Most fintechs partner with banks. Varo has become one and says it’s paying off • TechCrunch

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Last month, Varo Bank celebrated the second anniversary of obtaining its national bank charter. The move made Varo the first fully digital nationally chartered U.S. consumer bank.

The startup launched its banking services for young consumers comfortable with doing all their banking online in 2017. It has raised nearly $1 billion since its inception in 2015 and was valued at $2.5 billion when it was last raised in 2021. Its backers include institutions such as Lone Pine Capital, Warburg Pincus and The Rise Fund as well as U2’s Bono and NBA player Russell Westbrook.

Today, the startup competes with Chime, Current, N26, Level, Step, Moven, among many others. Varo’s approach to obtaining a charter separates her from the pack in that rather than partnering with a bank, she became one.

A lot has happened since Varo took over the complex, and expensive, bank charter itinerary. I caught up with Colin Walsh, CEO and founder of the company, to get an update.

This interview has been edited for clarity and conciseness.

TC: Was it worth it for you to get chartered as a business? And if so, why ?

Walsh: It was 100% worth it. This goes back to why Varo was created in the first place. For me, there was a huge opportunity in a space that incumbents haven’t been able to capture because it’s largely the economics of their model and misaligned incentives. The world unfortunately continues to be made up of haves and have-nots…. There are a number of things that need to be done in order to be able to provide access to the system at a lower cost: making payments easier, and often faster, for customers in particular who do not have a lot of money. Help people build credit and access credit, then over time be able to give them access to things that create a real sense of belonging. As we take customers on this journey, the only way to accomplish it all is to be a bank.

It also comes at a cost – there was no guarantee we would make it. We did, but it was a difficult, time-consuming and expensive process. There’s a lot of oversight in being a real bank, not just a tech company that’s partnered with a bank, and the other side of the coin is that it allows us to control our own regulatory destiny. If you partner with a sponsor, anything can go wrong with any number of those partners, which could put the business and business model at risk. So we have effectively eliminated a middleman.

Speaking of these uncertain economic times, all financial institutions – including Varo – are clearly operating in a very different market than you were a year ago. An article I read had a title stating that Varo could run out of cash by the end of the year. What changes have you made to adapt to the new macro environment and avoid running out of cash?

Varo took immediate and prudent action to reduce the burn rate through strategic cost reduction measures. These actions were put in place in the second quarter and we expect to significantly accelerate these efforts in the second half of 2022.

Our biggest expense reduction comes from marketing. We reduced June customer acquisition cost (CAC) by 64% compared to the first quarter. Although it was a difficult decision, we also reduced our workforce [affecting 75 people] in the second quarter to ensure the long-term health of our business given the current macroeconomic challenges. At the same time, we continue to execute our strong near-term product strategy to support future growth.

We continue to see strong customer growth and continue to have a clear path to profitability.

Prior to the market shift, you had secured a major funding round and talked about going public. How did you go from that big raise to risking running out of funds?

We have done a very big increase last year, which was a huge success. And we were doing everything that we said we were going to do as a result of that in terms of activating the growth engine. Then the market kind of changed very quickly around us. So we’ve repositioned the business to continue to invest and build products that customers will love and that will fulfill the mission, but we’ve reduced other expenses a bit.

I think what’s going to be really interesting, over the next few quarters, is to see how the kind of tough decisions we made early on to become a bank will really make a lot of sense. For example, I’m the only one who celebrates every time the Fed raises rates by 75 basis points and I think some of my non-bank lender friends see it as an existential threat.

Picture credits: Varo. CEO and Founder Colin Walsh

How is business going?

In 2021, Varo’s gross revenue was $74 million. In 2020, it was $41 million.

Today we have 6.8 million accounts, an increase of 196% in two years. Revenue increased by 100% and our expenses increased by 100%.

Note: The company provided me with its Q2 2022 financial highlights here, indicating that the company reduced its loss in the three-month period to $77.1 million from $84.4 million in the first quarter. These highlights also included the following information: “With Tier 1 capital of $219 million and a leverage ratio of 37.2%, Varo’s leverage ratio is in the top 5% of all U.S. banks .” and “Economic conditions require greater emphasis on capital preservation. The measures initiated at T2 will significantly reduce losses from T3 and lengthen the runway considerably.

What do you think of all the increased competition, including more niche neobanks targeting specific demographics, for example?

There’s been this confluence over the last 10 years between the emergence of these new banking institutions and these new businesses that are getting a lot of funding and spending money to educate the public. Along with that, there’s a generational shift in that you now have GenZs in their twenties. And you have Millennials up to their early 40s. So you have a massive population of consumers who have no real loyalty to incumbent institutions, and they are enthusiastically embracing these new solutions and turning to digital banking providers because they grew up with a phone in their hand .

It is useful that the more the number of players participating continues to generate awareness of the category. So from that point of view, I think it’s useful to have more players and everyone to have their own angle.

From a business model perspective, they are harder to scale. If you’re just focusing on a specific market niche and scale ultimately matters – in terms of being able to serve enough customers to cover your costs and actually get some of those economies of scale. It will be interesting to see, in this market environment, whether these more niche types of games will be able to attract the funding they need to sustain themselves. I think it’s going to be an interesting thing to watch.

There are a lot of good people with good intentions trying to do the right thing and trying to bond.

What do you see in the future for digital banks?

From a macro perspective, funding will not be as widely available. You’re going to see some players consolidate or find other ways to run their business through the cycle. But I think we are only at the beginning. We don’t know how long this economic situation is going to last, and so I think it’s going to really start to weed out which business models are really sustainable through different economic cycles and which ones are going to struggle.

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