Last month, Varo Bank celebrated its two-year anniversary Getting its national bank charter. The move makes Varo the first all-digital nationally chartered US consumer bank.
The startup launched its banking services in 2017 for young consumers to conveniently do their banking online. It has raised nearly $1 billion since the start of 2015 and Valued at $2.5 billion During its last rise in 2021. Its backers include firms 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 Chim, Current, N26, Level, Step, Moven and many others. Varro’s move to acquire a charter separates it from the pack rather than partnering with a bank that has become one.
A lot has happened since they took the complex and expensive, bank charter route. I reached out to the company’s chief executive and founder, Colin Walsh, to get an update.
This interview has been edited for clarity and brevity.
TC: Is it worth getting chartered as a company? And if so, why?
Walsh: It’s 100% worth it. It goes back to why they were created in the first place. For me, there is a huge opportunity in the space that the incumbents have failed to capture, because much of it is based on the economics of their model and misaligned incentives. The world is unfortunately made up of haves and have nots….there. Several things you need to do to provide access to the system at a low cost: Make payments easier and faster for customers who often don’t have much money. Help people build credit and create access to credit, and then over time, be able to provide access to things that create a real sense of ownership. As we move customers along that journey, the bank is the only way to truly achieve all of that.
That also comes at a cost – there are no guarantees that we’re going to make it. We did but it was a difficult, long and expensive process. There’s a lot of oversight involved in being a real bank, not just a tech company partnering with a bank, and On the flip side it allows us to control our own regulatory function. If you are partnering with a sponsor, something could go wrong with any of those partners creating a risk to the business and business model. So we’ve effectively cut out a middleman.
Speaking of these uncertain economic times, all financial institutions – including Varro’s – are clearly operating in a very different market than you were a year ago. An article I read had a title that suggested they were May run out of cash by the end of the year. What changes have you made to adapt to the new macro environment and avoid cash crunch?
They have taken immediate and prudent measures to reduce the burn rate through strategic cost reduction measures. These measures went into effect in Q2 and we expect to significantly accelerate these efforts through the second half of 2022.
Our biggest reduction in cost is coming from marketing. We reduced June’s customer acquisition cost (CAC) by 64% relative to Q1. Although it was a tough decision, we also reduced our headcount [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 production strategy to support future growth.
We are still seeing strong customer growth and still have a clear path to profitability.
Before the market shift, you secured a large funding round and talked about going public. How did you go from raising such a large amount to risking running out of funds?
We did A really big hike Last year, it was a huge success. And we’re doing all the things we said we were going to do in the back in terms of dialing up the growth engine. Then the market changed very rapidly around us. So we’ve repositioned the business to continue to invest and build products that customers love and are going to fulfill the mission, but cut back a bit on other areas of spending.
What’s going to be really interesting over these next few quarters is to see how much the tough decisions we made early on to become a bank really make sense. For example, I’m not the only one who celebrates every time the Fed raises rates by 75 basis points, and I think some of my non-bank lending friends see it as an existential threat.
how There is Does business happen?
In 2021, Varro’s gross revenue is $74 million. In 2020 it will be 41 million dollars.
Today, we have 6.8 million accounts, a 196% increase in two years. Revenue increased by 100% and our cost increased by 100%.
Note: The company referred me to its Q2 2022 financials Here, which indicates that the company narrowed its loss to $77.1 million during the three months, compared to $84.4 million in the first quarter. Those headlines also included the following information: “With Tier 1 capital of $219M and a leverage ratio of 37.2%, Varro’s leverage ratio is in the top 5% of all US banks.” And “economic conditions require additional focus on capital preservation. Actions initiated in Q2 will significantly reduce losses and significantly extend the runway beginning in Q3.
What do you think about increased competition, including more niche neobanks targeting specific demographics, for example?
In the last 10 years these new banking institutions have come up and these new companies are getting a lot of funding and spending money on raising awareness. Plus you now have GenZs in their 20s. And you’ve got millennials in their early 40s. So you have a huge population of consumers who don’t have real embedded loyalty to existing institutions and they’re enthusiastically embracing these new solutions and switching to digital banking providers because they grew up with a phone in their hand.
As more players participate, it is helpful to maintain category awareness. So from that point of view, I think it’s useful to have more players out there, and everyone has their own angle.
From a business model perspective, they are difficult to scale. If you’re focused on a specific niche in the market and at the end of the day scale is important – scale in terms of being able to serve as many customers as you can cover your costs and really get some of those economies of scale. It will be interesting to see in this market environment if more niche plays of that type can attract the funding they need to sustain themselves. I think it will be interesting to see.
There are many good people with good intentions trying to do the right thing and trying to build connections.
What do you see in the future for digital banks?
From a macro perspective, funds are not widely available. You’re going to see some players consolidating or finding other ways to conduct their business through the cycle. But I think we are in the early days. We don’t know how long this economic situation is going to last, so I think it’s really going to be a start to deal with business models that are really stable through different economic cycles.
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