The History (so-far) of Varo Bank: A Rollercoaster of Innovation and Challenges
Beneath the Surface: Case studies of underperforming banks
Varo Bank's journey is anything but dull. It’s filled with twists, turns, and ambition. Let's dive into this amusing history and see how a small well-funded fintech startup aimed to revolutionize banking, with a national bank charter and the rollercoaster ride it took along the way.
In late 2015, Colin Walsh, Roger Van Duinen, and Mykola Klemenko founded Varo Money. With backgrounds in American Express, Wells Fargo, Providian Financial, Lending Club, and ClairMail, this trio brought a mix of financial and technological expertise to the table. Varo Money's mission was to help the unbanked and restore credit access.
In 2016, Varo raised $27 million in May and an additional $7 million in October during its Series A funding round led by Warburg Pincus. These funds helped build its finance ecosystem involving partnerships with The Bancorp Bank for deposits, Galileo Processing for payments, Visa for debit cards, and several other smaller third parties. Varo became a state-licensed non-bank lender in 11 states, offering two loan products, both payday lender alternatives.
Walsh became attached to having an AI bot to interact with customers. Varo partnered with Kasisto, a company aiming to transform consumer banking with conversational AI, to create “Val,” which would power the bot inside Varo’s mobile app.
Even by Walsh’s own admission, the technology couldn’t live up to the requirements for giving financial recommendations on the phone. And as Walsh’s nephew said, it looked like Cindy Lou Who from The Grinch Who Stole Christmas. The idea was shelved.
Varo Money launched its platform on the Apple App Store in 2017. Its offerings targeted "hands-off creditworthy millennials." Aiming for credit scores north of 600 was a deviation from the mission, but it was seen as the first market test for the product.
With one step backward, Varo withdrew its application for FDIC insurance after regulators requested enhanced operations and more experienced management. However, they bounced back with a $45 million Series B funding round in January.
By July 2019, Varo had raised $100 million in Series C funding and launched on Android, boasting 4 million customers. This year marked significant growth but highlighted the challenges of scaling a fintech startup.
Varo hit a significant milestone in February 2020, receiving FDIC deposit insurance and raising $241 million in Series D funding. On August 1st, Varo Bank N.A. was officially established, making Varo Money a bank holding company. Experts calculated the cost of the charter at $100 million. Initially, the bank’s products were limited to friends and family for testing before opening to the public on October 1st.
Varo kicked off 2021 with its first nationwide campaign, featuring a Super Bowl ad with the tagline, “Money shouldn’t just work for some of us. It should work for all of us. It’s your money.” along with billboards in several cities. An accompanying Instagram filter also allowed anyone to put their own face on a $20 bill and share it on their social media sites.
In February, NBA All-Star Russell Westbrook’s investment added $63 million to their Series D II round and gained Westbrook as a spokesperson. Later that year, Varo raised $510 million in Series E funding, valuing the company at $2.5 billion and hinting at a near-term IPO.
The “tech bank” continued to lose money, necessitating additional funding. In February 2023, Varo raised another $50 million, albeit at a reduced valuation of $1.8 billion.
2024 has been difficult for the bank so far. News outlets such as CNET give Varo high marks on its high-yield savings, but the site’s David McMillin isn’t impressed with its recent “Line of Credit” product. With its upfront interest rate north of 30%, he likens it to a costly Buy-now-Pay-Later product, even with no late fees. It seems off the mark for restoring the financial health of its users.
CEO Walsh won’t give a quarterly breakdown, but he believes 2024 will be the bank’s first profitable year. In February, the bank celebrated the recruitment of Allen Parker from Zillow as the new CFO, only to have him decamp to Blue Origin in May. With non-interest expense at $52 million in Q1 and a net income loss of $16 million, it seems the right mix for Varo is still elusive. An IPO is still the hope, though.
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