The first challenger to be granted a national banking licence in the US, Varo is reaching out to the millions of Americans who still don’t have access to mainstream financial services. Chief Risk Officer Philippa Girling explains how it’s going about it.
Not every company can legitimately claim to have made history, but being the first US consumer fintech to get full regulatory approval to become a national bank is certainly one for the record books.
Three-and-a-half years and multiple rounds of applications later, San Francisco-based Varo Bank was finally granted a national bank charter in July. It now plans to vastly expand its services for the benefit of the millions of Americans who are financially struggling, and to lead what it calls a ‘new wave of financial inclusion’.
Because, even in one of the biggest democracies in the world, 22 per cent of adults are either unbanked or underbanked. According to a 2018 report by the US Federal Reserve, they either don’t have a bank account, or have an account but still go outside the banking system to make ends meet. It found that 28 per cent borrowed money using an alternative financial service product, which could include payday, pawn shop or auto title loans.
According to an earlier Federal Deposit Insurance Corporation survey of financially excluded households, more than half of those questioned said they simply didn’t have enough money to keep in an account, while a massive 30 per cent said they simply didn’t trust banks.
“These are the people we’re trying to help,” says Philippa Girling, chief risk officer at Varo Bank. “There are a lot of people who have not managed to successfully open a bank account; they may have had a prepaid card, or been finding other ways to manage their financial lives, with payday lenders and cheque cashers.”
Varo’s website proudly declares it is the ‘new way to bank’ and, by gaining its charter, it is certainly breaking the US banking mould. Like other US fintechs, Varo initially partnered with a community bank to offer services – in its case, Bancorp, which held customers’ funds while the fintech handled the consumer interface and app.
Regulatory approval by the Federal Deposit Insurance Corporation, means consumer deposits will be transferred to Varo which will now use Temenos Transact as its core banking infrastructure. By using Temenos’ Cloud-native technology, Varo hopes to rapidly innovate and deploy new digital banking products – from deposit accounts to savings and loans. But, unlike many other bank-in-a-box challengers, it’s developing its own tech stack.
“Temenos is our core system, it’s our ledger and, as a bank, we’ll be sitting on the Temenos infrastructure,” says Girling. “Much of the rest of the Varo experience, though, is really within our own tech environment and that’s something we really focussed on.
“We want to make sure that we’re building a unique intellectual property that’s Varo, because a lot of the things we do, the products we start to develop and offer, are going to be in our world,” she explains. “This is our secret sauce… what makes Varo, Varo. It’s everything our side of the tech stack.”
Since 2015, Varo’s core ethos has been to help Americans make progress in their financial lives. And, as the country’s poorest households take the hardest hit from the COVID-19 pandemic, that is becoming an even more pressing concern.
There is also a very noticeable racial divide between those who routinely access regulated financial services and those who don’t, largely driven by enormous income inequality. In its 2020 report, The Case For Accelerating Financial Inclusion In Black Communities, McKinsey points out that the average black American family in 2016 had a total wealth of $17,600 – about a tenth of that of an average white family. Nearly half of those households were unbanked or underbanked in 2017. Varo aims to tackle such financial exclusion from the very outset – at onboarding.
“We don’t require somebody to already have successfully entered the financial system in order to enter Varo,” says Girling.
“The key, I think, to everything in the future, is authentication, and Varo is leaning in to future innovation in that space,” she says – although she adds that if a bank’s know your customer (KYC) processes are too intuitive in the future, that could prove a little disconcerting for the customer. “If you applied to Varo and you put in your telephone number and we said ’thanks very much. Go ahead. Bank’, you’d think ‘how on earth do you know I’m me?’.
“It could be unnerving that we already know,” she admits, “and so we might need to build in an additional question just to help ease that user experience.” Once a customer is onboarded, Varo focusses on getting to know them even better, with the eventual aim of being able to offer more innovative and tailored products. And all this is made possible by the company amassing clean data in its own Varo data lake.
“As data comes into our lake, we are going to be checking the quality and lineage of that data, using the latest tech tools,” says Girling. This data can then be used to empower and inform decisions in the future because Varo intends to build a relationship with its customers from scratch.
“We will not charge you fees because you became a little overdrawn, we’re not going to charge you fees to take money out of an ATM or to deposit a cheque,” she explains. “We’re going to give you an opportunity to have a real banking experience so that you can build that relationship with us. We get to know you better, you get to know us better, and as that confidence grows, you’ll be able to do more things.”
The freedom to break the banking mould in many and various ways, comes back to Varo’s proprietary data analytics and legacy-free Cloud-based agility, leveraged by a different mindset. All the applications remain in Varos’ Cloud infrastructure, meaning that Varo can quickly scale up and scale down, and add new functionalities as required. “We’ve noticed how effective that’s been, just dealing with the pandemic,” Girling adds.
Perhaps the most obvious impact the outbreak has had on financial services is an accelerated move towards digital payments, as many people prefer them to cash, for safety reasons. This has, in turn, provided greater validation of online banking services. These digital payments in themselves help to provide a rich source of data for getting to know customers, although Girling stresses that the bank wants users to feel comfortable with that.
“We’re trying to make sure that we build a very transparent relationship with our customers,” she explains. “‘As in ‘this is what we’d like to know. Are you comfortable with us knowing that? This is how we will use it to help you’. And there are some things that are really easy to do.”
One of the first of these – to encourage good financial behaviours – is Varo’s Save Your Pay service, which enables customers to elect to automatically deposit a percentage of their salary into a savings account that earns higher interest, encouraging saving while rewarding the customer’s bond with the bank. Those deposits are also key to Varo’s other key proposition: lending to many of those one in 10 in the Federal Reserve report who don’t even bother applying for credit because they think their application will be denied.
“We’re really looking forward to finding ways to safely lend small dollar amounts to people who need that access to credit and just haven’t had it before,” says Girling.
Regulatory approval for Varo to become a national bank marks the end of one journey and the beginning of another. The process was necessary but draining.
“That focus on becoming a bank is a lot of work,” says Girling. “We can take all that energy, now, and pour it into innovation in the way we interact, learn from and build trust with our customers. They may or may not be excited about us being a bank. What they will be excited about is that, over the next six to 24 months, they’ll see Varo provide them with the kinds of products and services that they’ve always wanted.”