Axios Pro: Fintech Deals
August 05, 2022
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1 big thing: Varo's perilous path

Illustration of a magnifying glass over a hundred dollar bill revealing the Varo logo
Illustration: Sarah Grillo/Axios

When Varo Bank raised $510 million last September it was flying high — and moving towards an IPO that could provide an even greater sum. Then, the IPO window swung shut, Axios' Felix Salmon writes.

State of play: Varo Bank is the only U.S. neobank to have its own bank charter. That, the bank argues, puts it in a stronger position than most of its competitors — but also means it has to file quarterly reports showing just how much capital it's burning.

By the numbers: Varo lost $77 million in the second quarter, on top of a loss of $84 million in the third quarter.

  • That leaves the bank with $219 million of equity (assets minus liabilities), down $202 million in just three quarters from $417 million at the end of the third quarter of 2021.
  • On an absolute basis the bank remains strong — its capital is still 37% of its assets, which puts it in the top 5% of all U.S. banks. The problem is that its capital is falling fast, albeit at a decreasing rate.
  • CEO Colin Walsh tells Axios that June's losses came to $16.5 million, less than a quarter of the three-month total, and that fourth-quarter losses are likely to be in the ballpark of $35 million.

What they did: Varo has laid off 75 employees and cut back sharply on marketing expenses. From hereon in, the focus is to save money where possible and increase the number of customers using Varo as their primary bank — a pivot away from the previous strategy of trying to maximize the total number customers.

  • "We’re tapering back the heavy growth spending and some of the expensive customer acquisition," Walsh says. "We’re not going to spend hundreds of millions of dollars on marketing to create an iconic brand."

Being a bank helps, at the margin. Varo says its cost of providing payment services has decreased by over 50% since it became a bank.

  • Varo can also lend out customer deposits to the Fed, which its competitors can't do since they don't own their deposits. It can also add Zelle, which Varo is promising later this year.

Will it work? Walsh says that he'll end the year with more than the $104 million of capital that he had when he became a bank, and that capital adequacy isn't what keeps him up at night.

  • But, but, but: Varo's business model is as yet unproven. Walsh has yet to demonstrate that he can persuade a critical mass of customers to use Varo as their primary bank — something that's necessary to bring the company to profitability.

The bottom line: Varo's status as a bank makes its financial precariousness visible. Its more opaque competitors — think Chime, Aspiration, Revolut, N26 and the like — are all probably facing similar or worse economics right now.

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