Two years ago, Varo Bank obtained its national bank charter. Varo was the first consumer bank in the US to be all-digital.

Younger consumers were the focus of the startup's banking services. At the time of its last raise in 2021, it had raised over $1 billion and was worth over $2 billion. U2's Bono, Lone Pine Capital and The Rise Fund are just a few of the funders.

The startup competes with Chime, Current, N26, Level, Step, and Moven. Rather than partnering with a bank, Varo obtained a charter to make it stand out.

Since Varo took the bank charter route a lot has happened. Colin Walsh is the company's chief executive and founder.

The interview has been edited to make it clearer.

It was worth it for you to become a company. Why if so?

Walsh said it was worth it. In the first place, Varo was created. The world continues to be made up of haves and have nots and there are a number of things you have to do. Help people build credit and access to credit and then give them access to things that create a sense of ownership over time. The only way to accomplish all of that is to be a bank.

There was no guarantee that we would make it through. It took us a long time and cost us a lot. It allows us to control our own regulatory destiny because we have a lot of oversight in being a real bank, not just a tech company partnering with a bank. Any number of partners could create a risk for the business and the model if anything goes wrong. We were able to eliminate a middleman.

Varo is in a very different market than it was a year ago. There was an article that said Varo could run out of cash by the end of the year. How did you adapt to the new environment and not run out of money?

Varo has taken steps to reduce the burn rate. The actions went into place in the second quarter of the year.

Marketing is the biggest reduction in spending. The June customer acquisition cost was reduced by 64%. In order to ensure the long-term health of our business, we reduced our workforce in the second quarter of this year. We are doing everything we can to support future growth.

Strong customer growth and a clear path to profitability are what we are seeing.

You secured a big funding round and talked about going public. How did you get to the point where you were in danger of running out of money?

The raise we did last year was huge. We were going to dial up the growth engine on the back of that. The market has changed very quickly. To continue to invest and build products that customers are going to love and fulfill the mission, we scaled back on other areas of expenses.

The kind of tough decisions we made early on to become a bank will make a lot of sense over the next few quarters. I think some of my non-bank lending friends see the Fed raising rates as a threat because I am the only one who celebrates every time.

The image was created by Varo Colin Walsh is the CEO of the company.

Business is going well.

Varo had a gross revenue of $74 million in the year 2011. In 2020 it was over forty million dollars.

In the last two years, we have increased our account count by 196%. Our revenue is up and our spending is up.

The company narrowed its loss in the second quarter to $77.1 million from $84.4 million in the first quarter. Varo's leverage ratio is in the top 5% of all U.S. banks and it has Tier 1 capital of $219 million. The measures started in Q2 will lower the losses.

What do you think about more niche neobanks targeting specific demographic?

In the last 10 years, there has been a confluence of new banking institutions coming out and new companies getting a lot of funding to raise awareness. You now have GenZs in their 20s as a result of that. You have a group of people who are all the way into their early-40s. Because they grew up with a phone in their hand, a large group of consumers have no real loyalty to incumbent institutions and are enthusiastically embracing these new solutions and changing to digital banks.

The more players participate, the more category awareness will be generated. It's helpful to have more players out there and everyone has their own angle.

They are more difficult to scale from a business model perspective. If you want to provide services to enough customers that you can cover your costs and still have economies of scale, then scale is important. It will be interesting to see if the more niche plays will be able to get the funding they need to survive. That is going to be interesting to watch.

A lot of good people with good intentions are trying to do the right thing.

What do you think will happen to digital banks?

Funding will not be as plentiful as it could be. Some players will consolidate or look for other ways to manage their business. We are in the early days. We don't know how long this economic situation will last, and so I think it's going to weed out the business models that are sustainable through different economic cycles.

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Mobile banking startup Varo is becoming a real bank