Sometimes the road less traveled makes all the difference, as Robert Frost wrote. That was the road taken by Colin Walsh and his team of tech and fintech experts four years ago when they created the mobile bank Varo Money and decided to pursue a national bank charter. If all goes well, they will soon find out if the less-traveled route is the better one.
Varo Money, like all other challenger banks, has had to partner with a sponsor bank to gain access to the regulated banking system and be able to offer insured deposits. In Varo’s case it has been The Bancorp Bank. Many challenger banks have grown rapidly under that hybrid model, including Varo, but Walsh, CEO and Co-Founder, persisted in his belief that operating directly within the regulated banking system, ultimately would prove to be an advantage.
“There are limits to what you can do when working with a partner bank,” he tells The Financial Brand. “As the digital bank grows, for example, it could quickly break through the sponsor bank’s capital reserve limits. And there is risk to the digital bank as well if the partner institution runs into compliance ‘conduct’ issues.”
Thus, almost from the start Walsh began the process to obtain a national bank charter from the Office of the Comptroller of the Currency.
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Willing to be the First to Do the Heavy Lifting
In September 2018, Varo Money received preliminary approval for a national bank charter, pending approval by FDIC for deposit insurance. Once that happens, and after a follow-up examination by OCC, Varo Money would be become a full national bank with all the powers that come with that. The four-year old startup would be the first mobile-only national bank, and the first fintech challenger bank that truly is a bank in its own right.
All other challenger banks, including Chime, Monzo, Moven, and N26 operate using a sponsor bank partner. Only Robinhood, the mobile investing app, has announced that it plans to apply for a national bank charter. Japanese online merchant Rakuten has applied to the FDIC for an industrial loan company charter, but that’s a different animal.
Walsh expects the charter process to be completed in 2020. All told it will have taken about four years. The CEO says he’s known right along that getting a banking license is a long, difficult process that can’t be rushed. Regulators have to be convinced that the company has the systems, controls, procedures, capital, and expertise in hand to operate a bank not only in good times, but during a crisis.
In Varo’s case, it helps that Walsh has extensive consumer banking experience having worked for Lloyds Bank, American Express and Wells Fargo. But one executive, no matter how experienced, does not make a bank, and Varo has been adding experienced senior people to its team, among them Deep Varma, formerly of online real estate company Trulio, as Chief Technology Officer, and Deven Bhatt as Chief Information Security Officer. Bhatt had worked for OCC in the same capacity.
“The significance of what we’re doing, and the need to work with both OCC and FDIC, building out our risk management and compliant technology takes top talent,” Walsh states.
The executive acknowledges that by being the first fintech to apply for a banking charter, Varo is “doing a bit of heavy lifting,” as he told Business Insider. But he doesn’t think this makes it all that easy for those who may follow. It’s not as if OCC will suddenly be keen to hand out charters afterwards, he says.
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Radical Changes from a ‘Reformed Banker’
Walsh realized in his years working at large financial institutions that they really aren’t set up to help the 70% of Americans who are financially squeezed. “The top 1-2% of consumers are served well,” he says, “and the 30% who are not squeezed are fine using traditional bank accounts, fees and all.” But for the 180 million Americans feeling the pinch, Walsh, who refers to himself as a “reformed banker,” maintains that bank fees just add to consumers’ financial challenge.
“The primary focus for Varo at present is a consumer segment CEO Colin Walsh refers to as ‘hands-off creditworthy Millennials’ – people who don’t spend much time managing their money.”
Many of these consumers are Millennials, and that segment is the primary focus for Varo, at least for now. Walsh calls the particular portion of Millennials that Varo is targeting, “hands-off creditworthy Millennials.” These are people that don’t spend a lot of time managing their money, and as a result often don’t have enough funds to pay their bills.
Even if other legacy financial institutions wish to target this market, it’s a challenge for them to walk away from the pricing and fee structures that have been in place for so long, according to Walsh. That’s because of the high cost of the branch networks most of them maintain along with the cost to operate legacy technology. Walsh and his team set out to solve the fundamental problems of the middle class Millennial consumer, not simply by adopting a no-fee banking policy, but by building a holistic solution that truly helps people save and manage their finances using an intuitive mobile app.
No fees, however, is a big part of that. Walsh says the average consumer pays $350 a year in banking fees. Varo has now added to its list of features a “no-fee overdraft” service. “The vast majority of overdraft fee revenue comes from customers who can least afford it,” says Walsh. A Qualtrics survey found that about 40% of Millennials say they were hit with at least one overdraft fee in 2018.
The new Varo service allows customers to overdraft up to $50 without any fee or interest. The only requirement is that the person direct deposit at least $1,000 a month with Varo and make at least five debit card purchases a month using the Varo debit card.
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Big Emphasis on Savings
The Varo name was suggested by a Millennial advisory board. The word is used to refer to “money” in Mexico and is pronounced to rhyme with “car.” Walsh emphasizes the strong focus on savings as part of the mobile bank’s mission. The app has automated savings tools that allow consumers to save a portion of any direct deposit. It also has a round-up feature linked to debit card purchases. Unlike some savings apps, Varo Money pays generous interest on savings balances. As of September 2019 it was paying 2.80% on any balance up to $50,000 as long as the person had direct deposit set up and made at least five debit card purchases.
The app’s Forecast function uses machine learning to detect upcoming bills as well as when a person’s next paycheck is arriving and suggests how much they can comfortably save for the rest of the month. Other bank accounts can be linked to the Varo account to make the calculation more accurate.
Varo Money’s key features:
- No-fee online bank account
- Visa debit card with in-app card locking
- High-yielding savings
- Automated savings tools
- Early direct deposit
- Fee-free ATMs
- Cash deposits accepted at Green Dot merchants
- Personal loans up to $25,000 (in 21 states)
- AI-based spending tracker
- Free overdrafts up to $50
- Bill paying through the app
- Live customer service seven days a week
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Early Indicators of Success
To date, Varo has raised $179 million in capital from Warburg Pincus and TpG, and has about 750,000 registered customers. “They’re spread out all over the country,” says Walsh. The banking app gets high marks on several third-party review sites and, according to Walsh, has 25,000 5-star reviews in the App Store.
The banking veteran feels he’s finally found a way to make a lasting difference in how banks can assist consumers. As he says, he spent years trying to change the system from within. Ultimately, he has concluded that building a new kind of bank from scratch is easier than renovating a legacy institution. Launching a fully digital, technology-driven bank that helps the consumers most in need of financial assistance is a dream job for him. “A very new kind of bank that actually helps make managing your money easier and helps you save,” as he describes it.
With a full national charter in hand, Varo could prove a formidable competitor not only for other fintechs, but also for traditional financial institutions.