Beating Them by Joining Them?
Last summer, Varo did something no financial technology company had managed to do in the United States: Its national bank charter application was approved by the Office of the Comptroller of the Currency after a multi-year process.
Six months later, Varo Bank has filed its second call report — one that reflects a full quarter of operating with a bank charter. Prior to receiving its charter, the fintech partnered with a bank to insure customers’ deposits. These filings give the financial services space a peek under the hood of a neobank that wants to transform consumer banking by paying more for deposits in customer-friendly accounts. How is that revolution going?
Varo reports that it has $415 million in deposits and nearly 650,000 deposit accounts with less than $250,000. The bank previously said it had up to 2 million deposit accounts, many of which are still at its partner bank. The average balance in these Varo accounts is $639, compared to an average $17,000 for banks between $1 billion and $5 billion in assets, according to Matthew Kelley, managing director at the investment bank Stephens.
Right now, these deposits are expensive. Varo pays 2.05% on deposits, which contributed to a net income loss of nearly $470,000 during the quarter. But it also made $14.4 million in debit interchange over that time.
“[It] will be interesting to see how this tracks over time,” Kelley wrote on Feb. 1. “[It has] good growth for sure, but [the] focus will eventually shift to unit/overall profitability.”
So no, Varo’s financials don’t indicate that neobanks are crushing the profits of traditional banks. For now, bankers may not even want such small-dollar accounts.
But the company’s growth is evidence that customers are increasingly open to digital-only banks and comfortable using the digital channel. The consultancy Cornerstone Advisors found that about 15% of U.S. millennials held primary accounts at digital banks at the end of 2020 — up from 5% at the start of the year.
In the bank’s September call report, management included a brief comment explaining the trends behind its modest income, initial losses and outsized expenses: “The bank is in a hyper growth stage and investing in product, technology, and marketing.”
Varo expects to roll out various lending products over time, making good on one of its main objectives behind seeking a charter. When it does, it will have a bevy of retail customers to do business with. Banks should keep an eye on this new de novo entrant — and perhaps on their customers as well.
• Kiah Lau Haslett, managing editor of Bank Director
