Varo Bank Struggles with Non-Prime Loans

Varo recently secured an additional $29 million in funding as part of its ongoing Series G round, bringing its total raised capital to over $1 billion since its 2015 inception. 

This comes after the company faced valuation challenges, including a 2023 $50 million equity raise at a reduced $1.85 billion valuation compared to its $2.5 billion peak in 2021.

Founder and CEO Colin Walsh stepped down in November 2024, succeeded by Gavin Michael, former CEO of crypto platform Bakkt and banking technology leader at Citi and JPMorgan Chase. 

The transition marks a strategic shift as Varo pursues profitability after reporting a $65 million loss in December 2024. Walsh retains board membership and a significant stake in the company.

Operational Context

• Varo became the first fully digital U.S. national bank in 2020

• Recent workforce reductions (10% in 2023) aimed to streamline operations

• The company claims 38% net income improvement and 31% lower customer acquisition costs in 2024, though specific figures remain undisclosed

Analysts note the CEO change signals potential strategic realignment as Varo balances its fintech innovation roots with traditional banking profitability requirements.

Charge-Off Rates

• Varo Believe (secured charge card/credit builder):

  • Q4 2024 annualized charge-off rate: 2.37% (up 43% YoY)

  • Balances outstanding: <$40 million (2024)

• Varo Advance (small-dollar loans):

  • Q4 2024 charge-off rate: 27.62% (down 21% YoY but volatile quarterly)

  • Balances outstanding: $37 million (2024)

  • Fee structure: $8 per $100 borrowed (no interest)

Loan Products

*In pilot phase with waitlist as of Q2 2024.

• Core Approach: Cashflow analysis using machine learning to assess:

  • Savings patterns (e.g., auto-save features usage)

  • Transaction regularity (income/expense consistency)

• Data Utilization:

  • 80% of users engage with budgeting tools monthly

  • Average session duration: 5.5 minutes (high engagement)

• Target Demographic:

  • Paycheck-to-paycheck consumers (median account balance: $65)

  • Non-prime borrowers excluded from traditional credit products

2024 Loss Breakdown

• Net loss: $65 million (improved from $105M in 2023)

• Revenue streams:

  • 55.8% interchange fees

  • 27.5% account service charges

  • 10% interest income

Capital Efficiency

• CAC reduced to $50/customer (down 31% YoY)

• Revenue per account: $32/year (2024)

• Equity runway: ~$60M (burn rate: $18M/quarter)

Peer Comparison

*Publicly available data suggests Chime reached breakeven in 2023 with 13M+ accounts.

1. Concentration Risk: Over-reliance on interchange (56% of revenue) exposes Varo to regulatory shifts in debit card fees.

2. Asset Shrinkage: Total deposits grew <4% in 2024 despite 20% account growth.

3. Crypto Leadership: New CEO Gavin Michael (ex-Bakkt) faces skepticism about fintech-to-crypto pivots during a bear market.

• Near-Term Levers:

  • Scale Varo Line of Credit to offset Advance's high defaults

  • Monetize tax prep partnership (Column Tax) via cross-sell

  • Reduce operating expenses (already cut salaries by 18% in 2024)

• Long-Term Bets:

  • Banking-as-a-Service partnerships (unnounced deals in progress)

  • ML-driven underwriting to lower CAC below $30/customer

Varo’s lending playbook mirrors the broader fintech dilemma: balancing mission-driven inclusion with Wall Street metrics.

While their cashflow-based models and charter advantages provide differentiation, persistently high defaults in core products suggest either a flawed risk framework or an unavoidable reality of serving subprime demographics.

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