Varo Trims Losses, But Can It Last Til VC Market Thaws?
CFPB Not Letting Legal Challenge Slow It Down, FTX Reading List, FT Partners Monthly
Hey all, Jason here.
I cannot believe it is mid-November already. That means it’s time for me to stop by Slagerij De Molen (literally “butcher of the mill,” because it’s in a windmill) to order a turkey — given Thanksgiving isn’t a holiday here, they don’t usually stock them in the grocery store. I’m looking forward to sharing some of my favorite American dishes with some local friends again this year!
Existing subscriber? Please consider supporting this newsletter by upgrading to a paid subscription. New here? Subscribe to get Fintech Business Weekly each Sunday:
Connecting Fintech Leaders Across Latin America
Sponsored content: Latin America’s leading event for innovation in financial services is taking place in Miami this 13-14 December. Fintech Nexus LatAm brings together a stellar lineup including, Carlos Eduardo Brandt (Head of Pix Management and Operation), Paula Bellizia (EBANX), Gerry Giacomán Colyer (Clara), Adal Flores (Kueski), Sarah Clark, (Mastercard), Marlene Garayzar (Stori Card) and more.
We'll explore the industry’s most pressing topics including the acceleration of digital banking, fintech’s impact on the future, lending to the masses, and remaking payments. Don’t delay, tickets are going fast. Use promo code FBW15 and get 15% off!
Varo Trims Losses, But Can It Wait For VC Market to Thaw?
Troubled neobank Varo — the first to acquire a de novo charter — recently filed its third quarter call report. The filing paints a mixed picture of Varo’s progress to trim expenses and move toward profitability before the clock (and money) run out.
Good News: Expenses, Loan Balances, Interest Income
First, the good news. Varo’s efforts to trim expenses have borne fruit. Total non-interest expense dropped nearly $33 million from the quarter prior.
Layoffs reduced headcount from 777 employees at the end of Q2 to 642 at the end of Q3, reducing employee compensation from about $34.5 million to $29.7 million (-$4.8 million).
There’s less detail available on the other approximately $28 million reduction in non-interest expense, as quarterly call reports bucket most non-interest expenses besides salary and premises into a single “Other noninterest expense” line item. Presumably, a large component of the reduction here was driven by a ramp down in customer acquisition marketing.
Varo has also grown its loan book vs. the prior quarter. It reported about $8.3 million outstanding from its Varo Advance small-dollar loan product vs. $5.4 million at the end of Q2, though charge offs remain high.
Varo Believe, essentially a secured credit card, also saw balances grow from about $14.4 million to $18.1 million. While the card doesn’t generate interest income for Varo, it does generate more interchange income than Varo’s debit product. The growing size of the reported book indicates greater use of the secured card among Varo customers.
Interest income, primarily derived on balances due from other depository institutions, more than doubled from Q2, rising from about $1.2 million to nearly $2.5 million. Varo, as a chartered bank that can hold insured deposits, is a beneficiary of the rising interest rate environment.
Interest expense has increased more modestly, as Varo has been slow to pass along rate hikes to its customers: the base rate it offers for its savings account is 2% APY (and 0% for its spending account) vs. as much as 3% APY other banks like Capital One, Discover, or Goldman Sachs’ Marcus. As a result, Varo’s interest expense rose just $193,000, from $733,000 to $926,000, compared to last quarter.
Bad News: Slowing Growth, Declining Deposits & Assets
The bad news, however, may outweigh the good.
As Varo has trimmed its marketing spending, account growth, predictably, has slowed. Varo added just over 367,000 accounts during Q3 — vs. Q2, when it added nearly twice as many, or about 720,000 accounts.
The overall quality of accounts also appears to be deteriorating. Despite adding accounts, Varo’s total deposits actually declined compared to the quarter prior. Varo shed about $9.7 million in deposits to end the quarter with just over $300 million in customer deposits.
Varo also reduced the assets it holds by about $64 million, from about $593.2 million to $529.2 million at the end of Q3.
Varo hasn’t shown any improvement in its ability to monetize its users, with the average revenue per account for the quarter hitting an all-time low since the company gained its bank charter. Varo earned on average just $5.14 per account in the third quarter.
Can Varo Hold Out Long Enough for VC Market to Thaw?
While Varo did reduce its burn from about $77 million in Q2 to about $42.5 million in Q3, it did so through necessary cuts to staff and marketing. Varo ended the quarter with $181 million in equity capital, down from about $222.2 million at the end of Q2.
Varo’s reduced burn rate does extend its runway — based on Q3’s losses, it now has a bit over a year until it would hit zero equity capital — but the cuts to staff and marketing also greatly impair the company’s ability to grow and to better monetize its existing users.
That’s to say nothing of the continued impact of inflation and growing fears of recession. Varo’s user base is overwhelmingly low income and lower credit score.
As Varo users face increasing cost pressures, the balance they keep at Varo, already a paltry $59 on average, is likely to decline further. Charge offs on its Advance and Believe products, which Varo has struggled to control, are likely to increase if the economic climate deteriorates.
This all adds up to a very challenging picture for Varo. It can make further cuts to staff and marketing, which would extend its runway, but it seems unlikely Varo could cut its way to breakeven, let alone profitability.
Varo will need to try to raise additional external capital sooner or later. The question now is: can Varo survive until capital markets thaw?
CFPB Roundup: Credit Bureau & Crypto Complaints, “Dormant” Nonbank Entity Supervision
The CFPB isn’t letting the potentially existential threat posed by constitutional challenges to its funding mechanism to slow it down. In fact, the risk of having its budget subject to the Congressional appropriations process — potentially by a Republican-controlled House — seems to be encouraging the consumer protection bureau to double down on its various initiatives.
Reasonable investigation of consumer reporting disputes
Last week, the CFPB issued a circular reminding credit reporting agencies of their obligations to reasonably investigate when consumers dispute information on their credit report.
The number of credit bureau- and credit report-related complaints to the CFPB has absolutely exploded in recent years:
In theory, credit reporting agencies are suppose to investigate each consumer complaint they receive. But doing so can be time and resource intensive.
As the number of complaints has ballooned, credit bureaus have sought to make it more difficult for consumers to file complaints. Per the CFPB’s circular:
“The CFPB is aware that consumer reporting agencies and furnishers have sought to evade the obligation to investigate disputes by requiring consumers to submit particular items of information or documentation with a dispute before the entity will conduct its investigation of the dispute. Examples of this conduct include:
Consumer reporting agencies that require a consumer to provide a recent copy of the consumer’s report or file disclosure before investigating disputes despite the consumer providing sufficient information to investigate the disputed information;
Furnishers that require a consumer to provide additional specific documents even though the consumer has already provided the supporting documentation or other information reasonably required to substantiate the basis of a direct dispute; and
Consumer reporting agencies or furnishers that require a consumer to attach a completed proprietary form before investigating the consumer’s dispute.”
The CFPB’s circular reiterates credit reporting agencies:
“cannot avoid the obligation to conduct a reasonable investigation of disputes by making consumers satisfy demands other than those specified by statute or regulation”
“must provide to the furnisher all relevant information regarding the dispute that it received from the consumer.”
Complaint Bulletin: Analysis of Crypto-Related Complaints
Last week, the CFPB also published a report analyzing crypto-related complaints the bureau has received.
Unsurprisingly, as crypto exploded in popularity over the course of the pandemic, the absolute count of crypto-related complaints the bureau received increased dramatically, peaking in the summer of 2021 (though I imagine last week’s chaos in the crypto market will drive plenty of new complaints):
Also unsurprising is that a plurality of the complaints — nearly 40% — related to crypto frauds or scams:
The report also calls out poor or unreachable customer service and frozen accounts and platform bankruptcies causing customer losses, among other topics.
Final Rule on Nonbank Supervision Tool
Earlier this year, the CFPB announced its intention to activate its “dormant” authority to supervise certain nonbank financial institutions on the basis that they pose a risk to consumers.
The agency argues this authority is necessary to supervise firms that otherwise would fall outside of its supervisory scope, as defined in 2010’s Dodd-Frank, which created the CFPB. Per last week’s statement (emphasis added):
“This statutory authority gives the CFPB’s supervision program the ability to move as quickly as the marketplace. For instance, fast-growing companies in nontraditional areas of the consumer finance market may be engaged in novel activities that warrant supervisory attention. There can also be supervisory gaps in more traditional areas of the market that ought to be filled. Through the supervisory process, CFPB examiners can work with the company in question to fully understand and manage its risks.
When we make a determination that supervision is warranted, our focus is on identifying risks to consumers, preferably before they manifest in violations of law or consumer harm.”
When the CFPB “activated” this authority in April, it also revised its procedures for making supervisory risk designations to be more “transparent” by allowing the bureau to publicly release information about entities it sought to designate as posing a risk to consumers.
The rule finalized last week codifies a standard for information the bureau will not publish. Per the announcement (spacing modified):
“We will not publish information that would fall within two Freedom of Information Act (FOIA) exemptions, which protect confidential commercial information and personal privacy.
We can also withhold information when there is other good cause to do so—for instance, in order to avoid revealing specific violations of law or specific compliance management deficiencies.
Overall, this approach will provide assurance to the company involved that we will protect specific categories of sensitive information, while not stopping companies from raising concerns about the release of other information.”
Crypto Chaos as FTX Declares Bankruptcy: A Reading List
Crypto world was rocked last week as rumors swirled about crypto exchange FTX’s potential insolvency, driving a proposed shotgun marriage with arch rival Binance — which Binance abandoned about a day after founders from both companies tweeted about the deal.
Now, FTX, its affiliated prop trading shop Alameda Research, and about 130 other affiliated entities have filed for Chapter 11 bankruptcy protection.
FTX founder and CEO Sam Bankman-Fried, once thought of as a sort of John Pierpont Morgan of crypto, resigned his role in disgrace and is facing inquiries in numerous jurisdictions.
Uncertainty and fear continue to reverberate throughout the crypto ecosystem, with crypto lender BlockFi — which was bailed out by FTX earlier this year — freezing customer withdrawals and so-called stablecoin Tether briefly breaking its peg to the US dollar.
I believe the technical term for this disaster is a “hot mess.”
Given the wall-to-wall coverage this story has had across crypto, fintech, business, and mainstream media, I’ll refrain from adding my own two cents. Instead, if you’re behind, you can catch up on the story with some of my favorite coverage from the last week:
FTX’s ongoing saga: Everything that’s happened until now (Cointelegraph)
Crypto giant FTX collapses into bankruptcy (BBC)
FTX Had a Death Spiral (Money Stuff)
How Sam Bankman-Fried seduced blue chip investors (FT)
Investors Who Put $2 Billion Into FTX Face Scrutiny, Too (NYTimes)
Sam Bankman-Fried’s crypto empire ‘was run by a gang of kids in the Bahamas’ who all dated each other (Fortune)
The Latest Domino to Fall (Net Interest)
FT Partners Report: Fintech Funding Stabilizing?
FT Partner’s monthly fintech market report for October offers hints that dealmaking may be beginning to stabilize at a “new normal.”
After a year of frenzied deal making, the tide began to turn early in 2022, as it became apparent that inflation was not, in fact, “transitory,” and that interest rates would need to rise. Public market valuations quickly cratered and private dealmaking activity seemed to seize up (keeping in mind the delay between when deals are negotiated and actually become public).
But after hitting a low of $3.4 billion in August, financing volume increased in September and again in October. Investors are sitting on huge amounts of “dry powder” and are selectively — with proper due diligence — still writing checks.
While we’re unlikely to return to the manic days (or valuations) of 2021 any time soon, there are signs of a thaw.
Other Good Reads
Can A Bunch of Ex-PayPal Execs Lead MX to Open Banking Dominance? (Ron Shevlin/Forbes)
The Evolutionary Imperative to Be Boring (Fintech Takes)
Tech Money Fueled FTX’s Rise. The Crash Exposes Deep Flaws in VC (Bloomberg)
Contact Fintech Business Weekly
Looking to work with me in any of the following areas? Email me.
Fintech advising & consulting
Sponsoring this newsletter
News tip or story suggestion — reach me on Signal at +1-316-512-1571
Early stage startup looking to raise equity or debt capital