Analysis Featured

Competing With Banks Through a Mobile App

mobile banking

According to the Federal Deposit Insurance Corporation (FDIC), over 7% of Americans are still without banking services. Even more shocking is the number of the underbanked population – a whopping 19.9%. These numbers only go to show that brick-and-mortar banks have left the general American population down. Especially since the financial crisis, people have lost trust in traditional banks, and millennials don’t see the appeal in standing in line for banking services. To fill the void, Varo Money has launched a mobile banking business. The aim is to disrupt how banking is done in the United States. Its goal as to help customers cover their expenses, pay their bills, and build wealth over time.

Varo Money was founded in 2015 by Assaf Guery, Colin Walsh, Mykola (Kolya) Klymenko, and Roger Van Duinen. Its headquarters is located in San Francisco, California. The company has managed to raise over $78 million in various funding rounds with PE giant Warburg Pincus as the lead investor. CEO and Co-Founder Colin Walsh previously served for over 25 years in various reputed financial institutions like Amex in Europe, Lloyd Banking group, and Wells Fargo.

More Than a Bank

Throughout his professional career, Walsh realized a growing need to empower the next generation with tools that will help them improve their overall financial condition. He also realized incumbents were too entrenched in their existing business models to concentrate on developing products for the millennial generation. This became the driving force behind Varo Money. So he built a talented team with deep financial services expertise and a strong consumer technology knowledge. Varo Money is trying to be a one-stop shop for users’ banking needs and wants to inculcate better financial habits among customers by providing them with the right tools and financial guidance.

Last year, Varo Money launched their mobile app and banking products through a partnership with The Bancorp Bank. The partnership helped the platform come to the market with a FDIC-insured product. This helped them compete against incumbent banks and appeal to a larger cross section of the population. But Varo has big ambitions and wants a bigger share of the pie. That’s why the company applied for a national bank charter through the OCC. Even though obtaining this charter will be an uphill task, considering no new charter has been issued in the last decade or so, it’s a courageous move. It puts the spotlight on the young entrant and highlights its intention to be a serious regulated player in the industry.

Varo’s Business Model

The foundation of the Varo Money platform is relationship banking. It offers a basic consumer checking account just like any other bank, but the difference is a customer can perform all the basic functions like deposits and money transfers without having to go visit a bank branch. It even issues a debit card to customers and has started offering savings accounts. A customer can open a savings account on his or her mobile app and Varo offers interest rates up to 50 basis points as compared to 1 or 2 basis points offered by traditional banks.

Apart from the bank account, Varo also offers short- and long-term financing solutions. The short-term line of credit is a flexible line of credit (LOC) and is available to customers unexpected financial challenges. The LOC helps customers manage cash flows while avoiding the need to take a payday loan or cash advance. Also, 3- and 5-year fixed rate installment loans are aavailable for long-term financial needs.

Varo Money’s Technology and Competitive Posture

Varo Money is available as an iOS application with an Android version coming soon. The app is loaded with features like touch ID, a geolocation service to spot nearby ATMs, and the ability to link other accounts through APIs. The app is free and requires no minimum balance to open an account. Also, there are no foreign exchange charges or overdraft fees. Its customer base has access to over 55,000 ATMs worldwide as compared to 18,000 ATMs for Chase and 12,000 for Wells Fargo.

Varo charges a nominal fee for debit card usage. It also sells financial products of its partner bank earning income from that partnership. However, its lending products are a primary income generator. The pricing and structure of LOC products are developed to compete with other alternative lenders in the market.

Varo has a lot of competitors in different niches of banking. Players like Discover, Ally, and Goldman Sachs concentrate on only a few lending segments; these lenders do not follow a complete relationship model, but only offer a specific product. On the other hand, there are neobanks like Chime, Simple, and BankMobile that are single-purpose saving apps. Though they are doing a great job when it comes to user experience, the range of products offered by them is narrow compared to a full suite of products offered by a traditional bank.

This is where Varo Money is different. It is focused on customer relationships and wants the ability to offer the entire gamut of banking services to consumers. This gives it multiple cross-selling opportunities and reduces the cost of client acquisition. Its strategy seems to be paying off. In just 7-8 months, Varo has garnered tens of thousands of customers and over 100k downloads.

Conclusion

Varo Money is focused on replacing traditional banks with its comprehensive suite of online banking services and products. Coupled with its obsession for helping millennials make smarter financial decisions, Varo Money is looking to be an emerging player in the digital bankin sector.

Author:

Written by Heena Dhir.

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