Six-year-old digital bank Varo is the latest startup to capitalize on the flood of venture capital into fintech.
It has raised $510 million led by Lone Pine Capital, the Greenwich, Connecticut hedge fund founded by billionaire Stephen Mandel, Jr., bringing its total funding to $992 million to date. Other new investors in Varo include Declaration Partners, Eldridge, Marshall Wace and Berkshire Partners. Prior backers Warburg Pincus, Rise Fund, Gallatin Point Capital, and HarbourVest Partners also contributed to the funding round.
San Francisco-based Varo offers features that have recently become commoditized in digital banking: no monthly or overdraft fees, the option of getting your paycheck two days early and cash advances on your earnings. One thing that makes it different is its customer base: It has a concentration in the Southeast and is more diverse than that of many neobanks. Varo estimates that one-third of its customers are African American, and one-third are LatinX. Another big difference is its banking license. Instead of partnering with an FDIC-insured bank to offer checking accounts, as nearly all fintechs do, Varo spent three years and nearly $100 million to get its own bank charter, which was finalized last year.
Founder and CEO Colin Walsh, 52, was previously an executive at Wells Fargo and American Express. He says Varo’s bank charter will make it more profitable, with costs that are 50% lower than those of other neobank startups. That’s partly because Varo doesn’t have to pay outside banks for payments services related to debit card swipes and bank-to-bank transfers. Its banking license should make lending more profitable, too, although Varo has yet to release any major lending products outside of $100 cash advances and a secured credit card.
Walsh also believes the bank charter will help build customer trust. “Our goal is to be a single, trusted provider [of banking services] and have the legitimacy of being a full national bank,” he says.
So far, Varo’s bank charter hasn’t helped it garner a higher valuation than that of leading peers Chime and Current, which don’t have charters. Varo has four million “opened accounts” (one person with a checking and savings account equals two accounts), so its $2.5 billion valuation means each account is valued at roughly $625. New York digital bank Current was valued at $2.2 billion in April when it had “nearly three million members,” a value of $730 per member. Chime recently hit a $25 billion valuation and has an estimated 13 million customers, according to eMarketer. That’s $1,900 per customer. Each company defines accounts and customers differently, making apples-to-apples comparisons difficult, but the numbers directionally show investors are expecting faster growth or more revenue per customer from Chime and Current.
“Of all the fintechs, Varo has the clearest path to profitability due to our diversified revenue streams, lower cost base and capacity to generate our own capital,” says Walsh. “We’ve built Varo the right way—with long-term sustainability and business viability in mind.” He says Varo will surpass $100 million in annualized revenue this year and expects to become profitable by mid-2023. He’ll start to “seriously consider” going public “in the next couple of years.”
For its newly secured $510 million in funding, Walsh plans to spend aggressively on marketing and technology. He wants to build “a very differentiated brand, where we can be a leader in this space,” he says. “It’s otherwise kind of a crowded, noisy space.”