Last month, Varo Bank celebrated the two-year anniversary of obtaining its national banking charter. The move made Varo the first-ever all-digital, nationally chartered U.S. consumer bank.
The startup launched its banking services in 2017, aimed at making younger consumers comfortable to do all their banking online. It has raised nearly $1 billion since its inception in 2015 and was valued at $2.5 billion at the time of the last raise in 2021. Donors 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 and Moven, among others. Varo’s move to obtain a charter sets Varo apart from the rest, instead of partnering with a bank, it became one.
Much has happened since Varo left the complex, and precious, bank charter route. I spoke to Colin Walsh, the company’s CEO and founder, to get an update.
This interview has been edited for clarity and brevity.
TC: Was it worth getting a charter as a company? And if so, why?
waltz: It was 100% worth it. It goes back to why Varo was created in the first place. For me, there was a huge opportunity in a space that the incumbents couldn’t seize, because a lot of it is their model’s economics and misaligned incentives. Unfortunately, the world is still made up of haves and have nots… There are a few things you need to do to allow access to the system at a lower cost: make payments easier, and often faster, especially for customers who don’t have a lot of money. Help people build credit and access to credit and over time provide access to things that create a real sense of ownership. As we help customers on that journey, the only way to really achieve all of that is to be a bank.
That also comes at a cost – there were no guarantees we’d make it. We did, but it was a difficult, lengthy and expensive process. There’s a lot of supervision when you’re a real bank, not just a tech company partnering with a bank, and the flip side of that is that it allows us to determine our own regulatory destiny. When you partner with a sponsor, things can go wrong with some of those partners that could pose a risk to the company and business model. In this way we effectively eliminated an intermediary.
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 headline stating that Varo could run out of money by the end of the year. What changes have you made to adapt to the new macro environment and avoid running out of money?
Varo has taken immediate and cautious measures to reduce the burn rate through strategic cost-saving measures. These actions started in the second quarter and we expect to accelerate these efforts significantly in the second half of 2022.
Our biggest savings in spending comes from marketing. We reduced customer acquisition costs (CAC) by 64% in June 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 on our robust near-term product strategy to support future growth.
We continue to see strong customer growth and still have a clear path to profitability.
Prior to the market shift, you had landed a major funding round and were talking about going public. How did you go from that big raise to the risk of running out of money?
we did it a very big increase last year, which was a huge success. And we did all the things that we said we were going to do in terms of kick-starting the growth engine. Then the market around us has changed rather quickly. So we’ve repositioned the company to continue to invest and build products that customers will love and fulfill its mission, but scaled back a bit in other cost areas.
I think it’s going to be really interesting in the coming quarters to see how the tough decisions we made in the beginning to become a bank will really make a lot of sense. For example, I’m the only one celebrating when the Fed raises interest rates by 75 basis points, and I think some of my non-bank lenders see it as an existential threat.
How is business go?
In 2021, Varo’s gross sales were $74 million. In 2020, that was $41 million.
Today we have 6.8 million accounts, an increase of 196% in two years. Revenue has increased by 100% and our expenses have increased by 100%.
Note: The company pointed me to the financial highlights of the second quarter of 2022 here, indicating that the company reduced its loss to $77.1 million during the three-month period, compared to $84.4 million in the first quarter. Those highlights also include the following information: “With Tier 1 capital of $219 million and a leverage ratio of 37.2%, Varo’s leverage ratio ranks among the top 5% of all U.S. banks.” and “Economic conditions require an additional focus on capital preservation. Measures started in the second quarter will significantly reduce losses from the third quarter and significantly extend the runway.”
What do you think of all the increased competition, including more niche neobanks targeting specific demographics, for example?
There has been a confluence in the last 10 years of these new banking institutions coming out and these new companies getting a lot of money and spending money to raise awareness. In addition, there is a generational shift in that you now have the Gen Zs in their twenties. And you have millennials into their early 40s. So you have a huge population of consumers who have no real loyalty to established institutions, and they are enthusiastically embracing these new solutions and switching to digital banking providers, having grown up with a phone in their hand.
Conveniently, the more players participate, the category awareness continues to generate. So from that perspective, I think it’s actually helpful to have more players and everyone has their own angle.
From a business model perspective, they are more difficult to scale. If you only focus on a specific niche of the market, and scale ultimately matters – in terms of being able to provide services to enough customers so that you can cover your costs and really get some of those savings from scale. It will be interesting to see in this market environment if those kinds of more niche players will be able to attract the funding they need to sustain themselves. I think that’s going to be interesting to watch.
There are many good people with good intentions trying to do the right thing and build connections.
What do you see in the future for digital banks?
From a macro perspective, funding will not be as widely available. You will see some players consolidate or find other ways to manage their business throughout the cycle. But I think we are still in our infancy. We don’t know how long this economic situation will last, so I think it’s really going to wipe out the business models that are really sustainable, through different economic cycles and that are going to be tough.
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