Varo Bank's Colin Walsh Says 2024 May be First Profitable Year

Varo Bank founder Colin Walsh thinks 2024 will be the year that his neobank finally crosses into the black.

He won’t be pinned down to a specific quarter. But he says this will be the year that the bank, which began as the fintech Varo Money, will “join the “Post-Profit Club.”

Walsh says he’s learned many lessons along the way. The most important: Reaching profitability “takes longer than anyone anticipates.” Many entrepreneurial newcomers and foreign entrants to financial services didn’t fully understand this, he says.

Having learned the hard way that shortcuts don’t work, he made multiple course corrections, put more chips on product development while rethinking marketing.

“There’s a profound need for the types of services we’re building,” says Walsh, “and I’m encouraged that we’ve persevered. It’s a long haul with no quick way through.”

Eyes on Profitability, with an IPO Over the Hill

For fintechs, the dual Holy Grail is hitting profitability and launching an IPO. Though going public remains a ways off for Varo, early steps have been taken, including the recent hiring of Allen Parker, former CFO at Zillow and a veteran of key financial posts at Amazon, to become the bank’s new CFO.

Walsh says Varo needed someone who could help the bank grow in the next phases of development, through and beyond going public. He admits the markets aren’t terribly friendly right now, but believes that may work to Varo’s favor.

“We have more runway in front of us yet, in terms of business maturity,” he explains. “If we get to profitability this year, we’ll want to continue to scale and show predictable results before going into the public markets.”

In this regard, Walsh says he is learning from pioneers’ experience.

“For companies that went too early things didn’t work out so well and you’re not going to want to have public market investors if you haven’t really matured the business to the point where it’s highly predictable.”

In the interim, Walsh has an ongoing mission to balance the push for profits with growth: “My number-one priority is to get Varo to a place where we’re sustainable from a capital perspective, and generating our own capital.”

Three Forms of Vindication for a New Kid on the Block

For Walsh, CEO at $486.4 million-assets Varo, profitability and building capital from operations will be the vindication for a long line of decisions since Varo Money was founded in 2015 and began offering accounts in 2016.

After a career spent with mainstream providers like Lloyds Banking Group, Wells Fargo and American Express, he believed that modern technology could be tapped to provide no-fee or lower-cost services to average consumers.

If anything, Varo may be filling a bigger need now for affordable services than when it was founded, due to the impact of inflation and a tough economy. “The numbers have gotten worse, in terms of people who are just trying to get by to their next paycheck,” says Walsh. Late 2023 research commissioned by Varo found that more than half of consumers say they are having trouble paying their bills and that they are finding it difficult to save.

He’s long believed that there is a win-win here, giving consumers a break while still making a profitable business from that effort. He says Varo’s average revenue per user for active customers is currently around $290 annually, which he believes is “multiples higher than some other fintechs because our customers are really engaged with our products.”

Walsh also believed that a broader product line, rather than the narrower offerings of many fintechs, would have more appeal in the long run — particularly when many of the industry’s largest players offered breadth but at a steep price to their customers.

“With the people at the Consumer Financial Protection Bureau coming in and taking a hard look at that, those days are starting to change,” says Walsh. He thinks Varo will look better as the major incumbents come under increase pressure.

Walsh and his backers spent roughly $100 million and three years negotiating the federal bank chartering gauntlet, culminating in a brand-new full-service national bank charter granted in mid-2020. To date, Varo is the only fintech to obtain a national charter. (SoFi also began as a fintech and acquired a charter through a bank acquisition in 2022.)

Though it was hard-won, Walsh sees the charter as the right move, especially in light of increasing turmoil in the BaaS space.

“The charter was a big deal. It gave us legitimacy. We’re directly regulated and we can control our own regulatory destiny. We’re a direct member of the FDIC and the Federal Reserve,” says Walsh. “All of that matters.” He adds that in the recent economic cycle, being a chartered bank “gave us more levers to pull.” He also believes the full-service charter makes it easier to become a consumer’s primary bank.

Walsh says he’s happy that he could deal directly with the Comptroller’s Office and FDIC, rather than being in business indirectly through a BaaS sponsor bank relationship.

“I didn’t feel like I could control that,” says Walsh. “There’s sort of ‘stroke of the pen’ risk.”

Stoking Varo’s Pace of Innovation and Product Development

When Varo gained its charter, it initially boosted an already aggressive marketing push, spending multi-millions on promotion, including a nationwide campaign, including the Super Bowl and outdoor and transit advertising.

But as Varo and other fintechs found that growth alone wasn’t a long-term strategy, the bank has shifted towards product development. (Walsh says that marketing spending is now down 85% from the peak.) The company hired Wook Chung as chief product officer in early 2023. Chung had been most recently vice-president of product design and engineering at SoFi.

Since 2022 Varo has had a steady stream of new product introductions, including Varo Believe, a secured card for building credit; Varo Savings Account, a higher-rate offering; and Varo to Anyone, an instant payments service enabling Varo customers to send and receive funds to anyone with a U.S. debit card at no cost. All of these hinged on the charter. Walsh says customers have started moving from use to Block/Square’s Cash App and Venmo and PayPal to their bank’s payments app. (Varo continues to also offer Zelle.)

A bonus: Varo to Anyone plays a marketing role, because it exposes potential newcomers to the bank’s existence. Recipients can choose between having payments sent to an existing account or they can open a Varo account via a link in the payment message. In fact, Walsh says this has become the third-strongest marketing channel, coming after organic sales and paid referrals. A basic Varo account can be opened in two minutes, he says.

“It opens up new audiences, customers we haven’t spoken to before,” says Walsh. With the aid of such exposure, at a fraction of the cost, “we’re probably going to acquire almost as many customers as we did back in the go-go days when we were spending huge amounts of money.”

In the first quarter of 2024, Varo introduced more new products. First was Smart Bank Account, an interactive, ongoing budget tool built into the Varo Bank app. The new functionality shows the trend of spending for the current and previous month in a visual way intended to make it easy to see where the account holder’s money is going. The intent is to provide that within the app, says Walsh, rather than requiring use of an additional, outside app. Under development is a related function to help account holders track sources of income.

“We’re taking what has been sort of a dumb ledger of transactions to a much more robust budgeting and spending tracking tool,” says Walsh. The intent is to build a sense of confidence in managing personal finance.

The bank also introduced Varo Line of Credit, which offers pre-approved lines of up to $2,000 at a fixed rate. The credit process for this product goes beyond traditional analysis based on credit scores. Walsh explains that machine learning technology enables the bank to continuously evaluate how the customer is using Varo products, including their pattern of saving and making payments. Regularity can lead to higher lines beyond what credit scores along would support. The line of credit is currently in the waiting list stage, with wider availability to begin in the second quarter of 2024.

This product comes on top of the unsecured card and Varo’s pre-existing short-term Varo Advance product, which makes up to $500 available for short-term needs. (The advance service starts at $250, and good performance permits customers to move towards the higher limit.)

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Offering Credit as a Lifeline

Inflation has left many consumers in a tighter spot — the rate of inflation may be lower, but prices remain high. Many people lean on credit cards and other personal credit for day-to-day spending. But how does a brand that promises to help with financial management square that goal with expanding credit opportunities?

“Obviously, we’re only going to extend credit in a responsible way,” says Walsh. “If we give somebody a $500 advance, they’re not going to be able to get another one until they pay back the first.” Walsh says Varo products tend to be more flexible than many other lenders and adds that fees are among the lowest available.

“But if people can save, we want them to save,” says Walsh. “This has always been at the heart of our business from the beginning. I started this company because I’m trying to improve the outcomes for millions of consumers and helping to eliminate some of the stress associated with money.”