The news: Varo Bank risks running out of funds before the end of the year, according to a regulatory filing, per Banking Dive.
Funding and burn rate: Varo was the first US neobank to obtain a banking charter from the Office of the Comptroller of the Currency (OCC).
Varo’s CEO, Colin Walsh, assured Banking Dive that the bank would not need to raise additional capital to stay afloat, stating that the figures in the report were taken out of context. He said the burn rate was a variable discretionary investment cost and that the report does not outline the full strategy for the bank.
It’s not profitable: Varo used last year’s funding to invest in marketing, engineering, product development, operations, and risk management. But like most neobanks, Varo has yet to turn a profit.
The bank has also focused on lending as part of its push to obtain a banking charter, but according to a Banking Dive fintech analyst, the practice has not been a revenue generator.
Neobanks struggle to become profitable: Varo’s struggle for profitability is common within the neobank space.
Our roadmap to profitability highlights some actions that neobanks can take to work toward profitability, such as engaging in partnerships to offer more services and boosting premium account usage. Varo claims its investments are in line with its strategy and goals, but its lack of transparency makes it difficult to judge if it’s headed in the right direction.
Another round of funding? If Varo’s plans for profitability fail to materialize, the bank may attempt another round of funding. But fintech analyst Jason Mikula suggests a new cash raise would be difficult.
What’s next for Varo? Despite its CEO’s assurances, without a profit and without investors, Varo will face big challenges. Neobanks are still relatively new, but the market is already looking a bit saturated. As the first neobank granted a banking charter by the OCC, Varo has a prominent position and competitive advantage in the US neobank space. Any difficulties it faces will hurt the credibility of neobanks globally.