What Varo Money's Deal with Moven Means for Challenger Banks' Future

Moven Bank customers got a shock late in March 2020 when they learned that the mobile-only bank was discontinuing operations and would close all accounts by April 30. When the pioneering mobile-only challenger bank made the decision, no mention was made of where its corps of loyal mobile-banking customers would migrate to. Now they have a clearer picture of where to move their accounts.

In early April, Brett King, Moven’s Founder and Chairman, mentioned in a short video on his Twitter page that a new partnership with Varo Money had been reached that would provide a “soft landing” for Moven customers. Varo Money, expected to soon become Varo Bank, is similar to Moven as a digital-only challenger bank. In the video King apologized to the customers who had been with the challenger bank for years, explaining that the coronavirus had impacted their ability to continue that part of Moven’s business. In mentioning the Varo arrangement he said, “Hopefully if you move over there you’ll see some of Moven’s features deployed in Varo.”

Comments on Moven Bank’s demise churned the tight-knit fintech community for days, even though many likely already knew that the consumer-facing business was no longer the priority it had been. Moven CEO Marek Forysiak told The Financial Brand in November 2019 that the U.S. direct-to-consumer operation, which used CBW Bank as its bank partner, comprised just 10% of the company’s total user base worldwide.

Moven had in fact been hoping to spin off the consumer-facing business and had funding lined up before the coronavirus impact hit the U.S. full force. The funding was withdrawn, however, and the Moven team reconsidered its options and decided that the best move was to focus on its enterprise business, which, the company says, is growing strongly and well funded.

Forysiak explained further that another factor played a role in the decision. Moven’s first enterprise client, TD Bank, had an exclusivity clause in its contract that covered both Canada and the U.S. Forysiak says that Moven was able to negotiate dropping the exclusivity clause for the U.S., meaning that the company can now offer its patented financial wellbeing platform to any U.S. financial institution. While most of the eight institutions worldwide that are actively using the Moven platform are large, Forysiak says that he believes tier two banks and credit unions in the U.S. will particularly benefit from using the platform.

A Customer Acquisition Move

One of the people taking note of the Moven announcement was Colin Walsh, Varo Money’s CEO. The fintech executive told The Financial Brand that he reached out to King. “I thought this can be an exciting opportunity for us to welcome the Moven customers onto our platform. We have a lot of simpatico views of the world and what we’re trying to accomplish.” Walsh says he read some of King’s books before starting Varo in 2015 and incorporated some of his ideas.

Of partnering with Varo, Forysiak says, “They are the first digital-only bank in the U.S. That’s a bank we want to partner with.” Walsh and his team have spent three and a half years pursuing the dream of obtaining the first national bank charter for a fintech bank. The FDIC approved Varo for deposit insurance in January of 2020. The final steps include a pre-opening examination, according to Walsh.

Once that’s successfully completed, Varo Money will become Varo Bank, N.A., and be able to offer deposits directly. The Bancorp Bank has been its depository partner up until now. Walsh says they have a “very large deposit base sitting at The Bancorp. We’ll move that over once we open the bank, so we’ll have access to a very large source of low-cost lending,” he states. They’ll also begin offering many other products that a chartered bank can provide — loans, wire transfers, joint accounts, etc. — which will give the institution an advantage over other challenger banks. Varo’s revenue stream to date has been largely payments driven. “Having the ability to offer credit products with a balance sheet is certainly a big advantage,” Walsh states.

Walsh confirms that the primary goal of the agreement with Moven is customer acquisition. Even though Varo is growing rapidly (it had 1.6 million accounts at the time of the interview), getting the majority of Moven’s digitally focused customers on board will be a big plus. Further along, Walsh says they may add some of Moven’s algorithm-driven savings and real-time spending tools. But that would be a separate arrangement.

Future for Both Fintech Organizations

While the coronavirus pandemic pulled the plug on Moven’s plans to spin off its mobile bank, the worldwide crisis has actually had a positive impact for Varo Money.

Walsh says Varo is seeing a surge in new accounts. “Our cost of acquisition has declined rapidly, while account acquisition continues to accelerate. We’re seeing very healthy deposit growth. And we haven’t seen a slowdown in spending.” The crisis, Walsh states, “is opening up the reality that the day of the digital bank has arrived. And customers are reevaluating their relationships with their banks.”

“People have more time on their hands right now and they’re looking at their alternatives,” Walsh continues. “Varo and other challenger banks have been in this space now for a while. And consumers understand that these are credible options.”

Moven’s future is now completely tied to its enterprise business, where it has notched some recent wins, according to Forysiak. It’s first Latin American bank partner is just being finalized, and in March, Moven signed an agreement with STC Pay, part of Saudi Arabia’s largest telecom. STC Pay is an electronic wallet that the Saudi company want to convert into a standalone digital bank, Forysiak states.

Now that the U.S. market is fully open to Moven, it plans to take advantage of that by promoting its financial health tools. In that sense, at least, the pandemic is helping Moven. “The fact is that there’s going to be a COVID-20, or something like that, in the future,” Forysiak believes. “Financial institutions need to be able to do a better job enabling customers to prepare themselves financially for these types of events.”

“I think the big message that’s going to come from the crisis is a recognition of the investments that banks need to make in digitally enabled services,” Forysiak continues. Even Bank of America, he says, which was able to quickly put up a website to capture applications for the new payroll protection loans, had to manually process everything after that point.

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COVID-19’s Impact on Challenger Banks

There have been predictions of a fallout among neobanks and fintechs in general due to the drying up of funding. Moven’s consumer-facing business is clearly an early example of that expectation. Forysiak observes that it will be very difficult for institutions to compete that haven’t built war chests in the hundreds of millions the way neobanks such as Revolut and N26 have.

Walsh adds that not just neobanks but fintechs in general that are wholly dependent on capital markets funding will be challenged in the current situation, not only by availability, but also by pricing.

Both executives have backgrounds in traditional banking and understand the source of the industry’s margins and how thin they are. “Margins in banking come from a combination of deposits and lending,” Forysiak notes. “To me, that’s been one of the biggest shortcomings in the fintech space,” where the emphasis has been on one or the other, or on payments.

Digital experiences are critical for acquiring customers, he continues, but ultimately being able to own as much of the relationship as possible allows an institution to be able to maintain a margin. “For many of these fintech institutions,” says Forysiak, “either they have sponsorship that leads to what I call the ‘last man standing’ strategy, or they have to be able to operate more like a full service bank with both assets and liabilities. And that means licensing.”

That’s why Forysiak thinks Varo Money has (or soon will) put themselves in a very unique position of having all of those authorities to build a balance sheet. “And building a balance sheet allows for sustainability long term.”