Colin Walsh is on the cusp of accomplishing the audacious goal he set for himself four years ago: To open the first FDIC-insured fintech bank. Walsh, founder of Varo Money, Inc., just received FDIC approval for Varo Bank, N.A. The OCC will soon finalize the preliminary approval it gave the venture 18 months ago; by the end of this month, Varo plans to file for a holding company charter from the Federal Reserve.
Varo, an app-based bank with more than a million customers, currently offers services through a partnership with Bancorp Bank, a $5 billion bank in Wilmington, Del. Walsh says that as Varo has gained critical mass, it is time for it to ditch the hybrid model and obtain its own bank charter. He said the move will save money and allow Varo to offer more products.
Varo Bank will have no branches, deposit-taking ATMs or offices open to the public, but it will be a full service bank with nationwide operations through mobile, online and phone-based channels. This is not a fly-by-night enterprise that will disappear when the next tech bubble bursts. Varo will have capital of at least $104.4 million, and for the first three years will be required to have a Tier 1 leverage ratio of 10 percent or higher.
Walsh, a consumer banking veteran, started Varo to serve people who struggle with the current banking system, a population that Walsh estimates numbers around 180 million. Varo, for example, charges no fees. It also offers customers the ability to access direct deposited paychecks as soon as the money is deposited by their employer, rather than holding it until a specified payday. “People who are living paycheck to paycheck care a lot about cash flow,” said a Varo exec on a recent podcast.
The strategy is to build trust by providing basic banking services, and then offering loans, mortgages and more lucrative products. Walsh believes his business model is more compelling than other fintechs that focus on one type of loan or credit product.
Varo is going to be difficult to compete against. Banks that are dependent upon existing streams of fee income are not going to adopt a no-fee model. And, it is a lot easier for a start-up to create a next-gen suite of products than it is for a legacy bank to reformat existing products for new customers. My sense is Varo takes the competitive threat from fintechs to an entirely new level.