Now that Varo is first mobile-only bank to be FDIC approved, more products coming
Once Varo gets its bank charter, it will be able to offer credit cards, loans, joint accounts and more.
On Monday, Varo became the first mobile-only bank to be FDIC approved. Before the approval, neobanks like Varo and Chime were only able to accept customer deposits through a partnership with a traditional FDIC-insured bank. With the issuance of its bank insurance, Varo can soon offer a larger suite of products, including credit cards, loans and joint accounts.
Varo launched in 2017 with its mobile app and debit card, which feature no minimums or monthly fees, early direct deposit, a $50 no-fee overdraft forgiveness zone and free ATM withdrawals at more than 55,000 Allpoint machines. It has sought a bank charter just as long. The company initially applied in 2017 to both the FDIC and the Office of the Comptroller of the Currency, which preliminarily approved Varo’s bank charter in 2018. Varo then withdrew its FDIC application later that year to refine it according to the regulator’s guidance and refiled in 2019. The final step remaining is to receive the national bank charter.
“Receiving an official bank charter has been part of Varo’s vision from the very beginning, and we are excited to progress through the necessary steps to accomplishing that goal,” CEO Colin Walsh wrote in an internal blog. “Despite historic economic growth, only 29 percent of Americans are considered financially healthy. Varo is committed to creating inclusive financial opportunities that deliver measurable benefits to all consumers. Becoming a fully chartered bank will give us greater opportunity to deliver products and services that positively impact the lives of everyday people around the country.”
Final approval is expected in the second quarter of this year, when Varo will cease its partnership with Bancorp and transfer its depository accounts under its control. To date, Varo is the only neobank to seek its own bank license. Walsh has indicated he felt that a model where a neobank must partner with a sponsor and, accordingly, share its profits with it, is not sustainable.
Pushback and resistance
One of the most notable examples of this bank sponsorship is Goldman Sach’s sponsorship of the Apple Card. With new bank charters being rare in the United States nowadays, many fintechs have come to feel that it is more prudent to “lean” on an existing license than to obtain a new one. This is, in part, due to the pushback from the banking industry.
In November, Sen. John Kennedy (R, La.) introduced legislation — the Eliminating Corporate Shadow Banking Act — that would eliminate a nonfinancial company’s ability to create an industrial loan company. An industrial loan company (ILC) is a FDIC-insured bank that issues loans on behalf of a manufacturer — typically, to provide financing for buyers of the company’s goods. An example of this is General Motors Financing. However, when Walmart decided to apply for an ILC in 2005, the banking industry panicked from the perceived increase in competition.
Japanese online retailer and e-commerce platform Rakuten and credit card processor Square each attempted to obtain an ILC charter, only to withdraw their applications. “ICBA strongly supports the Eliminating Corporate Shadow Banking Act to close the industrial loan company loophole, which allows commercial interests to own full-service banks, avoid consolidated supervision and threaten the financial system,” said ICBA President and CEO Rebeca Romero Rainey in a press release. “Any company that wishes to own a full-service bank should be subject to the same restrictions and supervision that apply to any other bank holding company.”
A special fintech bank charter, which would have opened a faster path to approval, was blocked in 2019 when a federal district court ruled that the OCC did not have the right to offer this.
Varo was approved under a “traditional” bank charter. Walsh argues that FDIC approval will lower Varo’s costs by at least 50 percent, per CNBC.