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Neobanks 'will prove to be quite counter-cyclical': Varo CEO Colin Walsh on the future of banking

The neobank is about to become the first to get a U.S. banking license, and Walsh is optimistic about its prospects.

Varo CEO Colin Walsh

Varo CEO Colin Walsh says that while there are thousands of banks, "you have a huge segment of the population that's not being served well by them."

Photo: Courtesy of Varo

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.

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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