Analysis Featured

Ushering In the Future of Banking

Varo Money

Varo Money made the news in July 2017 when it applied for an OCC Charter. The goal was to capture a bigger share of the services pie at a national level and applying for a state-by-state license, which was a tedious, slow, and ineffective process. Though some startups have also considered the Industrial Loan Company route through Utah, OCC provided a more transparent route to attaining a bank charter to operate national level online lending and banking firm. Moreover, the young upstart applied for a full bank charter as compared to a fintech charter. This charter would allow Varo to operate on a national level as a full scale digital bank and would be on par with other traditional banks.

The company launched in 2015 with a vision to provide new age banking solutions. Varo provides a wide range of financial and banking products through its app. The San Francisco based company is led by its founders Colin Walsh (CEO) and Kolya Klymenko (CTO). The Varo team comprises of experienced professionals coming from leading brands like Amazon, American Express, Apple, Citi, McKinsey, and Instagram. Its social mission is to reduce the cost of banking, which is why Varo does not charge any service fee from its customers. It does not charge any monthly maintenance fees, foreign transaction fees, or ATM withdrawal fees. The company has raised almost $80 million in funding from marquee investors like Warburg Pincus and The Rise Fund.

Varo Money made history in September when it received preliminary approval from the OCC for a national banking charter. It is a huge milestone for the company, but also for the industry as it highlights that regulators are considering fintech players seriously for national level banking plays. The OCC’s preliminary approval came after a reported push by the U.S. Treasury to allow financial innovation at a national level. The Trump administration has openly encouraged the alt-lending industry as it has allowed credit to flow to small and medium businesses.

A New Era in the Banking Industry

This is the first ever charter granted to a fintech company and has raised a lot of excitement. However, the Office of Comptroller of the Currency has only given a conditional approval for the formation of Varo Money as a national bank. If approved, it will make Varo the first mobile-only national bank in the Unites States. OCC first requires Varo to raise $104 million as additional capital within 12 months and the completion of a Community Reinvestment Act plan. But with moneybags like Pincus bankrolling the company, the investment part looks to be easiest of the conditions. Varo Bank will also be required to take approval from the FDIC and obtain Federal Reserve membership.

Approval of the OCC charter enables Varo Money to set up its own bank, making it the first ever truly digital bank. Why is the OCC banking charter special? As compared to the fintech charter, it allows Varo to accept deposits. Though it wont be FDIC insured (that is a different approval process), deposits are a huge step forward for Varo. Moreover, it would rid itself of state regulations and Madden Vs Midland would become redundant.

Varo Bank shall focus on reducing the excessive costs charged by its brick and mortar counterparts. It will be able to streamline its operations and look to leverage the national charter for aggressive growth throughout the country as its competitors keep applying for state-by-state licenses. Varo has been privileged to receive this charter, since after the financial crisis, very few new companies have been granted the charter.

After Approval

Soon after receiving the approval from OCC, Varo announced its tie up with Temenos, a European banking tech platform, for core processing services. Jo Ann Barefoot, CEO of Barefoot Innovation Group and former deputy comptroller of the OCC commented, “This preliminary approval from OCC is a signal that regulators recognize the value technology can bring to banking for all Americans.”

“This is a historic moment and marks the start of a new era in banking,” said Colin Walsh, co-founder and CEO Varo Money. But the ride will not be easy. This decision is an encroachment on the turf long held dear by small banks. And true to form, the Board of Conference of State Bank Supervisors (CSBS) recently started litigation against OCC for allowing special banking charters for fintech firms.

It has also recently been announced that Varo withdrew its FDIC application, an important hurdle in reaching the full banking status. The application was pulled earlier this year, and it has been reported that they will reapply by year end as they have more clarity since the OCC approval.

Conclusion

The Rubicon has been crossed with this approval. Varo Money will inspire the more established fintech lenders to start their application process and a case by CSBS would not be enough to stop alt lenders dreaming of a national footprint. The ability to work on a national level creates a level playing field for fintech banking and lending startups and allows them to pursue their agenda of online banking targeted at millennials with renewed vigor. The industry should see a flurry of deals as companies raise money to bulk up before and after the application process.

Author:

Written by Heena Dhir.

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