Varo's Losses Shrink But Growth Stalls: Q4 Call Report
Varo's Losses Shrink But Growth Stalls: Q4 Call Report
Cash App Launches Savings (sort of), Chase Discourages A2A Payments, CFPB Proposes Credit Card Late Fee Rule
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Varo Losses Shrink But Growth Stalls, Q4 Call Report Analysis Shows
It’s call report season, and that means it’s time to check in on the only US neobank to obtain a de novo bank charter: Varo. (We’ve covered Varo previously here, here, and here.)
Like every other VC-dependent, loss-making fintech, Varo is in the midst of reorienting from “growth” to “profitability.”
Coinciding with filing its most recent call report, the company released a statement highlighting some of the progress it has made, noting its modest increase in revenue and progress in shrinking non-interest expense, resulting in a meaningful narrowing of its loss in the quarter:
But the metrics Varo highlighted are the rare bright spots in an otherwise lackluster quarterly filing.
Varo has two primary levers it can pull, both of which are on the cost side of the P&L: cutting marketing spend and layoffs. It has pulled both of them, shrinking headcount from 833 at the end of 2021 to 576 (-31%) at the end of 2022.
Marketing expenditure shrunk from $123.3 million in 2021 to $84.5 million in 2022 (-31%), with much of the reduction in spend appearing to come in the second half of 2022.
The result is that Varo was able to trim non-interest expenses nearly in half, from about $104.5 million in 2021 to $56.7 million in 2022. Based on the timing of the cuts, annual expenses could fall further in 2023.
But, even with those cuts, Varo still lost $32.5 million in Q4, for a total loss of $236.5 million for 2022:
And that’s the good news. The bad news?
Varo has shown little ability to influence the revenue side of its income statement. While interest income is up substantially from 2021, that is attributable primarily to rising interest rates — it is true that, here, Varo’s charter has proven to be a benefit.
But interest rates aren’t in Varo’s control. And, after peaking in Q1 2022, Varo has seen its deposit base steadily erode, dropping to $275 million by the end of the 2022 — crimping its ability to generate interest income. Varo’s interest expense has also ticked up as rates have increased, as it now offers 3% APY on its savings accounts.
Varo has seen its growth in non-interest income slow in tandem with its slower pace of account growth.
The overall result is a shrinking average balance per account — from $74.29 at the end of 2021 to just $51.66 at the end of 2022 — and declining average revenue per account.
In Q4, Varo generated on average just $5.21 in revenue per account, based on the data in its call reports.
It’s unclear if the picture of declining account-level metrics is because Varo customers are actually economically worse off or if Varo users are churning and, with reduced marketing spend, Varo is no longer replacing them with new active users — resulting in a lower share of reported deposit accounts that are actually active.
Despite slowing marketing spending, Varo’s customer acquisition efforts haven’t become any more efficient. In 2021, it added about 2.7 million accounts with an average CAC of $45; in 2022, Varo added about 2 million accounts at an average CAC of $43.
Generally, as you shrink marketing expenditure, you would do so by pausing the highest CAC channels, thus driving increased efficiency and declining CAC. The year average could obscure this, and Varo may show improved marketing spend efficiency going into 2023.
Defaults On Varo’s Lending Still High
Varo does seem to be having some success at driving increased adoption and/or higher usage of its “Believe” credit builder card. The card functions somewhat akin to a secured card, where a user pre-funds what’s essentially an escrow account that determines the credit line on the card.
Varo benefits from higher interchange income on the “credit card” vs. its standard debit offering, and users get a tradeline reported that can help them build or repair their credit.
But while Varo encourages users to configure the card’s balance to be auto paid, Varo can’t require this — leaving open the possibility of defaults and/or fraud.
While net charge off rates for Varo’s Believe card have come down, they remain shockingly high for what is essentially a secured card, coming in at around 2.37% on an annualized basis in Q4.
Meanwhile, on its Advance small-dollar loan product, Varo recently raised the maximum loan amount from $200 to $250. But repayment performance continues to look challenged, with over $1 million charged off (before recoveries) in Q4 2022 alone.
Such poor credit performance in what remains a relatively benign macroeconomic environment may help explain why Varo slowed growth in its book, with only marginally more in loans outstanding at the end of Q4 vs. the quarter prior. That its user growth has stalled out won’t help boost lending volume either.
The Clock Is Ticking On Varo’s Quest For Profitability
Varo is in a tough spot. It has little direct control over boosting its revenue.
Cutting its way to profitability is not realistic.
In 2022, even if marketing and employee compensation expenses were zero, Varo still would have lost over $30 million.
As Varo cuts spend, especially marketing spend, its ability to acquire new accounts and increase revenue from existing accounts is increasingly constrained.
Existing users are likely churning, with fewer new users coming in the door to replace them. And Varo, especially as a bank, has a high fixed cost base.
With about $150 million in equity remaining and a quarterly burn rate of $32.5 million based on Q4 2022’s filings, Varo has some time to try for an additional fundraise or to engineer a soft landing — but not much.
Cash App Launches Savings — Sort Of
Block’s consumer-facing product, Cash App, took another step in assembling its consumer banking product stack.
Born as a peer-to-peer payment app, Cash App achieved widespread adoption with famously low CAC thanks to the built-in network effects of P2P payments.
Cash App has also maintain enviable “feature velocity” — it still ships more like a startup than a bank.
Through a variety of vendor-partners and acquisitions, it now offers a debit card linked to a user’s Cash App balance, bitcoin trading, equities, and free tax filing.
But the savings feature — though apparently one of the most requested capabilities — has some notable shortcomings.
Despite parent company Block holding its own bank charter and existing bank partnerships, the “savings” feature Cash App is offering isn’t actually a savings account. Rather, it appears to be held as a stored balance — the same as a user’s Cash App balance.
This results in two notable gaps from a feature perspective:
Users earn no interest on their savings. In a rising rate environment, where other digital bank accounts/wallets offer rates as high as 3.75% APY, this is a meaningful distinction, though users who hold small balances may value convenience over the few dollars in interest they would earn.
No FDIC insurance (unless users hold Cash App’s debit card, Cash Card). The likelihood of Block going bankrupt seems remote, but, in a climate of heightened sensitivity post-crypto meltdowns, this is a curious choice.
The only conceivable reasons I can imagine for launching the savings feature this way is speed to market and to optimize conversion rate by avoiding procedures associated with opening a discrete new account — both of which could make sense as Cash App seeks to capture users’ tax refunds, given that tax season is already underway.
The way Cash App chose to build this is basically a relatively small UI tweak in how a user’s funds are displayed, given funds are stored in the same underlying place. Implementing a true savings account, whether through the Square Financial Services ILC entity or with an outside bank partner, would be a considerably bigger lift.
Chase “Doesn’t Recommend” Using Your Bank Account To Make Online Purchases
Major incumbents haven’t been afraid to cry foul — or make threats — when faced with upstarts seeking to disintermediate them.
For example, while PayPal, card networks, and issuing banks get along well enough now, that wasn’t always the case. Until a 2016 truce, PayPal purposely steered users to pay by linking a bank account rather than with a debit or credit card.
Understandably, card networks and banks — which stood to lose interchange income and, potentially, control of their customers — didn’t like this and cried foul about PayPal’s steering practices. Ultimately, PayPal reached agreements to cooperate with, rather than compete against, card networks and banks.
While the PayPal threat may have retreated into the rearview mirror, a new challenge to networks’ and banks’ interchange income has emerged: account-to-account payments (“A2A”).
Long popular in other countries, a host of US companies, including open banking infrastructure stalwart Plaid, are looking at ways to make A2A payments more palatable to American consumers.
Such payments could make use of existing ACH rails or emerging real-time payment networks like The Clearing House RTP and FedNow.
Incumbent banks are not ignorant to the potential risks A2A payments could pose.
JPMorgan Chase has reportedly spent considerable time and resources considering how to approach “pay by bank.” While the bank would likely prefer the status quo, should A2A gain traction, Chase would rather exert its considerable pull in how the market develops rather than watch from the sidelines.
It’s against this background I noticed an interesting alert in my Chase checking account last week.
Underneath an ACH transaction funding a payment to remittance platform Wise, I spotted an alert to “Stop and double-check,” which, when expanded, warns users that Chase doesn’t “recommend using your bank account and routing info to make an online purchase. Next time, you may want to pay with a debit or credit card, which have enhanced purchase protection options” —
Now, Chase isn’t entirely incorrect here, though there is quite a bit of nuance.
Consumers are protected from unauthorized ACH and debit transactions by Reg E. When it comes to other kinds of issues a consumer might have with a merchant, they may have additional rights or remedies as defined by card schemes if paying with credit or debit vs. ACH.
Still, Chase’s deployment of this “Payment security tip” modal seems designed to steer users towards its preferred, economically favorable outcome: continuing to use card payments vs. less costly alternatives.
CFPB Announces Proposed Rule To Lower Credit Card Late Fee Cap
The CFPB’s war on so-called “junk fees” continues as the agency unveils a proposed rule on credit card late fees.
The current regulations governing card late fees were formulated by the Federal Reserve Board before the CFPB’s creation. The regulations set a “safe harbor” late fee amount, which is adjusted annually to take into account inflation.
Currently, the safe harbor ceiling is $30 for cardholders’ first missed payment and $41 for subsequent missed payments. Such fees drive some $12 billion in revenue annually for credit card companies, according to the bureau.
The CFPB’s proposed rule would:
Cap the “safe harbor” late fee amount at $8
End the automatic inflation adjustment
Cap late fees at 25% of a borrower’s required minimum payment
The bureau estimates these provisions would lower aggregate late fee revenue by as much as $9 billion per year.
Other Good Reads
The Past, Present & Future of Big Bank Consortiums (Fintech Takes)
Stripe’s Difficult Teenage Phase (Fintech Brainfood)
Thanks to ChatGPT, 2023 Is the Year of the Chatbot in Banking (Ron Shevlin/Forbes)
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