5 min read

4 things to know about the FDIC’s landmark Varo Money decision

Sam Maule

So it’s official: Varo Money is well on its way to becoming the first fintech firm with a full-service national bank charter. All it took was three years and a hundred million dollars...

Obviously this has been in the works for a long time, and the process isn’t over yet – Varo still needs to pass an exam from the Office of the Comptroller of the Currency. But it’s looking likely that the company will be able to call itself a capital-B Bank by the end of next quarter.

So what brought us to this point, and what does this mean for challenger banks in the US going forward? There are a few conclusions we can draw...

1. Varo is in a very good position

A fintech with a full-service banking charter isn’t just unprecedented. Soon, Varo won’t just be the wrapping on top of US Bancorp accounts. Instead, it’ll be able to offer its own credit cards and loans, and that is the true path to profitability.

But those products will need to be amazing if it wants to stay competitive. Think about Marcus. It wasn’t successful because of its app – it didn’t even have an app until a month ago. But that didn’t matter. The product was great, so the company succeeded.

[Varo Money is] in the enviable position of owning its own destiny. It all comes down to the products it offers

Once it gets its charter, Varo will be up against the likes of Capital One and Bank of America. It’ll need to find a way to differentiate itself, and the best way to do that is by offering a top-quality card or loan.

Luckily, Varo has a few benefits on its side. It lacks the legacy overhead and branch costs of those behemoths, and it won’t need to pay third party provider fees because it owns all of its own tech. Unlike many challenger banks, it’s in the enviable position of owning its own destiny. It all comes down to the products it offers.

At this point, success is far from guaranteed. But make no mistake: this is a very positive move for Varo.

2. There’s no fast track to money

As my colleague Sarah Kocianski notes, the OCC is still fighting off lawsuits from several states that object to the agency’s ability to hand out fintech charters.

These disputes won’t affect Varo; it pursued a full-service banking charter, after all. But that doesn’t mean the process was a walk in the park. Again, this cost Varo three years and $100 million.

... Challengers either need to partner or strap their investors in for a long, difficult journey to a full-service licence

That price tag is no problem for a high-valuation company like Chime, but the timeframe is a different story altogether. As always patience is key. With no fintech charter on the horizon, challengers either need to partner or strap their investors in for a long, difficult journey to a full-service licence.

Unfortunately, the latter option won’t get any easier...

3. The FDIC isn’t a revolving door

The FDIC has been around since 1933, and since then, it hasn’t exactly built up a reputation as an innovator.

That’s changed under its current head, Jelena McWilliams, but the agency’s approach to bank charters has remained strict. According to Statista, the FDIC only issued seven new licences in 2018, and only two between 2011 and 2016.

If other challengers want to end up like Varo instead of Robinhood, they’ll need to play by the rules

Basically, getting a full-service bank charter is like going through a door that’s being blocked on the other side: it’s possible, but it’s far from easy. Varo managed to push its way through, but that doesn’t mean the FDIC is suddenly going to adopt a turnstile approach.

If other challengers want to end up like Varo instead of Robinhood, they’ll need to play by the rules. Data security, risk and compliance will need to be front-and-centre in everything they do.

N26 and Monzo will meet similar resistance if they decide to pursue a full-service charter.

4. Experience matters

It’s telling that Varo’s CEO, Colin Walsh, is a 20-year banking veteran who’s worked at American Express and Lloyds Banking Group. Industry experience and connections are crucial to obtaining a charter. As the Wall Street Journal notes, it literally cost Varo its last FDIC application in 2018 when the agency decried its lack of senior managers.

But that talent can’t be homogeneous. Industry experience is essential, but so is a strong grasp on technology. When challengers blend those elements together, they’ll be more likely to impress regulators.

The good news is that challengers can stock up on talent that possesses these connections and experience. As always, the main question here is money and willpower. Are these neobanks committed to building a company fit for a banking charter? If not, they should partner.

So there you have it! Obviously, Varo isn’t out of the woods yet: customer conversion and marketing still lie ahead. But there’s no denying that this is a major move. Let’s see if they can capitalise on it.

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 Sam Maule
About the author

Sam Maule

Sam (or Uncle Sam as he is known internally - and appropriately at 11:FS) is responsible for the 11:FS overall strategy and rollout in the US, Canada and Mexico.

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