Varo Bank: Challenges Ahead as Deposits Drop and Losses Deepen
The latest quarterly call report from the digital-only bank Varo paints a rather grim look at the financial health of the neobank. The report, released by the Federal Financial Institutions Examination Council, indicates that the bank’s total deposits have been halved over the last three quarters to $160 million, and quarterly net losses have deepened to $71 million.
This disconcerting performance comes just months after a leadership change, with founder Colin Walsh being succeeded by Gavin Michael as CEO in February. The new leadership now faces significant strategic challenges, as identified by outside analysts.
Varo’s Financial Health in Numbers
According to the quarterly call report, Varo’s total equity capital is at its lowest level to date, standing at $54 million. This figure is used to measure a bank’s financial strength from a regulator’s point of view. It also indicates the bank’s capacity to grow its operations. The significant decrease in Varo’s total equity capital now poses a significant challenge for the bank’s new leadership.
Contrary to the expectations when Varo acquired a 2020 national bank charter, the charter now seems to be a significant cost burden without the expected asset or fee revenue. The charter was intended to ensure profitability, allowing Varo to offer a full suite of FDIC-insured services without relying on a partner bank, according to former CEO Walsh. However, given the current financial standing of the bank, this vision seems to be far from being realized.
Analysis from Simon-Kucher
Industry analysts from the consultancy firm Simon-Kucher have provided some insights on Varo’s current situation. According to them, Varo needs to grow like a fintech but be profitable like a bank. The analysts noted that Varo seems to be losing active customers faster than it is acquiring them.
Despite the challenges, the analysts pointed out that Varo’s average revenue per active user is a positive sign for the company. However, they noted that Varo’s average deposits per FDIC-insured account and average revenue per account are low and declining compared to leaders in the global neobank database like Chime, Nubank, and Revolut.
Varo’s Growth Challenges and Future Direction
Varo’s net losses have been deepening in recent quarters, with the latest net loss of $71 million in the third quarter. Despite these losses, the neobank’s average revenue per active user has increased recently, showing a silver lining among the challenges.
However, the bank needs to address the discrepancy between its average revenue per active user and its low average revenue per account. As per Simon-Kucher analysts, this indicates that Varo’s active customer base is small compared to other high-growth neobanks.
The analysts suggested that Varo needs to motivate users to adopt desirable behaviors like direct deposits, cash advances, and lines of credit. They also recommended pricing all products effectively, expanding its service offering selectively to generate more fee income, and demonstrating expense discipline.
In conclusion, Varo faces multiple challenges in its path to profitability and growth. Despite these challenges, the bank’s unique position as the sole de novo neobank in the U.S. to receive a banking charter provides it with opportunities to turn around its fortunes. The coming quarters will be crucial for Varo as it seeks to balance growth and profitability.
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