instant cash advances and access to the Zelle P2P payment app, as Walsh told CNBC. Eliminating intermediaries has also reduced costs.

Further, because Varo now owns all its customers’ data, it can offer more personalized experiences and bring many things in-house, Walsh noted in the CNBC interview. “Customers do not want to have a dozen apps on their phone to manage their financial lives, they want a trusted provider to help them navigate through the various things that they’re trying to solve,” he said.

Where the Growth Will Come From

Despite its growing deposit base, Varo still has a relatively small portion of loans compared to a traditional bank. For example, in the period ended June 20, 2021, Varo had $152 million in total deposits and only $4.5 million in net loans, according to FDIC data. Even with a charter, Varo so far isn’t built like a traditional bank that generates revenue mainly from interest income. Instead, it still operates like a payments company that relies more on interchange income than consumer fees and interest.

Pricing Difference:

Varo will continue to rely more on interchange income than interest income, which allows it to develop lower-cost lending products.

However, building out that lending and credit portfolio will be a big part of Varo’s strategy for the next couple of years. It started in 2020 with small-dollar access through Varo Advance, which offers customers up to $100 for a small fee of between $3 and $5. And, as mentioned, the company is preparing to launch a secured credit card to be called Varo Believe

Varo is now also looking at other lending products with “larger amounts and a longer tail” to help customers move up the wealth ladder, says Girling. Even as Varo strives to attract new customers from broader demographics, it will also focus on offering products to existing customers as they move up to higher credit scores and better management of their own money. “We don’t want people to graduate out of Varo,” Girling states. “We want them to grow up with Varo so that we continue to offer them what they’re looking for.”

Essential to that plan is offering these customers a more holistic view of their financial worlds, so everything they need to manage their money is within Varo. And because Varo wants to build products in a manner that promotes financial fairness, it is helpful that most of the revenue base comes from interchange fees. “It allows us to develop lending products that don’t have to be the main driver of our income,” says Girling.

As for marketing, Varo made a splash in February 2021 with its “A Bank for All of Us” ad campaign and TV spots during the Super Bowl in specific markets. Girling says the company will use some of the Series E money to expand its brand presence.

“We are going to be out there much more overtly now,” the executive states, “and you’ll see us on television and billboards as we continue to build out the whole brand strategy in a quite dramatic way in the coming months.”

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