Articles by Gerelyn Terzo
Why BFS Capital’s Glazer Is Passing the Torch
August 22, 2017
Marc Glazer co-founded BFS Capital in the early 2000s and has remained at the helm all this time – until now. Glazer has passed the torch over to Michael Marrache, effective last week. He isn’t going too far, as the former chief executive will remain chairman of the board working alongside Marrache on the next chapter for the MCA and small business lending company. Meanwhile the executive pair points to a future not only where there is sustainability but where there is growth.
“We’ve obviously grown the company year after year over the last 15 years, and as with every other type of business and industry there were ebbs and flows. Over the last couple of years with a significant amount of challenges going on, we as a company decided we want to continue to grow but we want to grow in a way that benefits the company from a profitability standpoint as well as serves our customers,” said Glazer.
In April 2017, BFS Capital surpassed $1.5 billion in financings since inception. The company expects to fund more than $300 million in new financings in this calendar year.
“We’ll increase our reliance on algorithmic solutions, transparency in the ISO and customer experience and we will increase the number of financing solutions. Culture is significant for us and we will continue to build on the legacy Marc created,” said Marrache.
Marrache takes the reigns at a time when the industry is at a crossroads that will leave some alt lenders in the dust while other rise to the occasion.
“The stories that were challenging in 2016 look good in 2017,” said Marrache, pointing to OnDeck’s forthcoming profitability, Kabbage’s lofty valuation, CAN Capital’s return to funding, PayPal’s acquisition of Swift Financial and Prosper looking good.
“We think alternative and non-bank lending are in a good place. And yes, some of the folks that are no longer operating in this space were overextended or may have exhibited irrational behavior for pricing or customer acquisition costs. We think what we’re witnessing is the normal lifecycle of the industry. There were lots of participants earlier. Now to participate the industry must show a bit more control and sophistication. If you execute well, the tomorrows will be better than 2016,” said Marrache.
And according to Glazer, because of the changes in the business environment over the last couple of years, it’s going to require a different skillset to take BFS Capital to the next level.
“There are clear differences between starting a company, growing a company and becoming a billion-dollar small business financing platform. We’ve needed to evolve at each stage and now again with Michael’s leadership,” he said.
For Glazer, Marrache was almost always the succession plan.
“To be fair, hiring Michael four years ago, maybe succession planning was in the back of my mind somewhat. But as our relationship developed and as he was COO for three-plus years and then president, it became apparent that Michael’s skill set, passion, desire and how he looked at culture were all similar to myself. Let’s grow, but let’s watch our numbers. Make sure we treat people fairly. And for the businesses we are financing — provide thoughtful capital to help them versus creating problems for them,” said Glazer.
More Funding
BFS Capital’s business model is comprised both of MCAs and small business loans. Alternative funding company CAN Capital does both MCAs and loans and had to pause lending until recently. For BFS, however, it’s all systems go. And that means unequivocally continuing to fund small businesses.
“Absolutely, yes. And there’s no quizzicality in mind. I would say we are going to continue funding small businesses and fund more of them this year than we did last year. And we will fund even more the year after. So absolutely,” Marrache said.
BFS Capital sells through both ISOs and directly to merchants, the former of which is where most originations derive. “There are a number of solutions we are putting together to benefit that network,” said Marrache, adding he doesn’t believe algorithmic solutions will replace underwriters.
“We have a strong legacy of customer underwriting. We believe lower level transactions can be significantly more automated. Above a certain level and certain amounts of origination, we think algorithms and data solutions at that point are a facilitator, not a replacement of our underwriting,” Marrache said.
The Legacy
There was a time when BFS Capital’s growth plans included debuting in the public markets. Those plans have since been sidelined amid a chilly investor reception for alternative lender stocks.
“We spent a lot of effort in our filing,” said Glazer. “But at the end of the day, the market for the space had softened. Going forward I think it’s really going to be a question of what the markets look like and what makes sense for our company. We will evaluate that as the situation warrants.”
IPO or not, it appears Glazer’s legacy is still being written.
“I co-founded the company 15-plus years ago. Before finance and accounting, at heart, I’m an entrepreneur. That’s what I do, what I enjoy. I love starting companies, having the vision and creating things,” he said.
As chairman of the board and a major stakeholder, Glazer will continue to be active in BFS Capital.
The Scoop on iPayment’s MCA Renaissance
August 18, 2017
iPayment, a small business payment processing company, is placing a bet that it could be better the second time around in the MCA industry. iPayment Capital, which is scheduled to launch in the fall, is iPayment’s second foray into the merchant cash advance market. In conjunction with this expansion iPayment tapped Tomo Matsuo as senior vice president to spearhead iPayment Capital.
iPayment’s announcement comes on the heels of industry peers Square Capital’s Q2 loan origination of $318 million and PayPal’s acquisition of Swift Financial. Rather than remain on the sidelines, especially with access to data on some 137,000 small businesses, iPayment is making its move.
“Before Daily ACH loans and MCAs, we all started with the split payment MCA, and it’s exciting to see the recent renaissance of that mechanism with companies like Square and PayPal making it a key product feature. Transaction-based underwriting and variable payback schedules have become much more mainstream thanks to companies like Square and Amazon,” said Matsuo.
iPayment’s timing for getting back into MCAs is apparent but also coincides with the industry being held under a microscope for some questionable practices, not the least of which involves stacking, which can get small businesses in over their heads. Matsuo said the industry has a shared responsibility to fix this.
“I think there’s an opportunity for the industry to clean up some of the stacking and other practices. We all need to do more to better align ourselves with the needs and long-term health of the customers,” said Matsuo.
Meanwhile David O’Connell, senior analyst at Aite Group, offered his thoughts on the future role of MCA in small business funding: “Although we will always have merchant card advances in large volumes and these will be important to SMBs seeking funding, some of this volume will be replaced as the practices of alternative lenders become more entrenched: the provision of capital to an SMB based on a variety of data sets that achieve a fuller view of an SMB’s ability to repay only some of which is related to credit card volume.”
Balance Sheet Funder
Similar to its predecessor product iFunds, iPayment Capital will be a balance sheet MCA origination business. The company has the benefit of hindsight with iFunds, which was before Matsuo’s time there, as well as any missteps by the industry from which to pull.
“My job is to launch and build our own balance sheet MCA product, and we have a management team committed to the initiative,” said Matsuo. “iPayment is in a unique position because of our long history with the product — as a funder, split payment technology provider, and referral partner — and have a lot of experiences to build upon. There’s a great team at iPayment with a ton of institutional knowledge.”
iPayment’s access to customer data and insights certainly gives the company an edge. “It’s a crowded market going after a finite universe of customers. From a customer acquisition standpoint, iPayment has the benefit of having 137,000 customers,” said Matsuo.
iPayment also has solid industry partners including the likes of RapidAdvance with whom the company serves merchant customers. iPayment will continue to work with RapidAdvance and others on MCA. “We recently had the opportunity to strengthen our balance sheet, and we believe investing in iPayment Capital makes great business sense,” said Matsuo.
Matsuo pointed to opportunities within the smaller merchant segment for MCAs. iPayment Capital’s average funding size will be somewhere between Square Capital’s range of $6,000 – $7,000 and that of ACH alternative lenders at about $40,000. “We’ll be right in the middle,” he said.
Matsuo, a Bizfi alum, officially started in his new role on July 1, and he has no interest in looking in the rearview mirror. “At the end of the day, it comes down to pricing risk appropriately and maintaining proper controls,” said Matsuo, adding: “We all want to grow, but there are responsible ways of doing so.”
Go West, MCA Broker
August 16, 2017
If you check out the deBanked forum, one of the latest discussions originated from a self-described newbie business owner who wants to know, ‘What separates a successful ISO from the rest?’ The user, who calls himself jellyfish capital, asks the deBanked universe:
“I’m trying to figure out what the variables are that would dictate a successful brokerage/ISO vs. a shop that has a ton of turnaround and doesn’t make any money and ultimately ends up shutting its doors.”
The answer just might lie in the types of financial products the broker can sell.
MCA Broker Shift
Noah Grayson is managing director and founder of South End Capital, a commercial and investment residential real estate lender launched in 2009 that also started doing SBA loans and MCA consolidation loans in recent years to help out merchants with stacked MCA positions. Grayson pointed to a shift in the types of brokers signing up with the Encino, Calif-based lender.
“We’ve noticed a large number of brokers signing up with us are coming over from the MCA space. They’ve relayed to our staff that competition is too stiff to make enough money only originating MCAs, and they are looking for other avenues to bring in revenue,” Grayson said.
Indeed, South End Capital has seen an influx of brokers from the MCA industry gravitating their way. In fact, there has been more than a 10 percent spike year-to-date versus the same period last year in the number of brokers that discovered South End Capital through some form of Internet origin, such as deBanked, versus a targeted ad in a real estate related publication or through more traditional real estate origination means.
“What we’re hearing from our MCA industry referral partners is that their[customers] now want any option other than an MCA. These brokers are coming to us now because they are trying to evolve their businesses to stay afloat. Offering real estate or SBA loans has proved to be the next logical step for these brokers and it has provided a big bump to our business,” said Grayson.
As in any industry, making a career change can introduce unexpected challenges. A hurdle for the brokers, particularly as it relates to making the jump to commercial real estate lending, has been unrealistic expectations.
“Many MCA brokers have an expectation that real estate or SBA loans will work similarly to an [MCA], but it’s a more involved process. There’s more documentation and more moving parts to understand. There has been a big learning curve for a lot of these brokers — some have been willing to learn and are excited about the opportunity. However, many MCA brokers have proven extremely resistant to change and unable to adapt” noted Grayson.
There are hurdles facing the MCA industry, too.
Merchant Motivation
So what’s driving the shift? Small businesses, some of which are saddled with short-term obligations, have begun to realize that thanks to the rise of alternative lenders they have more options. Meanwhile unscrupulous collection agencies are throwing a monkey wrench into the situation, making it trickier for merchants to gain access to cash advances.
David Soleimani, CEO of LendFi Corp, said a major setback for the MCA industry has been the interference of collection companies convincing good paying merchants to default and cut their payments in half. By negotiating payments with a third party, merchants essentially become blacklisted from receiving any further MCAs.
LendFi senior account rep Jonathan Meyer specializes in cash advances, term loans, equipment leasing and lines of credit. He’s noticing a trend of more MCA brokers expanding their line of business in the last year.
“Companies are overextended [with cash advances.] It’s a problem,” said Meyer. “If everything is perfect, we can do a term loan or a line of credit if it falls under certain criteria.”
One small business came to LendFi’s Meyer recently and as a result saved himself a lot of cash. “I consolidated someone’s loan recently. I got him a term loan and saved him $14,000 a month. He had two loans at $110,000. I got him a term loan for $165,000 and he saved $14,000 a month. He was paying $22,000 per month,” said Meyer, adding that he also consolidated the payments from a daily to a monthly schedule. “That’s a huge savings,” he said.
For all of the twists and turns that may be up ahead for brokers and merchants alike, one thing seems clear. The MCA industry isn’t going anywhere.
“There will always be a [customer] whose only option is an MCA, and it has its benefits for many. For example, the only way to get business funding in one or two days is with an MCA. However, I think the reasons why someone would need an MCA are becoming fewer and fewer as other more viable financing options emerge,” said Grayson.
PayPal Scoops Up Swift Financial
August 10, 2017
Online lending M&A is under way. PayPal is bolstering its merchant lending capabilities with the addition of Swift Financial. While the deal was kept under wraps, some industry participants heard some buzz about a possible combination.
PayPal has been investing in its lending arm of late, evidenced by the addition of former Amazon executive Mark Britto as senior vice president and general manager of global credit in July.
Noah Grayson, South End Capital managing director and founder, weighed in on the deal.
“A merger of two industry leaders like this is not surprising. As the economy continues to improve and small business owners have access to more financing options, alternative business lenders are going to continue to consolidate to stave off competition, retain deal flow and secure profitability,” said Grayson.
Dave Girouard, founder and CEO at Upstart, a consumer lending platform that uses machine learning, reacted to the deal:
“I expect to see more consolidation in online lending across both consumer and small business in the next year. Platforms with either giant balance sheets or proprietary technology will likely stick around, but others will struggle to compete,” Girouard told deBanked.
Alternative lender LendUp was a recent recipient of a PayPal investment. Sasha Orloff, LendUp’s CEO, had this to say about the deal:
“I’m not surprised to see an acquisition in the fintech credit space and expect this will kick off a wave of acquisitions. PayPal is a force to be reckoned with and we have seen them lead the industry again and again. Whether it is the partner model like with Synchrony, the acquisition model like Swift, Braintree/Venmo, Xoom, or the investment model like LendUp, they are proving again and again why they are leading innovation in financial services decade after decade,” said Orloff.
Meanwhile don’t expect to see a PayPal/LendUp pairing anytime soon.
“For our part, we’re going after a very different market and we’re focused on driving consumer financial inclusion — and we’re very focused on remaining an independent company and helping companies like PayPal and banks offer better products for millennials and the emerging middle class,” Orloff added.
PayPal was already working with Swift on a white-label basis for one of its products, PayPal Business Loan, which is a term loan with structured repayments.
“Swift Financial offers complementary business financing solutions and advanced underwriting capabilities that accelerate our ability to acquire new merchant partners with business financing solutions and to deepen our relationships with existing merchants and channel distribution partners,” said Darrell Esch, VP and Commercial officer, Global Credit, PayPal, pointing to Swift’s advanced underwriting and product capabilities and seasoned management team.
Swift was launched just over a decade ago and has extended loans to 20,000-plus merchants.
Breslow: The Advantage Goes to Scale Players
August 8, 2017
OnDeck’s recent quarter answered a host of questions that surrounded the online lender, touching on everything from market share gains, to year-end profitability, to double-digit loan origination growth on the horizon. Another major growth driver that took the spotlight was the partnership between OnDeck and JPMorgan Chase, which has been cemented with expanded terms.
Noah Breslow, OnDeck’s CEO, told deBanked the partnership, which is bigger than any other relationship the online lender has formed, is firing on all cylinders.
“Ever since the product was introduced in April 2016 we’ve seen nice growth, incredible customer satisfaction and sound credit performance,” said Breslow.
In fact, the Chase partnership has been not only a flagship deal for OnDeck but very possibly the online lending community as a whole.
“We think it’s a harbinger of what’s to come in the space. Chase took a very forward thinking move a year and a half, two years ago when it decided to work with us to build a product,” said Breslow, adding that OnDeck remains in discussions with a number of large financial institutions about providing similar services and capabilities for online business lending.
The partnership, which started off as a pilot program between OnDeck and Chase, is a testament to JPMorgan’s commitment not only to OnDeck but also small business lending, which has taken it on the chin since the financial crisis. Under the new terms the relationship will continue for another four years.
“A whole segment of small businesses doesn’t want to borrow $5 million or $500,000. They want $50,000. The traditional bank lending process is not set up to make loans very efficiently,” said Breslow, pointing to the costs and time involved that cause banks to shy away from doing this.
OnDeck uses a score, dubbed the OnDeck score, that Breslow likens to a FICO score for small businesses. “The OnDeck score is built for our population. It looks at cash flow, personal and business credit, the industry and geography of the business, other debt, taking a holistic view of performance of the business than only FICO and cash flow,” he said.
JPMorgan Chase sets how much risk they want to take or not take with the loans they issue on the OnDeck platform, leveraging both their own data as well as data OnDeck has collected over the past decade of lending. Chase’s small business lending program remains invite-only.
“Small business owners will receive an email or phone call or some other form of solicitation, and then they can come to the website and get approved. We think over the next couple of years Chase will expand the scope of the program, but we’re not talking about how and when they are going to do that,” Breslow said.
OnDeck has taken a series of steps to strengthen the company’s balance sheet in recent months, not the least of which has been to tighten lending standards, which admittedly led to lower loan originations in Q2. Nonetheless the company expects to rebound with double-digit growth in loan originations in 2018, albeit off a low base.
OnDeck has largely completed a cost reduction plan that was started in 1H2017 and essentially removed $45 million in annual expenses from its P&L. “That was a lot of work to take on in a short period of time. We went heads down and got through it. In conjunction with that we rationalized our credit policy and our credit standards to be more conservative to reduce loss rates. The combination of those two moves set the business up to be profitable at the end of the year,” said Breslow.
These steps are resonating with institutional investors, including Mario Cibelli, managing partner at Marathon Partners Equity Management, which has an investment in OnDeck. He characterized the Chase extension as “good stuff.” “I think they had a solid quarter. They’re following through on some of their promises and I’m continuing to monitor our investment,” Cibelli said.
While OnDeck appears to be out of the woods, Breslow shared his perception of the industry.
“The advantages of online lending go to market leaders and scale players. Some folks with lower levels of scale can’t get credit performance right and don’t have enough capital to build out their business,” said Breslow.
With the expanded JPMorgan Chase relationship, gaining scale is on the horizon while some of the hard times appear to be in the rear-view mirror.
“The nice thing is we’re focused on growth again. The message we wanted to communicate yesterday is that we have all the capital we need to lend after the progress we made in the past year. We refinanced $850 million in credit facilities or added new credit facilities. So we have a great balance sheet that’s healthier than it’s ever been from a capital perspective. Now it’s about growing responsibly and profitably as we head into 2018,” said Breslow.
Funding Circle’s Hodges Talks $250 Billion Opportunity
August 3, 2017
Funding Circle, a marketplace that matches small businesses with lenders, broke a new barrier in the first half of 2017 with an 80 percent spike in global lending by about GBP 800 million. The U.S. marketplace lending arm, which was merged with UK-based Funding Circle in 2013, has experienced rising momentum over the same period.
Sam Hodges, Funding Circle co-founder and U.S. managing director, told deBanked that small business lending remains an underserved and untapped market, attaching a USD 250 billion value on the annual lending opportunity.
“I co-founded Funding Circle in the U.S. after experiencing firsthand how hard it is for established, successful businesses to access financing from the traditional banking system. The traditional banking system is broken and restricted by legacy issues, and most banks don’t view smaller-ticket commercial lending as their bread and butter.”
Since 2010, when Funding Circle was launched, investors including 60,000-plus individuals, financial institutions and the UK government have poured more than USD 4 billion into 32,000 businesses globally.
Currently the Funding Circle U.S. platform is only open to accredited and institutional investors. “Over time, we would love to offer this investment product to anyone in the U.S.,” said Hodges.
He further explained that Funding Circle marketplace enables investors to diversify their fixed-income portfolios with secured business term loans. All of the loans on the Funding Circle platform are pre-screened with a risk-rating and coupon rate attached, ranging from 4.99 percent to 27.79 percent, by seasoned credit professionals using proprietary data analytics.
“While there will always be some risk attached to any type of investing, Funding Circle concentrates on providing loans to established businesses that have operating history, cash flow and a strategic plan for growth,” said Hodges.
Main Street USA
Funding Circle borrowers have typically been in business for around a decade and generate annual revenue of $2 million with a staff of about 10 people. One key differentiator from the likes of industry giant Amazon Lending is that borrowers on the Funding Circle platform could be brick and mortar shops.
“Amazon is an impressive organization, but what we’re doing is different in a variety of ways. Where they are focused on helping merchants that sell on their marketplace, our borrowers include restaurateurs, gas stations, medical clinics, construction firms, IT consultants and more,” said Hodges.
He went on to describe Funding Circle borrowers: “Walk down Main Street in any American town, and you’ll see examples of our borrowers. These are established businesses who have been underserved by the traditional financial sector — they have assets and cash flow to secure loans, and a legitimate plan for growth. We actually have many borrowers who choose our loans over a traditional bank loan, because they are faster and easier.”
Full Circle
Funding Circle started off the year with a bang, having raised USD 100 million in equity capital to help accelerate growth not only in the U.S. but also the UK and continental Europe. Meanwhile the startup continues to invest heavily in technology and talent.
“We are focused on building a world-class technology platform that can handle millions of transactions daily and deliver a best-in-class customer experience for borrowers and investors,” Hodges told deBanked.
Along those lines, Funding Circle recently bolstered its executive team both stateside and globally, including the recent addition of Sean Glithero as CFO, who is to be based in London when he begins in his new role this fall.
“Sean shares our enthusiasm for building a better financial world by revolutionizing the financial system and securing a better deal for everyone. Sean’s record at Auto Trader, helping drive strong profit growth and shaping a digital marketplace into a dominant position, makes him ideally suited for this role,” Hodges said.
Meanwhile the U.S. executive team is also expanding, evidenced by the recent additions of Joanna Karger as U.S. Head of Capital Markets and Richard Stephenson, who joined as U.S. Chief Compliance Officer.
He is taking the reins of a balance sheet whose UK business achieved profitability in the first half of 2017. “Here in the U.S. we are doing quite well and continue to invest in growth” concluded Hodges.
As Some Alternative Lenders Stumble, Lendio Surpasses New Milestone
July 27, 2017
Salt Lake City-based Fintech startup Lendio has surpassed the $500 million threshold for loans originated to U.S. small businesses through its online marketplace. Lendio has been on a tear, evidenced by the fact that much of that amount, or $453 million, was done in the past two years.
The loans were distributed to 21,000-small businesses, including a combination of new customers and repeat business, and are a reflection of a few different catalysts.
Lendio CEO and founder Brock Blake told deBanked the drivers of Lendio’s growth are three-pronged, pointing to a strong economy, greater awareness of the Lendio brand and good partnerships.
“There’s never been a better time for small businesses to access capital. There are plenty of options out there. The economy is strong and healthy. Economic indicators suggest business owners are optimistic. They’re looking to get capital for growth,” he said.
Meanwhile awareness of the Lendio brand is on the rise.
“We see that on all of our metrics. People are finding us organically online, searching the name Lendio. We have a huge amount of customer referrals from existing customers. And a lot of repeat business. Our customers are coming back to us every three quarters, on average,” said Blake.
Lendio has become more ubiquitous thanks in part to some major partnership deals, the third leg of the growth stool. For instance, the small business lending startup has inked partnerships with the likes of Comcast, GoDaddy and Staples. This helps the company to compete with the likes of Amazon.
‘All of those partners have a base of small business owners that they then refer to Lendio. They say, ‘if you need financing, here you go. Here’s Staples powered by Lendio. Or Comcast powered by Lendio,’” explained Blake
And that pipeline is filling quickly.
‘We definitely have some really exciting partner deals in the works. I can’t mention names but there are at least three more big names that we’re working on, that we’re excited about,” said Blake.
Tech Platform
Lendio puts the tech in fintech by developing the technology infrastructure that facilitates the loan process, both for the small business owner and the lender. The lending process is similar to LendingTree for personal loans with some notable differences to the customer experience.
Instead of selling off a borrower’s information to lenders, Lendio assigns a funding manager to work with both the borrowers and the lenders. Once the small business owner fills out the application, Lendio then goes to work. The Lendio marketplace is comprised of around 75 different lenders.
“We pull credit. We connect with the credit bureaus. We pull bank statements. We connect with Google Local. We build the technology that has hooks into all borrower data and the lender underwriting engines. We’re trying to marry those two and make it a good experience for both sides,” explained Blake.
Lendio submits the information to three-to-five lenders that will provide the best loan options for that business owner. The lenders then decide whether they choose to underwrite the loan or decline.
“We go to the customer and say we have compiled three offers. Here’s the rate, etc. We present it in a way that they have a choice and they are in the driver’s seat. They work with one group and that’s Lendio. We do all the work,” said Blake.
The process is free to small business owners. Lendio generates revenue at the time the loan closes. “Lenders pay us an origination fee,” Blake explained, adding that the average loan size on the Lendio platform is $26,000. “We do loans as small as a couple thousand dollars and as high as $3 million. But most business owners don’t need a few million,” he said.
The Utah Connection
Utah has been coming up in the headlines a lot lately, mostly due to the fact that a couple of fintech lenders have applied for bank charters in the state. For Lendio, The Beehive State happens to be where Blake calls home.
“Utah isn’t necessarily the place to go and attract huge amounts of small business owners from a population standpoint. But from an economic and business perspective, it is a great state to do business in, very entrepreneurial. That’s the reason why bank charters set up shop here in Utah. It’s very business friendly. And the economy is extremely healthy,” said Blake, adding that the mountains and the skiing are great selling points for attracting top fintech talent everywhere from Silicon Valley to Chicago.
Future Growth
Lendio is a private company, and while Blake would not cross an IPO off of his list he wouldn’t say it’s something the fintech startup is pursuing right now.
“We’ve got an aggressive growth plan and we’ve got a strategy for how to execute and make it happen. We’re heads down to build a great business and see what the future holds for us as far as going public. But it’s not on our radar now,” said Blake.
Becoming a Bank – Varo Articulates the Leap from Fintech to Banking
July 26, 2017
Varo Money wants to become Varo Bank. The completely mobile-app driven fintech startup already lets customers juggle financial tasks with the touch of a button but now they want to make it official.
Varo has applied for a full national bank charter with the bank’s headquarters in Utah in hopes of becoming a national bank. Varo is the second fintech startup to apply for a bank charter in as many months, with the SoFi application still pending, though there are key differences to the design of each application.
Colin Walsh, co-founder and CEO of Varo Money, took some time to discuss the bank charter application with deBanked, offering his take on how the future of banking is moving toward mobile and reviving the banker relationship, which has gotten lost along the way.
deBanked: Why a bank charter and why now?
Walsh: We founded Varo with a specific vision: to be an indispensable financial guide for customers, with a full suite of banking and financial products. Our founding intention was to create a bank that made it easier and more affordable to manage money. We’ve been in conversations with the regulators for a number of months, and we completed the “pre-application” process. In the past year the regulators’ openness to new de-novo bank charter applications has shifted.
deBanked: Was SoFi’s recent move to similarly apply for a bank charter any inspiration for you?
Walsh: SoFi’s filing did not affect our process; we’ve been in conversations with regulators for months (see above answer). In addition, SoFi applied for a different type of charter than we did. They applied for a state-chartered ILC, which tend to be used by subsidiaries of companies whose primary business is not banking. We applied for a national bank charter to become a full-service national bank.
deBanked: Have you faced any backlash since applying for the bank charter?
Walsh: Not so far. Varo was founded to make it easier and more affordable for customers to manage their money and improve people’s financial lives. We believe that integrating traditional bank products with modern technology (predictive analytics, contextual alerts/notifications, auto-savings, visualizations) is the best way to achieve this outcome. While it brings a new breed of competition, we believe it is the future of banking and is ultimately in the best interest of consumers.
deBanked: Is Varo 100% smartphone banking? For iOS and Android? What type of growth are you experiencing?
Walsh: We also offer service through Interactive Voice Response and phone. We pushed our iOS app into the Apple App store [in] mid-June and are already experiencing very strong demand.
deBanked: Does Varo issue loans and are they from your balance sheet?
Walsh: Yes and yes. Varo makes unsecured loans to customers in states where we have lending licenses.
deBanked: You come from traditional banking, correct? What do you think of this shift toward online and now mobile banking/lending? Are traditional banks going to be left behind?
Walsh: That is correct, I spent 25 years with traditional banking and financial services companies. 92% of all adults ages 18-36 own a smartphone, and modern technology opens up the possibility of a personal banker in your pocket. The game is changing. Banking used to be a relationship business — but most banks have gotten too big to help the bulk of their customers solve everyday problems and get ahead.
Many incumbent banks aren’t able to make the technological changes that customers of the future will demand. Instead of making step-changes to their technologies, they continue to iterate on the same products and channels that serve the same customers in silos, without imagining what the future of banking could look like.
Varo will be the first entrant to truly challenge the existing banking model. Varo combines proprietary technology and integrated financial solutions to bring relationships back to banking for everyone, all on your phone. Varo is a bank designed around solving financial problems, not pushing products. There’s room for everyone, it’s a very big market, but Varo aims to raise the bar for what consumers should expect from their banks.
deBanked: Do you work with any bank partners?
Walsh: Yes, we have great partnerships with The Bancorp Bank, who serves as our sponsor bank for Varo Money’s current business, and Silicon Valley Bank, where we have our main bank account and a venture debt facility.
deBanked: Are consumers ready to make the shift to 100% mobile banking?
Walsh: We’ve seen that many customers are willing and ready to make the shift. Varo’s vision is that everyone deserves a personal banker in their pocket. Access to financial guidance should be instant when a customer needs it and not bother them when they don’t. We want to reduce stress through financial empowerment so that our customers can fulfill their ambitions, stop worrying and go live their lives.
Just like Amazon disrupted retail by providing instant shopping in a customer’s hand, banking in the future (and even today) doesn’t have to be about geographic coverage anymore. We believe that the future of banking is about providing an on-demand solution that gets customers from A → B with minimal friction and maximum delight. Once customers experience how easy and affordable Varo is, traditional banks seem outdated. Trust, safety, and security are requirements for our business that we take very seriously.
