Varo Bank is a digital-only financial institution that was founded in 2015 by Colin Walsh. Introduced as a mobile app that offered financial management tools, Varo received regulatory approval to become a full-service national bank in July 2020. Beyond simply offering checking accounts, the company has shifted its focus to offering a range of banking products and services, such as checking and savings accounts, credit cards and personal loans.
I recently had the opportunity to interview Colin Walsh on the Banking Transformed podcast. We discussed the importance of receiving a bank charter, and the potential impact of the closure of Silicon Valley Bank on Varo’s growth ambitions.
Receiving a charter was the right decision as it has allowed Varo Bank to differentiate itself from other fintech firms and tech providers, said Walsh.
“We’re a direct member of the FDIC, we’re regulated by the OCC, and we’ve made very prudent decisions to build a very effective risk management program that protects our customers,” Walsh said. “These moves build trust.”
Walsh believes that trust is at the heart of the banking industry, creating a solid relationship with consumers regardless of the economic environment or marketplace events.
Providing Credit During Economic Uncertainty
Varo Bank has grown exponentially since its inception, currently exceeding 7 million accounts. But many of these relationships are small-dollar deposit customers.
Walsh said that while the average customer deposit level and account activity may be low, the bank has been successful in growing the stickiness of relationships and focusing on high-intent customers. “By focusing on building the products and services that our customers want to improve their lives, Varo Bank has greatly improved the unit economics of the business,” he said.
Walsh noted that Varo’s lending success has been largely driven by its ability to offer lower cost and bridge financing products to consumers during times of economic stress. This has become particularly important in light of rising inflation, which has made everyday expenses more expensive for those living paycheck to paycheck.
“We see ourselves as a relationship lender,” Walsh said. “So, as we get to know our customers, and understand their capacity to repay and to handle debt, we can then extend more credit to them. But we want to do it in a prudent way, so that we don’t take a lot of the volatility and credit loss that can happen, particularly as you’re navigating through an uncertain economic cycle.”
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Varo Focuses on Organic Growth
Varo Bank made the tough decisions to reduce marketing expenses as well as staffing in 2022. While painful, Walsh said that the moves were necessary given evolving market conditions.
Instead of expensive new customer acquisition marketing, Varo has grown its customer base in other ways, including organic acquisition, referral programs, partnerships, and social media. While the bank reduced its traditional marketing spending, it continues to look for cost-efficient ways to acquire high-intent customers interested in digital-only banking solutions.
Walsh believes that, as a national bank with FDIC insurance, Varo has a distinct advantage with younger consumers worried about nontraditional financial institutions.
“We will greatly improve the unit economics of the business as long as we stick to our knitting and focus on those core primary relationships and building the products and services that those customers want to improve their lives.”
— Colin Walsh
In discussing the current economic situation, the failures of Silicon Valley and Signature banks, and the ripple effect of shaken confidence that has hit other banks in the United States as well as overseas, Walsh said he believes that the system is working as it was designed. While the Federal Reserve and the Treasury Department have had to make some hard calls, they have brought stability to the market, he said.
He stressed the importance of maintaining trust in the banking system and demonstrating effective risk management.
Varo’s status as a chartered bank has worked to its advantage during this time, as consumers continue to seek out trusted financial institutions, he added.
Watch Colin Walsh Interview on Banking Transformed YouTube Channel
Future Opportunities and Challenges for Varo Bank
When asked about trends that may impact Varo in the near- to medium-term future, Walsh noted that the rising rate environment was currently helpful for the company as it was earning a spread on its deposits. However, he acknowledged that changes in the funding environment could impact Varo’s ability to expand lending in the future.
When asked about Varo Tech, the unit tasked with executing the company’s overall growth strategy, Walsh said that it has been successful in helping Varo bring new features to market. While he did not rule out the possibility of Varo Tech offering its technology platform to traditional banking organizations in the future, he said that it was not a strategy Varo plans to pursue right now.
“When we zoom out and look at the macro conditions, on those fundamentals, whether you’re in a boom time or a stress period of time, it doesn’t really matter. It’s about whether you can create a trusted relationship?”
— Colin Walsh
Asked about the possibility of Varo being acquired, either as a digital banking unit of a traditional banking organization or by another fintech firm, he expressed little interest. But he suggested that Varo could be a consolidator at some point in the future.