Varo Trims Losses, But Future Remains Uncertain, Call Reports Show
Customers Bank Hit With Fed Enforcement, Senate Introduces Financial Services AI "Sandbox" Bill
Hey all, Jason here.
I’m wrapping up the newsletter from the hotel lobby in Austin, Texas, where I’ve been the last several days to attend Fintech Devcon.
It was my first time attending the event, and I wasn’t disappointed. The smaller scale and emphasis on hands-on engineers and product managers was a refreshing change of pace.
Something I’m trying to do this year is to vary the events I attend and media I consume, to ensure I’m exposed to a variety of viewpoints and don’t get stuck in a fintech echo chamber, so to speak. Fintech Devcon definitely fit the bill, as far as getting a different perspective on current opportunities, challenges, and risks in U.S. banking and fintech.
If you enjoy reading this newsletter each Sunday and find value in it, please consider supporting me (and finhealth non-profits!) by signing up for a paid subscription. It wouldn’t be possible to do what I do without the support of readers like you!Varo Trims Losses, But Future Remains Uncertain, Call Reports Show
Varo, the first U.S. fintech to acquire a de novo charter, has made substantial progress on trimming its losses, the bank’s recent call report shows.
Varo’s quarterly losses peaked at nearly $90 million in Q4 2021, perhaps the peak of the fintech bubble.
Since then, Varo has slashed non-interest expenses in half, primarily by reducing its headcount by more than 50% and cutting marketing spend. Varo has also grown interest income, thanks to higher rates, and non-interest income, as it has grown balances on its Varo Believe secured charge card and use of its Varo Advance small-dollar loan product.
The work on growing revenue while controlling expenses has enabled Varo to cut its losses in Q2 2024 to about $13.5 million.
Still, while Varo has narrowed its losses, it has struggled to improve account-level metrics. After hitting a peak of 5.3 million accounts in Q4 2022, the number of deposit accounts Varo reported began shrinking, as the bank closed dormant accounts to reduce overhead expense.
Varo reversed the decline and began growing its reported number of accounts, per its Q1 2024 call report, and it added nearly 600,000 accounts in Q2 2024.
Account-level metrics remain poor, however, with an average balance of about $70 per account and average annualized revenue per account of $31.56 based on Varo’s most recent call report.
Varo has grown balances for both its Varo Advance small-dollar loan and Varo Believe secured charge card, though increases were in the single-digit percents for both in Q2 2024.
While Varo has grown its loan book, it hasn’t made meaningful progress in lowering charge off rates — even for Varo Believe, where users pre-fund the account, which had an annualized charge-off rate of 1.87% in Q2 2024.
Varo Advance, which allows eligible users to borrow up to $500 for a flat fee of $8 per $100 borrowed, continues to have a staggering charge-off rate of 35% on an annualized basis.
Varo has announced plans to offer an additional line of credit product, which will allow eligible users to borrow between $600 and $2,000, also on a flat-fee basis.
However, given the bank’s struggles to date to control credit losses, the upside from offering larger loan amounts may be limited, if few users qualify or if losses swamp revenue from the product.
Varo has unquestionably made significant progress on its “path to profitability,” and it has something competitors like Chime or Current lack: its own bank charter. With Varo’s emphasis on interchange and lower-income and credit score users, the charter hasn’t been particularly accretive to its business model.
However, in the wake of the Synapse/Evolve meltdown, Varo benefits from something its non-bank competitors don’t have at the moment: greater regulatory clarity about its business and operating model.
Customers Bank Hit With Enforcement Action For Digital Asset, Dollar Token Activities
Pennsylvania-based Customers Bank is the latest institution to get hit with a regulatory enforcement action related to its “novel” activities — in Customers’ case, its digital asset and dollar token activities.
In the wake of the collapse of Silvergate and Signature Bank, Customers became a go-to for crypto businesses in need of a bank partner. The bank partners with hundreds of crypto firms, including major exchanges and stablecoin issuers.
According to the written agreement Customers entered into with its primary federal regulator, the Philadelphia Federal Reserve, the Fed identified “significant deficiencies” related to Customers’ compliance with BSA/AML and OFAC requirements.
The enforcement action, which is relatively narrowly focused compared to those received by other partner banks recently, includes the following requirements:
Strengthen board oversight of the bank’s compliance with BSA/AML and OFAC requirements
Ensure individuals or groups at the bank responsible of BSA/AML and OFAC compliance have the appropriate subject matter expertise, staffing levels, resources, and independence to carry out their responsibilities
Improve the quality, comprehensiveness, and granularity of reports received and reviewed by the board, including relating to the bank’s digital asset strategy and proposed activities
Improve risk management practices as it relates to the bank’s digital asset strategy, including by enhancing written policies, procedures, and risk management standards
Ensure individuals carrying out risk management responsibilities related to the bank’s digital asset strategy have adequate subject matter expertise, stature, independence, and authority to carry out their roles
Establish appropriate compensating controls to mitigate risks
Provide sufficient information, data, and reports to senior management and the board to enable the proper identification and oversight of existing and developing risks
Revise and strengthen the bank’s BSA/AML program, including customer due diligence, beneficial ownership, and suspicious activity monitoring and reporting
Conduct a comprehensive risk assessment that considers all products, customer types, geographies, and transaction volumes in determining inherent and residual risks
Appoint a qualified individual with adequate resources and training to implement and maintain a BSA/AML program appropriate for the bank’s size and risk profile
Revise the bank’s customer due diligence program, including remediation of deficient due diligence for existing customers
Revise the bank’s program for detecting and reporting suspicious activity
Engage an independent third party to do a transaction lookback review for the period March 1, 2023, to August 31, 2023
Enhance the bank’s compliance with OFAC requirements
Notify the Federal Reserve at least 30 days prior to engaging in new strategic initiatives, offering new products or services, or developing new relationships related to the bank’s digital asset strategy
Analysts at Piper Sandler who spoke with the management team of Customers Bank said the bank doesn’t intend to exit or shrink its digital asset business, but that the fallout from the enforcement action would “at the very least, make the business less profitable as [the bank] works through expense demands to remediate issues.”
Bipartisan Bill Hopes To “Unleash” AI Innovation In Financial Services
Senators Martin Heinrich (D-NM) and Mike Rounds (R-SD) introduced a bill, the Unleashing AI Innovation in Financial Services Act, that would, they argue, “establish regulatory guardrails at financial regulatory agencies for regulated entities to test AI projects, allowing them to experiment with cutting-edge technologies in a safe way.”
In the House, Representatives French Hill (R-AK) and Ritchie Torres (D-NY) introduced a corresponding bill. The bill would enable firms to request, through an application process, that specific regulations be “waived or modified.” Companies could also propose alternate methods of complying with existing regulations.
If approved, the sandbox would permit “regulated entities to experiment with test projects without unnecessary or unduly burdensome regulation or expectation of retroactive enforcement actions.”
As part of the application process, firms would need to demonstrate that the proposed AI test project:
would “serve the public interest,” improve financial access and inclusion, or promote consumer protection;
would enhance efficiency or operations, foster innovation or competitiveness, improve risk management and security, or enhance regulatory compliance;
would not present a systemic risk to the financial system;
is consistent with the purposes of AML/CFT obligations;
would not present a national security risk to the United States;
The measure, if approved, would apply to entities regulated by the Federal Reserve, OCC, FDIC, NCUA, CFPB, SEC, and FHFA.
Fintech Funding: Steady As She Goes
FT Partners released its August 2024 fintech market update and analysis, showing a steady stream of fundraising. July saw $4.8 billion invested globally across 295 deals.
Other Good Reads
How to spot the next big thing in Fintech: A framework (Fintech Brainfood)
Bank allies say FDIC brokered deposit plan reflects outdated thinking (American Banker)
Listen: Fintech Balancing Act: Risk, Growth & Regulation (Operate Podcast)
Listen: The Rise, Stumble, and Forward Go of Fintech (FinWise Eye On)
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