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Five years after launch, Varo Money is set to become the first digital banking startup to receive a fully fledged banking license. Varo currently offers a zero-fee bank account and high-yield savings account, but has to do so through its sponsor bank, Bancorp. With a license, it'll be able to offer those products without anyone else's involvement — alongside new, previously off-limit offerings like credit products.
If all goes to plan, Varo will be the first digital-only bank able to offer a full suite of banking products, differentiating it from peers such as Chime and MoneyLion in the increasingly competitive neobank market.
Last month, Varo received FDIC approval, satisfying "the most onerous conditions" on the path to becoming a full bank, its CEO Colin Walsh told Protocol. Ahead of its license being granted (which it expects this quarter), Protocol spoke to Walsh to discuss the hurdles neobanks like his face in the U.S., as well as the company's competitors and what coronavirus might mean for its business.
This interview has been lightly edited and condensed for clarity.
How much of a role do you think regulation has played in the success of U.S. neobanks?
I think it plays a huge role. Working with a sponsor bank, there's only so much you can do in terms of the breadth of product. The regulator doesn't want to permission the full range of consumer banking products, because that just entails lots of risk — operational risk, compliance risk — that could be very challenging for a sponsor bank to manage if they were trying to offer a full suite of consumer banking products.
In order to get a charter, you have to go through a very rigorous process to demonstrate that you actually have the risk, and controls, and the expertise to be able to manage across that whole suite of products. And so I think part of the lack of really big challengers yet in the U.S. — and I say yet, because it'll be game on once we have our full national bank charter — is that the regulatory process is really complex. You have to invest a ton of money; it's not an easy undertaking, it's taken us over three years. And so I think that's a real barrier to entry.
In the U.S., they're like: "Look, we've got thousands of banks, why would we need new challengers?" Now my argument is: You might have thousands of banks, but you have a huge segment of the population that's not being served well by them. And so therefore you do need to bring in innovators that can actually cost-effectively and profitably serve these customers. And they're listening, that argument has resonated with the regulators now. But that being said, they haven't made the process any easier.
What will you be able to do once you are licensed as a bank?
When we open up the bank, we'll be able to have a full suite of credit products. So everything from credit cards and installment loans, and home equity lines, and new savings products such as CDs and robo-investing. We'll be able to offer joint and household accounts; we'll be able to accept wire transfers. There's a whole series of things that we'll be able to do as a bank, that are really challenging to do as a fintech that's working with a bank sponsor.
How will no longer having a sponsor bank affect your margins?
In a very positive way. Because if you imagine, to have a partner that's taking a huge part of your revenue — the economics of being a standalone bank, particularly with a fully digital platform, is a significant step change.
How has the presence of digital offerings from big banks — that can compete with your products — affected traction?
I think that a lot of customers, in particular customers that are more financially well-off, they're very well served by the banks today. So they have neat product offerings, they've invested a lot of money in good mobile apps. They have rich reward programs. Consumers who are fairly financially well-off are very well served by the incumbents. I think that there's a large group of consumers that have not been terribly well-served, but they want to bank with a bank — going back to this point that actually being a bank matters, they need credit cards and they need mortgages, and they need to send wire transfers, and they are married and need joint accounts, and all these things. And so there really hasn't been an option for that group of consumers.
And then there's a group of consumers that are pretty financially vulnerable. They're working with payday lenders and check-cashers and prepaid cards. And those are the customers that players like Chime are able to attract, because their product offering solves a problem for these customers, but they're not as sensitive to wanting that full scope of products that a bank will bring, and they're probably more willing to to move their business to someone like a Chime.
How do you feel about Goldman Sachs's Marcus, the company's high-yield digital savings account?
Marcus is going after a different segment. It's going after that more financially healthy customer; they're more of a product business than a relationship business. They have high-yield savings accounts, they have installment loans, now they're talking about a checking account. But we started right from the beginning, trying to focus on a specific customer segment, and being able to build a relationship — starting with checking and savings and getting into credit and so on and so forth — and focusing on a group of consumers that the banks are not serving well, but they want to have a bank, and they want to have a bank that's going to meet the wide range of their needs. I see us playing in different spaces as Marcus. We're really going after the everyday middle-class consumer. Marcus is going after a higher-income customer and slightly different segments for its different product lines.
For us right now it's a really interesting, open field because no one has the technology capabilities that we have, in terms of being truly digital and the modern, sophisticated tech stack that we've built, alongside of having a really wide breadth of products to offer consumers. We will be sort of a new breed player, so to speak, in the U.S.
So you feel as if you don't have much competition?
Lighter competition. I think everybody — like the J.P. Morgan Chases, the Citibanks, the Goldman Sachses and the Bank of Americas … and then you've got SoFi, and Robinhood, and Wealthfront — they're all going after that higher-income millennial group, and kind of middle- and upper-middle class, wealthier consumers. I think that kind of core middle-class consumer who's seen their budgets stretched over the last two decades, they haven't seen much wage growth, they've seen their housing expenses go up, their medical expenses, huge amounts of student debt — these people that are just feeling more financially squeezed and really trying hard to stay in the middle class. That's the customer that Varo is going after. They're not wealthy, but they're ambitious and they've got goals, and they want to get ahead, and they don't feel the banks are supporting them.
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The economy isn't looking great, to say the least, from the fallout of the coronavirus pandemic. Is there anything you're particularly worried about on the horizon?
There's just a lot of uncertainty still that has to play out. But I think that in a down cycle, a proposition like what we offer — eliminating hundreds of dollars of fees, helping people structure their budget by giving them their paycheck early, and giving them free overdraft services, giving them tools to save money and incentivising them to save money, giving them access to credit products — these are all things that become even more valuable to consumers in an economic cycle. And so I actually think that companies like Varo will prove to be quite counter-cyclical, and the demand for these products will continue to grow.
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