Varo traces the perilous path of neobanks

When Varo Bank raised $510 million last September, it was flying high — and headed for an IPO that could fetch an even bigger sum. Then the IPO window closed.

State of play: Varo Bank is the only American neobank to have its own banking charter. This, the bank says, puts it in a stronger position than most of its competitors – but also means it must file quarterly reports showing how much capital it is burning.

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

  • That leaves the bank with $219 million in 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 still represents 37% of its assets, putting it in the top 5% of all US banks. The problem is that his capital is falling rapidly, albeit at a decreasing rate.
  • CEO Colin Walsh told Axios that June losses were $16.5 million, less than a quarter of the three-month total, and fourth-quarter losses are expected to be around $35 million.

What did they do: Varo has laid off 75 employees and drastically reduced its marketing expenses. Going forward, the goal is to save money wherever possible and increase the number of customers using Varo as their primary bank – a pivot from the previous strategy of trying to maximize the number number of customers.

  • “We’re cutting heavy growth expenses and some of the costly customer acquisition,” Walsh said. “We’re not going to spend hundreds of millions of dollars on marketing to create an iconic brand.”

be a bank help, at the margin. Varo says its cost of providing payment services has fallen by more than 50% since becoming a bank.

  • Varo can also lend customers’ deposits to the Fed, which its competitors cannot do since they do not own their deposits. He can also add Zelle, which Varo promises later this year.

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

  • But, but, but: Varo’s business model has yet to prove itself. Walsh has yet to demonstrate that he can persuade a critical mass of customers to use Varo as his primary bank, which is needed 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 others — are likely all facing similar or worse economics right now.

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