Varo's Progress On Profitability Stalls, Q2 Call Report Shows
Eco Pivots, Decides FDIC Insurance Isn't A Bug Afterall
Hey all, Jason here.
Around the time this lands in your inbox, I’ll be on my way to 🇲🇽 Guadalajara, Mexico! I’m looking forward to spending the next couple weeks in the country — both for work and some R&R.
Also, a huge congrats to the entire Knot team on news of their $10 million Series A — I’m thrilled to be one of many people supporting the company by investing in this round!
Existing subscriber? Please consider supporting this newsletter by upgrading to a paid subscription. New here? Subscribe to get Fintech Business Weekly each Sunday:
Your opinion matters! 🗳️
Sponsored content: Hi risk and compliance leaders 👋 Share your insights on fraud and AML and get $50. Take a 5 minute survey.
Varo’s Progress On Profitability Stalls, Q2 Call Report Shows
Varo filed its second quarter call report at the end of July, and the picture it paints isn’t exactly encouraging.
Though the company has made substantial progress — lowering its quarterly losses from a peak of $88 million in Q4’21 to about $27.5 million last quarter, Varo’s progress on its “path to profitability” appears to have stalled.
On the revenue side, non-interest income, driven primarily from interchange, out-of-network ATMs, and cash advance fees, was flat quarter over quarter.
Interest income was up 30%, thanks to rising rates — even though Varo’s deposit base and assets declined quarter over quarter. Interest expense rose a more modest 13%, as Varo has been slower to pass along rate hikes to its depositors. Overall, net interest income was up nearly 41% sequentially.
Varo’s efforts to cut costs — primarily by reducing headcount and cutting marketing — appear to have stalled out. Reduction in overall non-interest expenses have been minimal since Q4’22. Q2’23 saw a paltry 3% drop in non-interest costs.
Employee compensation, included in the non-interest expense item, actually increased quarter over quarter — despite a nearly 12% drop in the number of employees. Average compensation per employee jumped by about $10,000 for the quarter in a sign that Varo may be having trouble hanging on to key talent.
Perhaps most alarmingly, given Varo’s stalled efforts to shrink its high fixed costs, is that it is actually losing users, which the company ascribes to closing dormant accounts. Varo reported about a 6% drop in deposit accounts vs. last quarter.
Despite shedding accounts, the average balance per account still declined. The typical Varo user holds just $74 in their account on average. Average revenue per user for the quarter saw a 10% bump to $6.62 ($26.48 on an annualized basis), thanks to higher interest income from rising rates.
On the credit side, Varo is still struggling. Loans tied to its Varo Believe card, which functions akin to a secured charge card, are down about 8% vs. last quarter to $25.7 million. Outstanding loans for its Varo Advance small-dollar loan product rose a robust 30.5% to $14.4 million.
However, Varo has made zero progress on its high charge-off rates since last quarter.
Varo Believe saw a near-identical 1.56% in charge-offs (annualized, net of recoveries), while Varo Advance saw its charge-off rate edge up slightly to an annualized 27.58% (charge off rates computed as amounts charged off, net of recoveries, divided by outstanding portfolio at end of respective quarter.)
The bottom line is Varo’s customer base is shrinking, as are the company’s deposits and assets. The little growth in revenue Varo is seeing is coming thanks to the Federal Reserve hiking rates — not from any strategy the company is implementing.
Varo has managed to trim losses by reducing expenses, but its progress has stalled out. Continuing to cut market costs will translate into a stagnant or, more likely, shrinking customer base. Employees, whose options are likely underwater and who have seen successive rounds of layoffs, seem to be demanding more cash to stick around.
With the additional $50 million of capital Varo quietly raised in April, the company has just shy of $150 million in equity remaining. At its current burn rate of $27.5 million, that gives the company less than a year and a half to turns things around, find additional capital, or try to find a graceful exit.
a16z-Backed Eco Pivots, Decides FDIC Insurance Isn't A Bug After All
Eco, which memorably touted its lack of FDIC insurance as a feature, has changed its tune and is making a pivot.
When Eco launched in 2020, interest rates were zero, meaning the yield savers could earn on vanilla (but safe!) savings accounts was also basically zero.
Eco promised to use the magic of crypto to offer users as much as 5% APY without risk by storing their funds as USDC stablecoins. The company went so far as to actively deceive prospective users during one-on-one onboarding conversations, where it was company policy to say yield was generated by lending USDC to “tier 1” institutions “like Fidelity and Goldman.”
In reality, Eco was storing/lending user funds through BlockFi (now bankrupt), Wyre (now bankrupt), and Prime Trust (now bankrupt.) Eco’s one-time partner bank Signature also failed due to “poor management.”
As the crypto system imploded and regulators have ramped up attention on the sector, yields on USDC have come down. Meanwhile, interest rates have risen substantially, and some money market accounts are now paying nearly 5.50% APY — rendering Eco’s original value proposition moot.
But the company had raised nearly $100 million in capital — giving it runway to attempt a classic startup move: the pivot!
The new Eco seems to have four distinct but interconnected parts: a rebooted Eco app, a crypto p2p wallet dubbed Beam, a crypto-powered internet point-of-sale system called Tender, and a pair of Eco cryptocurrency tokens underlying all of them.
The Eco App: A Vanilla Neobank (now with FDIC Insurance!)
The previously USDC-focused Eco app has morphed into a fairly vanilla neobank offering — which, in an amusing reversal, now touts the protection of FDIC insurance:
Eco partners with Piermont Bank to provide banking services and hold customer deposits. The app offers a fairly unremarkable set of features and seems to be primarily positioning itself against p2p payment app/digital wallet Venmo.
Eco offers 4% APY on savings, with the ability to earn up to 5% APY, if users meet certain unspecified conditions.
Users also can get 5% cash back at select merchants, like Amazon, Airbnb, Doordash, and Uber, which is a fairly common offering (eg Cash App Boosts, Venmo Offers, Current, Juno, etc.)
Eco also gives users “Eco Points,” which the company calls an “open rewards currency,” for their spending. But it’s not quite clear what Eco Points do.
The company describes the points as follows (emphasis added):
We’re building Eco Points to have real and transparent value, be sendable to your friends (even outside the Eco app), and be usable with a wide array of brands you care about. Not only that, they give you a real say in what comes next.
So yes, these Points are what you think (hope?) they are.
Today you earn them for sending, spending and saving money in the Eco App. Soon you’ll be able to use them more widely. Eventually we envision creating an entirely new Economy based on them.
But, one step at a time...
The positioning against Venmo and the description of Eco points seem likely to tie in to its Eco crypto tokens and Beam, the p2p crypto wallet.
$ECO & $ECOx Tokens: “Fixing” Money
This is where things get weird.
Declaring that “money itself is broken,” Eco says it has the answer: its own “decentralized alternative” to fiat currencies, the $ECO token and its companion governance token, $ECOx.
Eco promises the new cryptocurrency will have “the independence of Bitcoin and Ethereum combined with the usability of stablecoins. A currency with diminishing volatility over time that protects the purchasing power of holders — independent of the policies of any geopolitical entity.”
The “manual” describing the cryptocurrency project is filled with the kind of pseudo-intellectual philosophizing, appeals to “community,” and promises of hard-money policy and decentralization that are de rigueur for many crypto projects.
What’s less clear, from the manual and whitepaper, is what $ECO is actually for; the last page of the manual merely states:
What you choose to do with this Manual is up to you, the Eco Community. In this Manual are all the right starting conditions, we believe, to build a real currency and Economy — one that works more transparently and in our collective best interest.
Despite all the talk of “community,” nearly 30% of $ECOx tokens were given to VCs, including a16z Crypto, Pantera Capital, and Expa. An additional almost 20% was given to “ecosystem partners,” including Eco itself and its linked Eco Association, VC firm Expa, and one-click checkout firm Bolt, whose cofounder, Ryan Breslow, is also credited as a cofounder of Eco.
The overall distribution of tokens means that investors, partners, advisors, and the company itself control nearly 50% of the voting power for the currency’s protocol.
It’s not immediately clear if the Eco “Points” awarded for spending in the Eco app are the same thing (or interchangeable with) the $ECO/$ECOx crypto tokens. A post from last October discusses how Eco “Community Points” holders on Twitter and Discord can claim $ECO and $ECOx tokens, but it’s not clear if this process and conversion rate also applies to the points users earn from spending in the new Eco app.
Beam: An Aspiring Crypto P2P Service
Eco announced the launch of Beam, a “decentralized payments project” that hopes to function like a “global Venmo,” in an interview with Techcrunch last week.
Beam is a non-custodial (or “self-custodial”) crypto wallet, meaning the company doesn’t actually hold cryptocurrency on behalf of users. Metamask is another example of a popular self-custodial wallet, which operates as a browser extension. Though unlike Metamask, which can hold a wide variety of cryptocurrencies and tokens, Beam can only hold USDC — or Eco’s own token.
Beam seems to be primarily a UX that simplifies users’ interactions with underlying blockchains, with the primary use case being to facilitate P2P payments — with the goal seemingly being to provide a meaningful use case for the $ECO token.
But, as Beam itself acknowledges, that simplified UX may reduce the security of the service:
Beam is for payments, not for holding significant funds long-term. Treat it like a change purse — a place you put cash that you plan to pay someone soon. We make Beam as secure as we can, but it’s still a payments wallet…
Beam makes an intentional tradeoff: making it really easy to pay and transact, but at the cost of some security.
Also, for some reason, the only way to create and log in to a Beam account is with a Twitter account — which, given the current state of the service, is a very curious decision from both a usability and a safety and security perspective.
Like other popular P2P wallets, users can pay to create their own “Beamname,” powered by the Ethereum Name Service (ENS) — though to claim it, users must pay in Eco’s own token, naturally.
Tender: A Crypto Point-of-Sale System
The final piece of the pivot puzzle is Tender, which the company describes as “an internet-age point-of-sale system meant to enable instant, seamless, in-person crypto payments for merchants.”
Tender enables merchants to accept crypto payments from users across a number of popular blockchains, including Avalanche, Ethereum, Polygon, and Binance.
Tender claims to have multiple benefits vs. traditional, fiat POS systems, including enabling merchants to “accept payments from customers all over the world,” lower fees than credit cards, faster transactions than traditional payment methods, and improved cashflow for merchants.
While nothing on the Tender site references $ECO tokens or Eco Points, one can imagine the future possibilities for overlap and interoperability with the Eco banking app, the Beam wallet/p2p app, and the associated points/crypto token schemes.
A Crypto-Native Block, Rife With Conflicts of Interest
Taken altogether, Eco seems to be trying to create a crypto-native version of Block’s Square/Cash App ecosystem, where Eco (and its investors) have upside not only from company equity, but, potentially, from the currency used across the platforms itself.
You have to give the Eco team credit for an ambitious pivot. Still, what they’re building has one hell of a cold-start problem across every pillar.
Why would a user want to sign up and use Beam, if no one else is on it? Particularly for crypto-savvy early adopters, who likely are already comfortable with other non-custodial wallets that offer similar functionality.
Why would a merchant sign up for Tender, which would seem to require them to simultaneously run two separate points-of-sale: a ‘regular’ one for fiat currencies plus Tender to accept crypto? Is not accepting crypto really a barrier to merchants making sales?
And why would a user choose the rebooted Eco app, now operating on fiat US dollars? The 4-5% APY it offers is better than what moneycenter banks are paying, but is no better than what online-only banks and money market funds offer.
Other Good Reads
Embedded Finance and Banking-as-a-Service Report 2023 (The Paypers)
India’s Digital Payments Locomotive (Fintech R&R)
Terra Is Usually A Security (Money Stuff)
About 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