While there are always interesting things happening around fintech there is not often news which moves the needle for the entire industry. Because of the regulatory environment in the U.S. the digital banking startups have partnered with banks in order to offer banking services. While the digital bank may offer some compelling features and a user friendly interface, it is more of a skin on top of the actual bank which holds the funds and operates the core banking platform. At the end of the day it is the bank calling the shots, which is potentially frustrating for a nimble startup. Many fintech companies were holding out hope for the OCC Fintech Charter, but this potential opportunity was shut down by a federal judge in 2019. One of the options that remain is a national bank charter, though it comes with its own set of challenges.
In July 2017 it was reported that Varo was pursuing a National Charter. Varo first started operating their digital bank offering through a partnership with Bancorp Bank but their goal was always to be able to act as a standalone national bank. In fact CEO and Co-Founder of Varo Colin Walsh shared in our 2018 podcast episode that they started conversations all the way back in 2016 which demonstrates his clear vision for the future:
…Actually in the 4th quarter of 2016 that we started the conversation with the OCC and we said to them that we’re not interested in the ILC charter or state charter. We’re not really interested in the fintech charter because we’re collecting deposits, facilitating payments and making loans and that’s what national banks do and so we were very clear that we really wanted a full national bank charter.
Varo was given preliminary approval for their national bank charter by the OCC in September 2018, but subsequently withdrew their application with the FDIC to make revisions. Their latest application was refiled last summer and yesterday we learned that the FDIC has officially approved their application for deposit insurance, a first for a digital bank in this country. The company will still need to get final approval from the OCC through a pre-opening examination and the Federal Reserve for their bank holding application.
What makes a national charter so special is that Varo will be able to make loans in all 50 states without having to worry about state by state licensing which can be an arduous process. They will also be able to act as a standalone bank, not tied to their partnership with Bancorp bank. This includes checking and savings accounts along with other loan products.
However, their longtime desire to achieve a national bank charter came with significant cost. In an American Banker article Colin Walsh revealed that the process cost them an estimated $100 million. In addition they must capitalize the bank as Walsh shares:
The agency, as part of its Feb. 7 approval, is requiring Varo to provide about $104.4 million in capital to the bank.
The process was rigorous with the FDIC requiring detailed information on everything from their executive hires to their core banking platform to stress testing scenarios. From there, examiners visited Varo’s offices and obviously this has all been going on over the last several years.
This news sets Varo apart from any fintech operating in the United States. Not only was this a big risk for the Varo team but also for their backers such as Warburg Pincus, The Rise Fund and TPG who were willing to provide the capital for Varo to see the process through. When you’re breaking new ground in an area like this there are certainly no guarantees. It is hard to fathom the amount of time that went into this process and to contrast it with other regulatory schemes such as the UK where dozens of digital banks operate. Walsh noted that Varo opened 150,000 accounts in January but stopped short of disclosing their entire customer base. Varo has always been one to keep an eye on in the digital banking space but now they are the company that I’m sure many peers will be looking up to. Congratulations to the entire Varo team.