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Illustration: Christopher T. Fong/Protocol

Neobanks have an interchange problem

Protocol Fintech

A hearty hello, and welcome to Protocol Fintech. This Wednesday: Neobanks’ profit problem, Kraken’s sanctions probe and layoffs at Shopify.

Off the chain

What happens when Unstoppable Domains meets an immovable force? The crypto domains company just raised $65 million at a $1 billion valuation for “blockchain domains.” These aren’t regular web domains and require special software to access. ICANN, which oversees domain names, has warned against so-called alt-root domains. If this sounds like a recipe for chaos, it is: Unstoppable is suing a competitor, Handshake, over the .wallet top-level domain.

— Owen Thomas (email | twitter)

Banking on interchange

The recent layoffs at Varo are just the latest sign of the squeeze neobanks are feeling. Varo last week cut 75 jobs, or 10% of its staff, a move CEO Colin Walsh wrote was necessary to ensure the digital bank has "sufficient capital to execute on our strategy and path to profitability."

Making money has proven an elusive goal for the neobanks. Just 5% of about 400 global neobanks identified by research firm Simon-Kucher and Partners have reached a break-even point, according to a May report.

  • That didn't matter as much when venture capital investors were pumping fintechs with funding in 2021. But the cooling of the market has clearly squeezed some startups.
  • Fintech firms raised $20.4 billion in the second quarter of 2022, down by roughly half from the same period in 2021, according to CB Insights. Banking-focused fintech startups raised $1.9 billion during the quarter, an almost 80% year-over-year drop.

Most neobanks targeted the underbanked. The term is most often used to describe tech-driven startups that offer some form of banking service, such as online checking accounts.

  • Neobanks such as Varo and competitors Current and Chime have raised billions from investors and built up bases of millions of customers. They offer free banking accounts to low- and middle-income consumers, whose incomes might leave them vulnerable to overdraft fees and maintenance costs at traditional banks. Most of the firms’ revenue comes through collecting interchange fees on card swipes.
  • Varo in 2020 became the first U.S. neobank to receive a national banking charter. The process took three years and cost a reported $100 million. The charter allows the firm to directly hold and lend against customer deposits — a bread-and-butter moneymaker for traditional banks.
  • But, as fintech analyst Jason Mikula detailed in a recent newsletter, Varo has yet to build a significant lending operation. About 98% of its revenue still comes from interchange fees as of the first quarter, along with fees from ATM withdrawals and a cash-advance program. “No U.S. neobank has built a meaningful lending business,” Mikula said.
  • First-quarter regulatory filings showed Varo was burning through cash so fast it could be out of money before the end of the year, as Mikula wrote in May, despite raising a $510 million Series E round in September 2021. At the time, Walsh told Banking Dive that Varo had “sufficient capital to reach profitability.”

The slowdown could reshape the digital banking sector. Ron Shevlin, chief research officer for Cornerstone Advisors, recently declared in a Forbes column that the "End of the Neobank Era" had arrived.

  • "The days of fintech startups going after middle- to low-income consumers in the name of inclusion, it is very noble and altruistic, but it has not yet built a sustainable business," Shevlin told Protocol.
  • Walsh’s blog post hinted at a new strategy for Varo in announcing the layoffs. He wrote that the company is establishing a new business unit called Varo Tech to "bring together the technology, design, data and product functions under a single umbrella."

David Becker, CEO of the Indiana-chartered First Internet Bank, noted that there have been shakeouts in the sector before. His bank, founded in 1997, is a rare survivor from a group of dozens of online-only banks that popped up during the dot-com boom of the late ’90s. If the current market slowdown continues, he said, there is a lesson to be learned from the companies that survived. "You really have to offer the full suite of services, because customers don't want to bank in six different places," Becker said. "You need to offer the full suite — or customers will find someone else who can."

Read the full story on Protocol here.

— Ryan Deffenbaugh (email | twitter)


Chip shortage could undermine national security: The global shortage of semiconductors has impeded the production of everything from pickup trucks to PlayStations. But there are graver implications than a scarcity of consumer goods. If the U.S. does not ensure continued domestic access to leading-edge semiconductor manufacturing, experts say our national security could suffer.

Read more from Micron

On the money

Kraken faces sanctions investigation. The Treasury Department is reportedly investigating whether the crypto exchange allowed users in Iran to buy and sell digital tokens.

On Protocol: The SEC is probing whether Coinbase illegally allowed trading of unregistered securities. The regulator listed nine tokens it believed to be securities in an insider trading case it filed against a Coinbase employee last week, though the probes appear to be separate.

Shopify will lay off 10% of its staff. CEO Tobias Lütke said the company staffed up in a bet that the pandemic has permanently accelerated ecommerce demand. "It’s now clear that bet didn’t pay off," he wrote in a memo to staff.

Gen Z is socking it away. Generation Z workers — ages 18 to 25 — are saving, on average, 14% of their income for their golden years, according to new research from BlackRock, ahead of their older counterparts in the workforce.

Another Senate bill would make some crypto transactions tax-exempt. A new bill from Sens. Pat Toomey and Kyrsten Sinema would exempt any crypto transaction under $50 from capital gains tax reporting. The Lummis-Gillibrand bill has similar provisions to exempt small transactions.


Pat Toomey is also beating the “regulation by enforcement” drum. In a letter to SEC Chair Gary Gensler, the senator blasted the agency’s “uncompromising refusal to give regulatory clarity” to the crypto industry, instead pursuing a “capricious and ineffective approach to consumer protection known as regulation-by-enforcement.”

Just one question for
Emmalyn Shaw, managing partner, Flourish Ventures

Throughout her career, Shaw has had a special interest in financial health. Before joining Flourish, she co-managed the financial inclusion team at Omidyar Network.

What’s your perspective on crypto and Web3 investing?

We know that — notwithstanding the most recent meltdown — Web3 is going to be highly integrated in our world. We are going to be operating in a world where we are paying our mortgage maybe through our traditional bank account, but we’re going to be remitting capital using some crypto, some decentralized structure. We’re going to be able to buy our coffee using some exchange. But when we think about the U.S. … a lot of folks who lost capital in this last meltdown were the most financially vulnerable. There’s this opaque nature in crypto that has made us reluctant to play in it. Thinking from the impact level, we know there’s money to be made, but that wasn’t the point. The point is the impact on consumers and where we want to play within that.


Chip shortage could undermine national security: To ensure American security, prosperity and technological leadership, industry leaders say the U.S. must encourage domestic manufacturing of chips in order to reduce our reliance on East Asia producers for crucial electronics components.

Read more from Micron

Thanks for reading — see you tomorrow!

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