Main Street has no shortage of options for where to park its money. Whether it’s digital-only banks — known as challenger or neobanks — or investment apps that have grown into full-service offerings, the market for personal finance has arguably never been more saturated.
And while there is no denying the newcomers pose a significant threat to the traditional players— such as JPMorgan Chase, Wells Fargo and Bank of America — the old guard does hold one significant advantage: national bank charters.
No recent fintech or challenger bank has received a national bank charter from the Office of the Comptroller of the Currency. Instead, startups interested in offering checking and savings accounts are forced to partner with banks that do have charters, typically small regional firms known as sponsor banks, which then take a cut of the profits for their efforts.
However, that could soon change for one challenger bank. Varo filed an application with the Federal Deposit Insurance Corporation on Monday. The FDIC application is one of the final steps the startup has to take to receive a national bank charter from the OCC, which it was granted preliminary approval for back in September 2018.
The move comes just a few months after closing a $100 million Series C round that included over 40 investors including private equity firm Warburg Pincus, TPG Capital’s The Rise Fund and Chinese-based Gopher Asset Management. Varo CEO and co-founder Colin Walsh declined to provide a valuation, citing the fact the company plans to raise another round before it goes live as an independent bank, but said to date Varo has raised $179 million.
Walsh told Business Insider it’s not sustainable to try and grow while continuing to run under a sponsor bank. As the digital bank grows, it could eventually pose a systematic threat to the bank its partnering with due to its size. The digital bank is also at risk if the sponsor bank gets caught up in regulatory issues that could impact its own business.
“You just don’t control your own destiny when you’re operating that model as much as you do when you’re actually an independent bank,” Walsh said. “Us having that sort of several-year lead on going through that regulatory process and getting on the other side of that regulatory process will allow us to compete in a way that many of the fintechs will struggle in terms of having the breadth of products and having some of the cost advantages.”
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The charter application has been a long process — Walsh said initial conversations with the OCC began in December 2016 — but there is a light at the end of the tunnel. Following FDIC approval, the OCC would then do a final examination before granting a full charter. If the timeline hold ups, Walsh said Varo should be able to run as an independent bank in the first part of 2020.
But not everyone in the industry sees the benefits of a national bank charter the same way Walsh does. While several fintechs have explored the possibility of obtaining a national bank charter from the OCC in recent years, only two currently have applications submitted. Varo and Robinhood, which applied for one in April, as reported by the San Francisco Business Times.
European neobanks N26 and Monzo, which enjoyed success in Germany and the UK, respectively, both recently launched in the US without any definitive plans to try and obtain a national bank charter.
An executive at one competitor told Business Insider he’s happy to let Varo spend time and resources working on obtaining a charter. Once Varo gains approval, a playbook will have been established for what regulators are looking for, thereby making the entire process easier, the executive said.
While Wash admits that Varo is doing a bit of heavy lifting by being the first challenger bank to try and gain a national bank charter, it’s not as if the OCC will be keen to hand them out afterwards.
“I think it’s a little bit of wishful thinking,” Walsh said. “The regulators have to be cautious. … To think all they have to do is swing by Washington, D.C. and pick one of these things up. They are sort of fooling themselves.”
And that’s not to say Varo hasn’t had time to focus on other areas of its business outside the charter application. In the last year it’s tripled its customer base, according to Walsh. In July it will hit 750,000 registered customers, which comes just two years after launching its app in July 2017, he added. And there’s also plans for a credit card, among other financial offerings, in the “not-so-distant future,” Walsh said.
By comparison, Chime, which launched in 2014, announced it surpassed 4 million bank accounts in June, quadrupling its user base over a one-year period. Monzo, which went live in 2015, eclipsed two million customers in the UK in May with a reported 40,000 accounts opening every week, making it the fastest growing bank in the country. Meanwhile, N26 reported having over 2.3 million active users in Europe in January when it announced closing a $300 million Series D round valuing it at $2.7 billion.
See more:UK digital-only bank Monzo is launching in the US — but getting American customers to sign on may be a challenge
As for Varo, with new investors come expectations of returns. And as its customer base continues to grow, the pressure to charge customers fees to generate a greater profit could rise.
However, Walsh throws cold water on the idea, pointing to the benefits the charter will provide, including the ability to make money off deposits, something it can’t currently do.
“How do you avoid the desire to ratchet up fees over time? We won’t need to,” Walsh said. “It also runs against the philosophy of why the company was started in the first place. We really are authentically trying to help consumers that are feeling stuck.”