Neobank Varo nears profitability

San Francisco-based Varo Bank, the first digital-only fintech bank to obtain a national bank charter, has a "line of sight" to reaching profitability, founder and CEO Colin Walsh said. 

"Overall, where we are right now is getting closer to profitability," Walsh said in a recent interview. "We're very focused on that. We continue to bring down operating losses."

Varo, which started as Varo Money in 2015, reported $29.9 million in operating losses through the first six months of 2024. That's down from $56.5 million for the same period in 2023 and $161.5 million for the first half of 2022.

Varo received its charter from the Office of the Comptroller of the Currency in August 2020. Earlier this month, Varo was named the 10th most trusted bank in the U.S. in American Banker's annual survey of the top 20 banks by reputation.

According to Walsh, Varo is well-positioned to benefit further from a likely flight to safety as consumers begin thinking twice about giving business to unregulated fintechs. 

"I think you've got a confluence of more customers adopting [digital banking] solutions and a real question mark around should they be putting their money into something that's not a bank…especially on the back of the debacle with Synapse and all these customers getting their money trapped," Walsh said.

Fintech middleware provider Synapse filed for bankruptcy in April, leaving funds belonging to tens of thousands of customers frozen, the result of record-keeping differences between the San Francisco-based company and partner banks. The episode only heightened a trend of increased regulatory scrutiny that has resulted in nearly two dozen regulatory orders aimed at banks providing so-called banking-as-a-service facilities to non-bank fintechs interested in collecting deposits, issuing credit cards or making loans. As a result, a number of banks have exited the field entirely. Others have scaled back their involvement.

For Varo, the decision to obtain a bank charter brought with it a heavier expense load, but it looks better in light of the difficulties other fintechs are facing, Walsh said. "I can manage the operational risk, the compliance risk, the BSA-AML, and I have a team of people that understand all aspects of an enterprise risk management program," Walsh said. "Four years in, I think that was a good call."

Varo's brighter financial picture — it also posted a 32% increase in noninterest income — comes as some other prominent digital-only banks are reporting their first profits. Dave said it broke into the black the fourth quarter of 2023. Chime, considered the largest U.S. neobank, did so three months later. 

Though digital-only banks remain an "emerging category," the sector has made significant strides the past three years, Simon Wu, a partner at San Francisco-based venture capital firm Cathay Innovation, which holds an equity stake in Chime, said in an interview. 

"When you look at Varo and Dave right now, then back at their 2021 financials, they have made big strides in creating operating leverage in their business," Wu said. Varo lost $265.5 million in 2021, according to Federal Deposit Insurance Statistics. The publicly traded Dave reported a $20 million net loss. 

Varo's banking charter frees it from reliance on partners and gives it "more control over its services and revenues," David Donovan, executive vice president and head of financial services at digital consulting firm Publicis Sapient, wrote in an email. Varo's commitment to financial inclusion helps set it apart. "By offering fee-free accounts, early access to direct deposits, and financial wellness tools, Varo can build a loyal customer base," Donovan added.  

Still, Varo's cash burn has been significant, while it and other fintech banks face sharper competition from traditional banks, which have steadily improved their digital offerings, Donovan noted. Without achieving profitability soon, Varo could struggle," Donovan wrote. "To thrive, it must innovate, control expenses, and further differentiate itself." 

Varo has taken several steps to improve its footing in recent months. In August, it signed a five-year deal making Marqeta the issuer processor for its card business. In March, Varo hired Zillow and Amazon alum Allen Parker as chief financial officer. 

"I do think Varo has an opportunity to continue to innovate, continue to build technology solutions for a customer group traditional institutions aren't able to effectively serve," Walsh said.

Since their customers tend to be younger and more tech-savvy, but also less affluent than those of traditional community banks, digital banks, including Varo, have employed low-fee or fee-free models. The sector's success could have far-reaching consequences for the broader financial services industry, according to Wu. 

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"If someone can improve the customer experience and create an equation from a business standpoint that works — you're seeing signs of that with Dave turning profitable, Varo and its progress…Chime doing great — it shows it is possible to serve this historically challenging segment from a profitability standpoint," Wu said.

"For a person who lives paycheck-to-paycheck, having to pay an extra $15 a month seems considerable," Wu added.