Varo Money, the U.S. digital bank, is on a mission to become a full-fledged national bank.
Challenger banks, or fully-regulated, digital-first banks, have been popular in the UK and Europe, with Revolut, Monzo, and N26 soon expanding into the U.S. But American digital banks — like Chime, SoFi, MoneyLion, and even Varo, which currently partners with The Bancorp — have so far opted to partner with established banks in order to provide insured deposit services rather than become regulated entities themselves.
Varo Money CEO Colin Walsh told Cheddar that a sponsor bank will only be able to take his company so far, considering Varo's expected growth.
"We have a wonderful relationship with The Bancorp, but the reality is as we get bigger it becomes a problem for The Bancorp because they have to manage their own leverage ratios and capital ratios and be concerned about compliance and risk," said Walsh. "These [digital banking] programs become an existential risk for the bank and startups like Chime and others could outgrow their sponsor bank."
When a bank surpasses $10 billion in assets, it becomes subject to heightened regulatory requirements like stress tests and caps on interchange fees, which merchants pay whenever a customer uses a credit or debit card to make a purchase. For a small bank like The Bancorp's business model to work, it has to stay below that $10 billion threshold. (The Bancorp currently has $4.6 billion in total assets.)
"If we get too big that becomes problematic, and it becomes much harder to find a path to profitability," Walsh said. "Being a bank is really a sustainable business model for us for a lot of reasons. You control your own destiny, and you're able to scale within the regulated environment."
He added that if Varo becomes its own national bank, its related costs would go down 50 percent from what it currently faces via the program model with The Bancorp.
The company makes most of its money from interchange fees, as well as its personal loan product.
Varo has 750,000 registered users and has had $600 million in total deposits, including more than $50 million in savings accounts. It was pre-approved for a national bank charter from the Office of the Comptroller of the Currency last year — that will be its primary regulator — but it also needs FDIC approval before it can accept insured deposits.
Walsh is focused on "the basic things a customer has to have" to practice good financial health: steady income, managing money, and savings. It currently offers a high interest savings account with a 2.8 percent annual percentage yield if customers meet certain requirements; if not, they can receive a 2.1 percent APY. On Tuesday Varo also made no-fee overdraft protection available — the most requested feature by customers "by a long shot," Walsh said.
The company is thinking of adding certificates of deposit and robo investment products "to help people optimize their assets over time."
Varo is also interested in credit services and helping people access, build, and repair their credit. It currently offers an installment loan product and a line of credit. Walsh said the company will introduce a credit card when it becomes its own bank — it's considering both secured and unsecured credit cards — and over time move into home ownership products, too.
The competition in Varo's space has become much more nuanced since the fintech movement began a few years ago. Rather than a race between the banks and the fintech startups, the startups have evolved in different ways — differentiating by adding different financial products like fractional stock investing or crypto trading, upping their content strategy, offering in-person networking opportunities. For young, digital banking entities not regulated like traditional banks, they've gained a lot of trust among consumers, based on the growth of these startups alone.
"The fundamental currency we deal in is trust," Walsh said. "The big banks have eroded a lot of the trust. I don't think it was ill will — just messy systems and lax controls."
Companies like Facebook and Apple have also come into the mix, raising questions about which entities consumers trust more: Wall Street or Silicon Valley.
"The court of public opinion is changing rapidly," Walsh said. "There are massive opportunities for tech-led, fully digital, highly efficient, low-cost bank platforms to enter the market and provide some fundamental services to consumers."
This article has been updated to reflect that Varo Money was pre-approved for a national bank charter last year, not approved, and has had $600 million in total deposits.