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 AltFinanceDaily, 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.
AltFinanceDaily: 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.
AltFinanceDaily: 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.
AltFinanceDaily: 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.
AltFinanceDaily: 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.
AltFinanceDaily: 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.
AltFinanceDaily: 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.
AltFinanceDaily: 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.
AltFinanceDaily: 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.
JP Morgan Opens Doors for Startups. Literally.
June 30, 2016
JP Morgan is luring fintech startups by dangling a key card to its doors.
The bank plans to start an “in-residence” program for startups on the block who show potential to ‘disrupt’ and solve problems in areas of automation, blockchain and analytics.
The online program will give chosen startups access to JP Morgan’s systems and network to work on common problems in the bespoke areas of technology. The New York-based banking behemoth has been beefing up its tech arm and has invested nearly $3 billion towards new investments. It has been asserting its presence on the fintech block with the launch of a Venmo-like real time payment service.
Earlier this year, it hired former economic advisor to President Obama, Seth Wheeler to lead its fintech and innovation strategy.
Filling The Funding Gap for Canadian Borrowers
March 5, 2023
“Generally, capital availability is usually stronger in the U.S., but I would say Canadian businesses are definitely less serviced when it comes to options to be able to access capital,” said Cato Pastoll, Founder and CEO at Loop. “There’s just kind of less services or less products out there for companies so that definitely means that there’s going to be more demand for loan related products.”
One of the lingering challenges in Canada is that the big banks tend to hoard the data that would be valuable to fintechs to service more borrowers, hence the recurring call for open banking.
“If you’re a fintech and you don’t have access to that information, you have to figure out a way to access it from the banks that do hold it,” said Tal Schwartz, Senior Product Manager at Nomis Solutions and Writer at Canadian Fintech. What’s happened as a result is that a whole cottage industry has formed to figure out ways to relay data without APIs.
Cato Pastoll’s company, Loop, is among those that have come up with clever solutions to service Canadian customers. For example, Loop can help Canadian-based companies obtain loans in U.S. dollars to help them grow while also offering other services like expense management tools and cross-border payments.
“A lot of businesses have a hard time getting financing from the bank,” Pastoll Said, “so there’s definitely a few players that do provide different products to help companies be able to access growth capital, working capital, and many of them have been around as long as we have for the last five to ten years or so.”
“So, things that can probably improve in Canada are all related to competition, law, and kind of creating a more equal playing ground between banks and fintechs,” said Schwartz. Although those initiatives seem to be trending in the right direction, it’s been a very a slow march forward.
Canadian Lenders Summit a Real Bright Spot in Challenging Times
November 17, 2022
When the Canadian Lenders Association last convened for its summit in 2019, the organization had only 75 members. Today, its membership is approaching 300. Most people I spoke with attributed the rapid growth of membership to the tireless efforts of CLA co-founder and President Gary Schwartz. That achievement was also visually evident on Wednesday when more than 500 attendees literally packed into the MaRS building in Downtown Toronto for the first return to in-person since all those years ago.
The excitement of being back together was bittersweet in that there was collective acknowledgment that the economic climate had become less than favorable. For example, the opening session of the entire day was aptly named Raising in a Downturn. However, the discussion itself was much more optimistic. Neil Wechsler, CEO of OnDeck Canada, for example, talked about the benefits of having operated their business “underleveraged and overcapitalized” to be prepared for times such as this while numerous sidebar conversations suggested that startup fundraising was still very active. Expansion was also top of mind for many with several companies revealing that they had just set up shop in Canada from abroad or that they had expanded their home-grown Canadian business into other markets like the US. 
Predictions for what’s to come were all over the place but few, if any, expressed any real fear (except for the mortgage people). Attendees came to the summit to do business, grow, and to partake in the annual ritual of lamenting the slow adoption of open banking.
The banks, meanwhile, are also warming to fintech (finally) and had ample representation at the event. Innovations in concepts like loan insurance and collections technology also stood out. Seating during the sessions were always completely full throughout the day and overall it was a major success. Despite whatever happens next, I would anticipate that the CLA would probably graduate to an even larger venue next year as the organization grows in importance.
Why is Canadian Fintech Sizzling?
March 1, 2022
Downtown MontrealIn recent weeks, Canadian fintech companies have made major splashes in the world market. In the sphere of acquisitions, lending, funding, products and even digital assets, multiple Canadian cities and the companies that call them home have gained a reputation for being a focal point in fintech progression. Cities like Vancouver, Toronto, and Montreal have become start-up hotspots for companies looking to ride the wave of Canadian financial innovation.
In the country’s most internationally impacting financial move, Montreal-based payments company Mobeewave’s acquisition by Apple is set to come to fruition, as the company is about to take their phone-to-POS mobile merchant terminal live around the world. Apple acquired Mobeewave last year for $100M and will use the company’s technology to allow merchants and customers to conduct payment transactions by touching phones.
Other companies of note are Hopper, the Montreal-based mobile travel agency that is embedding ‘travel fintech’ into their products. Things like insurance, price drop guarantees, and price freezing are now offered on the Hopper app, which is now valued over $5B after an influx of capital from Brookfield Asset Management.
BNPL giant Klarna has also made moves in the north, opening offices in both British Columbia and Quebec in an attempt to further their expansion into the Canadian market. In a recent interview, the company’s CEO said their research had found at least half of Canadian shoppers were a prime contender to get the best out of Klarna’s services.
So this all begs the question- Why is Canada so ripe for fintech?
“We’re a fast growing market with a strong immigration policy, cheaper technical talent, and strong government hiring incentives,” said Tal Schwartz, Senior Product Manager at Nomis Solutions. “Secondly, we’ve been successful at ‘Canadianizing’ global solutions. For example Brex and Ramp have no client presence here, but Caary and Float have successfully built homegrown solutions that fill a local need.”
Schwartz spoke further on Canadian companies putting their own improvements on established products, making ‘Canadianized’ versions of fintech products and ideas. “Revolut tried entering Canada with little success,” said Schwartz. “Now two years later Koho, Wealthsimple and Neo have cornered the digital banking market from within.”
Even Canada’s legacy financial institutions have been challenged by fintech, as the nation with the notorious ‘Big Five Banks’ has seen neobanks creeping towards the top as the highest used, as the neobank dubbed Equitable Bank is now Canada’s 7th largest after acquiring Saskatoon-based Concentra Bank earlier this month. Equitable has newly grown its mortgage portfolio thanks to its partnership with Canadian fintech Nesto, a mortgage broker marketplace. The move also gives Equitable a footing in the credit union space, as Concentra provides treasury and trust services to over 200 credit unions in Canada.
Even the metaverse has taken interest in what Canadian finance can offer it. Terra Zero, a Canadian metaverse real estate platform is now offering mortgages on Decentraland for those looking to purchase property in the trendiest space on the internet.
Canadian finance has made a big leap since a year ago. Pandemic-induced restrictions decimated the country’s financial fortitude, and international competition has never been more intense. Like Schwartz mentioned, it’s the ability for Canadian companies to innovate the innovators, using ideas stemming from other products to “Canadify’ fintech, that has surpassed their industry past the point of survival.
“I think Canadian fintech is hot right now because in Canada, we don’t have the alphabet-soup-level of federal bodies as the U.S. does, primarily leaving enforcement to smaller, more personal, more flexible provincial organizations,” said Nick Chandi, CEO of Forward AI, a Vancouver-based fintech. “In addition, Canada is set on Open Banking, with the Advisory Committee’s final report published in August 2021 and follow-up survey showing that the majority of the Canadian financial services industry wants to move ahead on implementing open banking in Canada ASAP.”
On top of financial friendly politics, Chandi believes it’s Canada’s concise population centers that breed collaboration and innovation. “It’s also a smaller community,” Chandi said. “With most fintech workers living in one of a few key cities, it’s easy to network and make things happen.”
Canadian Lending Looks Strong Post-Pandemic
January 11, 2022
After having their entire industry threatened by pandemic-induced restrictions, the Canadian alternative finance space has started 2022 off with a bang. Canadian lending saw billions in growth, as the industry hopes to utilize fintech’s technology and the government’s new take on open banking to bring their industry back to full swing.
“Main Street small business recovery is looking very strong for 2022 as restrictions ease moving into the warmer weather,” said Tal Schwartz, Senior Advisor for the Canadian Lenders Association. “However, in the short term, lenders are paying close attention to the Omicron variant, and particularly how aggressive the federal government is prepared to be in terms of sustained subsidies.”
Despite the uncertainty of the next several months, Canadian finance seems to have a healthy balance of offering modern financial products alongside an effort a return to normalcy. The crypto-lender Ledn raised $70M USD for the world’s first crypto-secured mortgage product, while the BNPL company Flexiti received a $527M facility from the National Bank of Canada. Merchant Growth, a small business lender, also raised $4m in equity financing.
According to Schwartz, most lenders who stayed in business used the last year to deeply invest in their technology across the board.
“[Lenders] have equally repositioned themselves in ways that better service a post-pandemic SMB clientele,” he said. “There is significant effort among lenders to evolve into financial health dashboards of a business, rather than being viewed exclusively as a financing source.”
According to the numbers, there has been significant growth by two notable Canadian lenders that are acting both as a financial management tool and a lending source. Canada’s largest subprime lender goeast Ltd, and Borrowell, a mobile loan marketplace, achieved $2B in portfolios and 2M users respectively to end the year.
“Fintech platforms become more sticky and can capture more client data if they become a hub for business management, with financing simply being a component of their platform,” said Schwartz. “Fintech lenders are coming out of the pandemic much stronger and with a sharper mandate than before.”
Iwoca Brings Flexible Repayment Loan Product to Funding Xchange
September 3, 2021
Iwoca, a UK-based small business lender, announced Wednesday that it will be launching a new flexible loan product for online sellers through Funding Xchange. According to Iwoca, they will be the first lender in the UK using “open banking” for revenue-based payments to online businesses on the marketplace.
Small businesses in the UK operating in e-commerce can now apply for revenue-based financing between £1,000- £50,001 through Funding Xchange’s website. The loans will have monthly payments based on the borrower’s revenue, but will also allow businesses to choose repayment options that are based upon their daily ups and downs, allowing the borrower different payment amounts during times of slow business, seasonal disruptions, or other factors that may cause business to halt during certain times of the year.
“Our vision is to provide finance to SMEs when, where and how they need it. We are transforming small business lending through product innovation powered by technology, combined with creative distribution partnerships,” said Christoph Rieche, co-founder and CEO of Iwoca in a company release.
Iwoca has a history of being on the front line of innovation in lending, as they claim to be the first UK company to provide instant credit decisions with Amazon and eBay sellers. The company also claims to be the first company to offer a lending API in their services, while also taking credit for being the first SME lender to connect the 9 largest banks in the UK with open banking.
“Iwoca and Funding XChange are leaders in the use of intelligent technology to make SME funding more accessible, more affordable and more sustainable. By transforming the credit-assessment and cost-to-serve, we deliver targeted, self-serve propositions to underserved segments,” said Katrin Herring, CEO of Funding Xchange in the same release. “Given the challenges that the crisis has created for small businesses, this partnership is delivering critical access to finance to help businesses rebuild and flourish.”
How to Think About Credit Invisibility
July 29, 2021Authored by:
Lily Cook, Researcher at Canadian Lenders Association
Tal Schwartz, Senior Advisor at Canadian Lenders Association
Recent research by PERC has highlighted the issue of credit invisibility in Canada, defined as “persons with either no account payment history in their credit report (referred to as “no files”) or fewer than three accounts in their credit report (referred to as “thin files);”
In Canada, credit scores are calculated using payment history, outstanding debt, credit account history, recent inquiries and types of credit. However, according to research from Cornerstone Advisors, the ‘on-ramps’ to being credit visible are limited and come with challenges. The most common paths are:
- Credit cards:
- Collections: Collections as a point of entry into a credit system immediately sets the consumer at a disadvantage, since the first thing to identify them is a negative characteristic.
In general, Canadians under 25 tend to use credit cards at far lower rates. Those in that age group who do have a credit history have the highest percentage of credit scores below 520, according to Equifax Canada.
The rate and impact of credit invisibility in Canada is significant:
- 35.3% of Canadians are credit invisible vs. 19.3% in the US.
- the issue disproportionately affects immigrants, minority communities or younger individuals.
How are fintechs addressing this?
1. Access to alternative data
Canadian data aggregators provide lenders with access to non-traditional credit information that advanced firms can apply ML to in order to better adjudicate credit.
- Open banking data providers like Flinks and Inverite provide consumer transaction history information that allows fintech lenders to underwrite credit invisibles based on their cash flow instead of their credit score.
- Commercial data providers like Forward AI, Boss and Railz pull financial data from accounting systems, payroll, and point of sale terminals in order to give lenders a more fulsome picture of a businesses health.
2. Make alternative data mainstream
PERC Canada recommended that the CFPB explicitly include non-financial institutions in their definition of a ‘creditor’ in order to report positive payment data to credit bureaus. Credit reports that could ‘reward’ customers for paying telecommunications bills on time, for example, could make the credit system more forgiving in the future.
- Billi, for example, a Canadian fintech allows users to integrate on-time payments for their Amazon Prime and Netflix accounts into their credit reports in order to improve them.
Canadian credit bureaus have also taken active steps to being more inclusive of alternative data. A prime (no pun intended) example is Landlord Credit Bureau’s (LCB) and Equifax’s partnership to allow rent payments to count towards credit scores.
- Both as a way to reduce risk for landlords and give tenants a leg up in the market, this shared use of alternative data is “ninety-plus per cent….positive in nature, so overwhelmingly landlords use this to reward tenants,” LCB’s CEO, Zachary Killam said.
3. Create a better on ramp to credit building
Credit building loans can unlock credit for those with minimal histories or challenging track records. These are installment loans that only pay out once the customer has paid them off, and are offered by fintechs like as Spring, Marble and Refresh.
Essentially reverse loans, the reverse structure protects the lender, in the event that the customer doesn’t make all their payments. Over the course of the loan term, the customer’s payments are reported to the credit bureaus. Borrowell, which recently acquired Refresh’s credit building loan portfolio, is now one of the largest providers of this service in Canada.
So what’s the solution?
In order to drive meaningful change on the issue of credit invisibility, fintechs must continue to enable lenders to challenge the limitations of the credit system – by improving access to alternative data, normalizing its use and building better on-ramps to the credit system than collections and credit cards.
Credit invisibility is caused largely by structural issues within Canada’s data markets, but fintechs are starting to fill these gaps.
