Varo, the first Fintech customer to receive a National Bank charter, is now facing cash crunch

A year ago, digital banks were driving high, attracting billions of dollars in venture capital and spending aggressively on marketing to bring in new customers. Today, fintechs trade for a fraction of what they sold just a year ago, inflation is rising and a recession is threatening. Venture capitalists turn off the money tap and the industry is buzzing. Varo is the latest fintech to end up in financial trouble.

Since raising $ 510 million for a valuation of $ 2.5 billion in September last year, it has burned through the money quickly, losing $ 84 million in the last quarter alone. The bank has less than $ 263 million left of the $ 510 million, and if it continues to spend at the current rate, it would be insolvent in about nine months. A spokesman for Varo rejects this characterization and says “Varo’s capital and liquidity conditions are among the strongest of all banks nationally.”

In any case, Varo has already started cutting costs. After hiring 298 full-time employees during 2021, according to regulatory records, Varo’s total number of employees fell by 65 people in the first quarter of 2022, a decrease of 8% from the top. A spokesman for Varo says it was due to “natural wear and tear” [of employees] which was not replaced due to ongoing productivity efficiencies. “) And it plans to become even more aggressive in cost reduction:” We discipline our efforts to save capital and accelerate our cost-effectiveness efforts to support our path to profitability “, says the spokesperson.

Varo was founded in 2015 by CEO and former Wells FargoWFC
CEO Colin Walsh. In competition with other digital banks such as Chime and Current, Varo offers its customers free check accounts, a secured credit card and a small dollar cash advance program. But unlike its competitors, which partner with major banks such as Bancorp to host customers’ accounts, in July 2020 Varo became the first consumer neo-bank to secure a federal banking license – a move that cost nearly $ 100 million, Walsh said.

Securing a banking license allows Varo to earn a marginally higher cut of “exchange fees” on customers’ debit card swipes, as well as lending against their deposits, as most banks earn most of their money. “One of the nice things that the charter gives us is that we can actually pursue growth and profitability at the same time,” CEO Colin Walsh told TechCrunch in September last year after Varo secured the license.

Almost a year later, Varo – like many fintech startups today – is far from profitable and has burned through its cash reserves dangerously fast. It earned just $ 546,000 in total interest income last quarter, although raising interest rates by lending customers’ deposits was a critical reason to secure a charter in the first place. The Atlanta-based bank’s customer base is mostly low- to medium-income Americans, and data from call reports sent to the FDIC show that the average Varo account balance is only $ 84, giving the bank only $ 336 million in total deposits and limiting amounts it can benefit from lending these funds.

A spokesman for Varo says that these figures are “inaccurate and incomplete. The interview report does not give the full picture of Varo’s finances or performance.” However, the spokesman refused to give other figures.

“The average [Varo account] the balance… has been fairly steady between $ 70 and $ 100. There is no indication that they have suddenly attracted customers with higher incomes, says Jason Mikula, a fintech consultant at 312 Global Strategies. “The challenge of attracting the higher-income customers is that they tend to be fairly well served by an established bank.” Since one of the advantages of the bank charter is the ability to lend customers’ deposits, the failure of the average balance sheet number is significant.

To compete in the increasingly crowded digital banking area, where competitors such as Cash App, Chime, Current, Albert, Dave, MoneyLion, SoFi, Revolut and N26 are fighting for the same customers, Varo has spent exorbitant amounts on marketing and advertising. $ 123 million last year. Based on historical spending, Varo may have spent around $ 50 million on marketing last quarter in an effort to expand its customer base. But as more players have entered the market, the cost of customer acquisition has increased dramatically, say industry experts. Chime seems to have cracked the code of customer acquisition better than other digital banks – market research firm Cornerstone Advisors estimates it has more than 10 million customers, almost three times as many as its second closest competitor, Current.

To Varo’s credit, the company increased its total accounts by 2.7 million last year, reaching over four million today. But Varo says that this number represents the total number of open check, savings and credit accounts the bank hosts (a customer can have three accounts), so the number of actual users is probably significantly less than the number of accounts. And it refuses to disclose how many customers have funded accounts and how many of those accounts are active. For context, comparable neo-banks have reported high turnover rates; competitor Dave reported that less than 25% of the accounts were active last year.

It seems that the asset-light approach taken by Chime and other digital banks is proving to be a better model for building a digital bank. “I actually think the charter has been a real albatross,” said Sheel Mohnot, co-founder of the San Francisco-based venture capital fund Better Tomorrow Ventures. “For me, and for many people who look remotely, a charter has never really made sense for this business … If you make money on exchanges, what’s the point of having a charter?”

What options remain for Varo? One possibility is to raise more risk capital. This will extend Varo’s runway, but it will probably also lead to a dramatic drop in valuations. Varo rejects any need for further fundraising; a spokesman for the bank says: “Varo has raised significant capital and does not need to raise more capital at this time to achieve profitability.”

The recent fintech downturn has led other private companies to reduce their valuations in recent rounds of financing; buy now, pay later start-up Klarna is reportedly planning to raise money to a value 70% lower than the last round last year, according to a recent Wall Street Journal report. “If this were just any old neobank with the revenue they have, Varo would probably be worth $ 500 million at best,” Mohnot speculates. Varo was valued at $ 2.5 billion in its fundraising round in September last year.

Another option for Varo may be to try to be acquired. It presents its own problems. Varo is only allowed to charge high brokerage fees for debit transactions because it has less than $ 10 billion in assets, which qualifies it for an exemption from the so-called Durbin amendment to the Dodd-Frank Act of 2010 which was passed after the financial crisis in 2008. If Varo was bought by another bank with more than $ 10 billion in assets, it would be forced to make a significantly lower cut in debit card fees, which account for over 90% of revenues. If Varo is to cope with the ongoing market downturn, some serious cost reductions – probably in the form of layoffs and lower marketing expenses – will be crucial to keep the bank afloat.