Varo's $50m Raise Extends Runway By Just Six Months, Call Report Shows
Fed Payment Study: Yes, People Still Use Checks, Apple Savings Off To Strong Start, Fintechs Raised $2.9Bn in April
Hey all, Jason here.
This week’s newsletter is coming to you from Chicago, where I’ve been visiting family for the past week or so. I’ll be here for next few days, before making a stop in New Mexico, and then a quick swing back through NYC.
In “fintech family” news, a big congrats to my podcasting partner and Fintech Takes creator Alex Johnson on the addition to his family — he and his wife recently welcomed a baby girl 🎉
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Varo’s Q1 Call Report: $50 Million Raise Extends Runway By Just Six Months
Varo, the first US neobank to obtain a de novo bank charter, recently filed its first quarter call report. While the company has made incremental progress on the revenue side, partly thanks to rising interest rates, its efforts to trim expenses seem to have stalled out.
Varo did reduce its overall loss by about 11% vs. Q4 2022 but, at nearly $29 million, the fledgling neobank is still a long way off from profitability — which helps to explain why the company raised an additional $50 million in equity at a substantially reduced valuation, as first reported by Fintech Business Weekly.
Still, the additional capital extends Varo’s runway by less than six months, based on its current burn rate. The additional $50 million in funding was finalized in April, per management comments in the call report, and thus is not reflected in Varo’s Q1 data.
On the revenue side, Varo reported modest increases in both interest and non-interest income.
Interest income rose about 12% vs. the prior quarter, driven by rising rates and deposit growth. Interest expense grew by 24% to about $1.6 million, yielding about $2.5 million in net interest income.
Non-interest income also grew by approximately 12%, with non-interest expenses down slightly more than 1%.
The overall result was a $29 million loss for the quarter — a substantial improvement over the large losses the company has posted in prior quarters, but Varo’s progress on trimming expenses appears to have reached its limit.
More promising metrics include Varo’s deposits and assets, both of which showed meaningful growth after three consecutive quarters of declines.
Varo also grew its loan book in the quarter, with credit card loans for its secured “Believe” product growing about 32% to nearly $28 million and outstanding balances for its Advance product growing 29% to just over $11 million.
But credit quality remains a challenge. While Varo improved charge off rates compared to prior quarters, losses remain high and suggest the typical Varo borrower is a high risk one.
Perhaps most alarming is Varo’s shrinking number of accounts reflected in its call report. For the first time since becoming a bank, Varo reported a decline, with its number of accounts dropping by about 3% to about 5.2 million.
The decline seems to be driven by Varo moving to close accounts of inactive users, according to management commentary in the report (emphasis added):
“Varo is focused on maintaining strategic investment to increase product innovation and attract contribution margin positive customers, while closing out inactive accounts.”
The average balance and average revenue per account did improve materially, but this appears to mostly be an effect of closing inactive accounts, rather than an actual improvement in the performance of existing customers.
With a relatively high fixed cost base, the only hope Varo has for reaching profitability is to grow its number of users, deposits, and assets — a difficult outcome to get to while slashing marketing spend and closing users’ accounts.
Fed Payment Study: Yes, People Still Use Checks
The Fed recently published the results and underlying data set from its Federal Reserve Payment Study. The recent release focuses on non-cash payment methods, including consumer, business, and government usage of ACH, checks, general purpose and private label cards, and ATM transactions; wire transfers are excluded from the data set.
With FedNow slated to launch in July, the study provides context on existing payment usage trends.
On a dollar-value basis, ACH payments, especially debit transfers, have seen a marked uptick, particularly since 2018. And while the number of checks written has declined, the average size of a check transaction has increased, driving a fairly stable amount of value transfer by check in recent years:
Looking at the number of non-cash payments by type demonstrates the continued growth in popularity of card payments, especially debit, which saw significant gains in usage during the pandemic:
Apple Users Stash Nearly $1Bn in New Savings Accounts In Less Than A Week
Apple’s recently launched savings feature is off to a strong start, with Forbes reporting users deposited nearly $400 million in funds the first day it was available, and close to $1 billion in just four days.
It’s unclear what proportion of the funds were balances users had previously held in their Apple Cash accounts vs. funds transferred from external bank accounts.
More than 240,000 savings accounts were opened in that timeframe — a number that represents just 0.2% of iPhone users in the United States.
When it comes to user acquisition, Apple has a structural advantage vs. any fintech or bank: more than half of Americans use an iPhone, and Apple controls the hardware and operating system on those devices. While currently only existing Apple Card holders can open a savings account, a general market rollout is inevitable.
The real winner here may be Apple’s bank partner Goldman Sachs. In a market where competition for deposits is heating up, Goldman has unlocked a new channel for sourcing funding — even if that means paying 4.15% APY for the privilege.
FT Partners Monthly: $2.9 Billion Raised Across 225 Deals In April
After the extreme outlier of March, driven by Stripe’s mega $6.5 billion round, fintech funding volumes returned to a more muted level in April, per FT Partners’ monthly market update.
With the tightened fundraising environment, we’re beginning to see signs of elevated fintech M&A activity: Greenwood acquired fellow neobank Kinly; micro-investing app Acorns acquired UK kids’ neobank goHenry; and UK neobank Tandem acquired bill-splitting app Loop Money, for starters.
Expect to see more such deals in the coming months as startups burn through their runways and struggle to raise additional capital in what has become a much less friendly fundraising environment.
Other Good Reads
Anatomy of a Run: The Terra Luna Crash (NBER)
Global Fintech 2023: Reimagining the Future of Finance (BCG & QED)
JPMorgan: The bank that never lets a crisis go to waste (FT)
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