Varo Bank could run out of funds by year-end | Hacker News Reader

Varo Bank could run out of funds by year-end

bankingdive.com

58 pointsaruanavekar89 comments

> “We remain very well capitalized and have sufficient capital to reach profitability, without having to raise additional capital,” Walsh said.

Fun aside: when I was a trader following the financial crisis, we'd play a parlor game counting the number of times a bank said "capital" in press release and on earnings calls. The more times, the more fucked. This sentence would have been a winner.

Same with “strategic” on slides at a hedge fund.

In the immortal words of the character Mark Baum (based on Steve Eisman) in "The Big Short":

"That's hilarious".

I am referencing the scene when he meets the CDO manager, and he said this with the utmost sarcasm. A great scene, based on true events, in a great movie.

Wow, they raised 500 million at a 2.5 billion valuation, but now has their value estimated by some analysts at 450 million. And that's with a not-too-shabby quarterly revenue of 22 million. This highlights what a terrible position unprofitable companies that rely on funding are in right now in this market.

There are many ways to value a company. The 450 million valuation comes from just considering revenue. Every fast-growing company looks terrible by that measure.

> 450 million valuation comes from just considering revenue. Every fast-growing company looks terrible by that measure.

Looking at only revenue is usually criticized for being too generous. What other factors should be considered in this case?

(That said, a 10x multiple is more conventional for fintech. That clocks them around $900mm.)

It's never been clear to me what advantage these totally virtual banks have over an account at a local bank or credit union with a real local brick and mortar presence and real people who can help you face-to-face with any issues.

> what advantage these totally virtual banks have over an account at a local bank or credit union with a real local brick and mortar presence and real people who can help you face-to-face with any issues

From what I can tell, neobanks are the Robinhoods of banking. They target users willing to trade off real features for a cute interface. I don't get it, because I like money and competence. But I suppose I see the niche. There are domains of my life in which I too will pay a premium for aesthetics, even at the expense of functionality.

(I bank with Fidelity. They're great. I've never been into their physical locations, though I suppose they exist.)

There is a physical Fidelity location next to the Kendall/MIT T stop in Cambridge. I've been there; the person I dealt with was competent and pleasant.

As a long time customer, I was invited into the Backblaze IPO. Fidelity was the broker I had to go with. They made me physically come into a branch and fill out paperwork in order to open an account.

They offer better rates and lower fees, that's why they are popular. Their cost of operation is lower than a traditional bank (no physical locations) and they normally pass a big portion of that saving on the costumers. In my region web-only banks are the only ones who can offer accounts with 0 fees, no transaction limits and their saving account interest rates are always higher (irrelevant these days).

> offer better rates and lower fees, that's why they are popular

Sorry for being unclear, I was comparing neobanks with other online banks. The advantage over those with brick-and-mortar locations is clear. Apart from the subprime market, which American neobanks have targeted and who may have trouble accessing higher-aiming online banks, I don't see the pitch.

They don't have to pay for brick and mortar presence.

In most cases, virtual banks:

- Do not require minimums (something that until recently was standard practice across all major banks)

- Offer products that help customers through cashflow issues (Example: Chime's SpotMe feature)

- allow you to create a bank account in a matter of minutes regardless of your geography (atleast in the States)

- Offer a network of ATMs that you can withdraw money from (again w/o a fee)

- Provide a digital product experience that isn't a series of compromises due to having to work w/ legacy systems (unlike most established banks or credit unions)

- Many banks have very low minimums on their lower accounts.

- I'm not familiar with SpotMe specifically, but this seems like a credit card with extra steps and less security, depending on the exact implementation

- I can do this for new accounts at my current bank, and in 10-15 minutes at a new bank

- Most banks (admittedly not for lower level accounts) will reimburse ATM fees.

- No argument with me on this one, consumer bank tech is some of the worst out there

> - Most banks (admittedly not for lower level accounts) will reimburse ATM fees. > - very low [ie non zero] minimums on their lower accounts. > - No argument with me on this one, consumer bank tech is some of the worst out there

Not sure if this comment was attempting to refute it's parent but it doesn't sound like a very strong argument when most of your points support the parent

You seem to be banked, and unware how it is to be non-banked or marginally banked, which is the target customers those neobanks in the US

I don't understand what a bank does that requires a physical presence. I have only used small banks in the last 30 years, so that I can reach someone on the phone, but that doesn't mean I have to go in person; I never visited my current bank in person. My kid joined a credit union in a city he's never visited and is unlikely to.

For shops, it's different: it's convenient to be able to pick something up immediately; visiting in person often makes comparisons better; and some things have to be seen in person to buy (fresh groceries, for example, or most books). Occasionally shopping can even be fun (bookshops). But none of those apply to banks.

The only time I've been in a real bank in the past 10 years was when I've needed a cashier's check, or a medallion signature for transferring brokerage accounts.

How do you withdraw $500,000 from a virtual bank with no branches?

Is that the use case you should optimize for?

If you must use other bank to cash your money, then your virtual bank is not enough and stands on others. Your dollar is worth slightly less if deposited in such a virtual bank.

Check, ACH, wire transfer...

I mean, yeah, you're not going to be able to get $500,000 in cash, but that would be a very rare thing anyway.

Edit: and if you show up at your local bank branch and ask for $500,000 in cash on the spot, they probably will not be able to give it to you anyway. You'll have to give them a couple of day's notice, at least.

I think the person asking for $500k in unmarked bills probably doesn't want an electronic record of where they are sending the money.

Except that $500k withdrawal is definitely going to draw some attention all on its own.

Suspicious Activity Report. The bank is going to file paperwork which in the US goes to a Federal agency responsible for figuring out what people are doing, some of it might be innocent (e.g. withdrawing $500 000 and putting it in a safe under your bed is a bad idea but not illegal) but much is not.

There is zero chance a normal bank branch will give someone $500k in physical cash with no notice. Even with advance notice I suspect many branches would simply refuse. Most bank locations don't keep all that much cash on hand and don't really want to deal with it more than they have to.

Cashier's check, bank transfer, or wire.

you wire the money. I have done it many times.

I see not being able to withdraw $500k cash as a feature

Have you ever tried to withdraw more than 10k from a bank? You have to call ahead and schedule it to the minute. Banks really don’t like to have a lot of cash on hand. I suspect you don’t actually want to have that much cash on hand either. It should go straight from one bank to another.

Have you never had to get cash?

> Have you never had to get cash?

Most online banks reimburse ATM fees. So every ATM becomes your ATM. Which I find more convenient than having to search for branded ATMs.

Actually, no. Now, that I think about it I have not been to an ATM in two years (since before Covid).

Everyone takes Zelle, CashApp, Paypal, Venmo these days.

They still love cash in a lot of European countries. Hell even most barber's / kebab shops in London won't take card in my experience, and I've had the odd embarrassing experience when I've brought food then the banks network was down and I couldn't pay (though they were surprisingly understanding and just told me to come back in a few hours and try again)

With the advent of JustEat etc. practically all the London kebab shops that aren't specifically money laundering fronts are now taking card.

Anecdotally, I can go for months without withdrawing cash.

I use an ATM 2 or 3 times per year anymore. My wife hasn't been to one in years probably.

Not in the last 5 years. The only cash I ever have on hand is from dropping off my recycling.

Have you never heard of ATMs? I get cash from ATMs. I'm not typically getting cash when the bank is open anyways and it's (basically) the only way to obtain cash when overseas.

I only visit an ATM a couple times a year but there's no reason I couldn't go every couple days if I used mostly cash.

To dispense the folding stuff, which I prefer for privacy reasons.

Also one day there will be be a power cut of various size and duration and you digital wallet will become nothing.

We're getting too trusting of tech.

That doesn't require an entire bank. An ATM can dispense cash. Depending on what deals your online bank has, you can probably find a fee free ATM near you even if it isn't an ATM for your bank.

Sure, at some point the ATMs may all get disconnected. But if that happens, your local branch may also be disconnected, so even if you go in person, you still won't be able to access your account.

I guess the ATMs don't have to be yours to be used by you (although if law does not require sharing I would expect they'd be used for lock-in, though that's irrelevant here I suppose).

> Sure, at some point the ATMs may all get disconnected

What I'm saying is that without power digital currencies functionally don't even exist, whereas paper notes do and remain usable, not vanishing from your pocket.

It's totally possible to go entirely remote, but having a local credit union with a local office can have benefits, especially when you need to explain something that wasn't working right (failed mobile deposit, returned bill pay check are two of my recent ones).

It's also nice for certain loans, especially when you can chat with the loan officer and learn that if you push for the 10 year mortgage vs the 15, they don't sell the 10 year ones.

I wish I made enough money to pay a mortgage in 10 years.

And I make a lot of money. Just not that much money.

The key is to just not buy as much house, but that often involves compromises people don't want to do.

> It's also nice for certain loans, especially when you can chat with the loan officer and learn that if you push for the 10 year mortgage vs the 15, they don't sell the 10 year ones.

I'm confused, you seem to be implying that "we don't sell 10 year mortgages" couldn't be portrayed through digital or telephone banking (and is nice for some reason). Am I missing something or did you miss a word that changes the meaning or..?

You can ask, and they may tell you, but most if not all banks will have a note saying "we could sell servicing or the loan itself at anytime" - the question being what they actually do as opposed to what they could do.

It's a minor thing, but's also the kind of thing you might not find just interacting remotely.

A certified cheque, in order to buy a house or secure a large purchase.

Using a virtual bank, I would be able to request one, and have it mailed... the entire time it's being mailed, I would be on pins and needles, because that certified cheque is literally cash, and that cash is no longer in my account.

Should it get lost, you are SOL.

Use a wire transfer. It's faster than mailing a cheque and only costs like $20.

In my neck of the woods wires when buying property are so uncommon my lawyer told me I was the second one ever in her twenty-year practice to do so.

That's funny, I made 5 wires into escrow during my purchase

An old coworker of mine once sold some property to a guy who paid in cash. I would be terribly paranoid the entire day.

Twenty dollars for a transfer? I think my bank is expensive because I pay transfers 0.25 euro...

It isn't literally cash, and you aren't sol. You can cancel a certified check, and only the recipient can cash it.

I ramble on about this frequently on HN [1], but the Fed's FedNow instant payment service is going live next year. Initially, $25k will be the limit for value transfer, quickly moving to $100k, and finally supporting up to $500k under certain circumstances. Anything else and you're using FedWire (which tops out around $50M per wire transfer). This should eliminate the need for certified checks and money orders over time, and the fraud that goes with them (although fraud controls around instant payments will still be a risk to be mitigated and accepted in various quantities; the first release of FedNow will supposedly have fraud prevention tooling available to system participants).

[1] https://news.ycombinator.com/item?id=31530010

Every modern financial system that isn't designed for fraud has an undo mechanism in it. Some are harder to trigger than others, but nothing is lost.

What country are you referring to? Surely there are hardly any countries where use of a cheque/check is common for any purpose?

This level of financial insanity usually means the US

But that's just a terrible financial system, in Brazil you would just wire that money, possibly with a call to your manager to ensure the transaction is ok. But even if you want to use a literal antique like a cheque, you should be able to specify who will be able to cash it out and the money should not leave your account before that is done.

(last time I got a cheque was 2 decades ago as an already semi-dead payment method)

Monoanecdata: My credit union called me one day. I had accidentally gone over on my checking account. She asked me if I could bring the cash in that day. I did, and there were no charges leveled against my account for doing so.

Had a similar thing happen - I was underpaying my mortgage by a few cents every month and the credit union caught this. I was able to go to the branch, give them the difference and they didn't fine me anything. Very personal service from the branch manager, which honestly made me more of a fan.

A majority of replies to this comment are only relevant for the dumpster fire that is the US consumer financial space.

Do you want to pay for those buildings and people? I certainly don't. I'd rather pay for a good mobile app.

Is rent an appreciable line item for banks? I don't think it is. And bank tellers make somewhere in the neighborhood of $35-40k/yr at the high end.

They still pass on cost, artificial or not.. They add fees, minimums, and lower interest than online.

This Varo Bank has 768 employees. My credit union has 16 branches and half the number of employees; employees are a cost whether they sit in a branch office or in the main office somewhere.

I suspect your local credit union doesn't have 4 million accounts like Varo.

Yes but, again, isn't this whole "digital era" thing based on the premise that scaling is cheaper per user involved?

I'm not sure I understand, this is the point I'm trying to make. Varo is going to be able to support more customers since they have fewer variable costs. Legacy banks are going to have to pay for real estate and their labor force through worse interest rates and fees.

Varo also is trying to make a profit for its owners, whereas a credit union's owners are the depositors.

But there are online-focused credit unions, too.

True, only 120k members (out of a potential membership of 2.3 million).

However, it also isn't going to run out of funds, either.

Counterpoint: it's not clear to me why face to face interactions with banks are needed at all.

Number of times I have needed a face-to-face interaction with a person from my credit union in the past 20 years: 1

...and I haven't lived in a state where they have a branch for the past 17 years. Don't get me wrong, my credit union is great, but they're not really into innovation the way that fintech startups are.

Absolutely colossal.

I live in the UK which has multiple established neobanks.

Back in the day I used one of the biggest traditional banks. I had to schedule an appointment to open an account. Twice, because some of the papers they wanted from me were apparently outdated. The appointments were weeks in advance and for the second one I had to go to a neighboring city as the branch there had the best availability.

They would regularly block some of my transactions at random, sometimes sending me an SMS and demanding a response to continue. I was not even able to send the SMS back as my carrier blocks messages to paid numbers by default. Their software wouldn't let me update my address correctly. It would randomly cut off half of it. Their app was antiquated and had 5 or so different codes/passwords that they wanted me to write down for different purposes.

As an absolute cherry on top, I made a completely regular transaction while abroad and they decided to block all my spending to "protect me from fraud" and demanded that I show up in person to one of their branches to have it unblocked. I was abroad for 6 months with no way of accessing my main bank account.

The neobank I moved to let me register online, selfie with a passport plus a day of waiting. Their security was far better as they actually adhered to modern best practices and their fraud protection was minimally invasive. At no point was I prevented from making a transaction for longer than 5 minutes and all their precautions were reasonable. Their app is a joy to use and contains genuinely useful features. And all this was handled without me ever talking to anyone.

I could keep going for longer, but the point is neobanks are more customer friendly in all ways imaginable while consuming far less resources by automating that which is easily automatable.

Physical locations require a lot of overhead costs which come from customers in one way or another.

Banks without physical presence often offer better interest rates and better fee structures (free checking, cheap or 0 overdraft fees, etc.)

I've lived a few states away from my credit union for well over a decade now. In that time, there've been maybe two times where it might've been more convenient had I been able to physically go to the bank. I'm not convinced that the brick and mortar banks offer any compelling advantages over virtual ones.

I have banked for several decades with First Direct, a "telephone bank" in the UK which has no physical branches, and is now legally part of HSBC.

When I was a child I lived in a small (but wealthy) village, growing up I remember there were two banks, in small purpose built buildings, plus a post office (operating similar services to a bank) and two building societies (offering mostly savings and mortgages, no current accounts)

By the time I was a teenager, the banks had left, and all that remained was limited services from a "post office" which now had a single counter in a general store, and a Real Estate agent who had taken a weekend course in some basic tasks to operate as an agent of a Building Society with which they had an agreement. This is about the time I needed an actual bank account and I picked First Direct.

A few years after I joined, First Direct made a big deal of their exciting new electronic banking service. Just dial up to the number provided, install their software and conduct several transactions electronically. I never used this service, my family did not own a modem.

But a few years after that, Netscape shipped their SSL feature (today its successor is TLS 1.3) and First Direct began to move towards what we'd consider today an online bank.

I moved to a city to study, and I never left. When I arrived, the city district where I live had all the major high street banks, including one of the building societies (which had since de-mutualised, destroying its social value for a quick money grab) I'd grown up with. Today none are left, although they do all still own a building somewhere in the city, and most operate a branch open to customers in the city centre.

If you used branch services from any of the conventional banks, at all, ever the service got significantly worse in this period. But for First Direct nothing changed, the people who pick up (in under 5 rings per the founder's goals, I've met some of them, actually I worked for some of them in a previous role) are technically call centre workers, but they've got all the skills needed to assist customers the same way a deputy branch manager or equivalent might have if there were still branches, which there are not.

Obviously most banks these days have a web portal where basic stuff can be done, and that all exists for First Direct. I can check my balances, recent statements, move money, order some basic stuff... but any time the web portal can't do it, I just call them and that's where the magic is.

There's no nonsense trying to fob you off with a machine, every call is answered (aim: under 5 rings) by a human, who can verify you are who you claim to be and either do what's necessary in most cases or hand you off. Almost everything is 24/7 so I have literally never thought about when I call them, I just call them, and talk, like the person who picks up is a bank manager, because in effect that's the role they have.

I've called them to move the price of a home from my account to a lawyer (to buy the place where I live now), and I've called them to ask my current account balance at like 2am, I've called to say "I lost my credit card, oops" and I've called to ask what happens if I want cash (answer: for small amounts they just cause it to be vended from a nearby ATM on request, for large amounts it comes by courier). There's no sign that they even distinguish between the most trivial silly requests and those that you'd need to make an appointment for at a "real" bank. It's all just part of the job. I've never applied for a loan from them (I don't like owing people money, hence I bought my home for cash) but my understanding is that I could get a mortgage by just calling. After all they have all my financial records for decades.

First Direct is great; I've been an account holder for a bit over ten years, after getting an offset mortgage with them. I've once needed physical contact, for which they have an arrangement to use your local HSBC branch. Otherwise it's just as you say: ring up at 2am, answer within 5 rings, incredibly helpful staff.

Frankly, I'm astonished it's survived. It was always an 'internal startup' in a big bank (Midland, before they were taken over) and I would have thought the bean counters would have successfully lowered service standards by now - or at least stuck a heavy fee on and marketed it as 'premium'. But no, it just keeps rolling on, delivering excellent customer service, decade after decade.

I don't even like HSBC, but it's so good I don't want to leave.

I’m in the UK and moved to Monzo from NatWest last year and it’s the first time in my life that banking has been an actual joy. The advantage for me is that literally everything I ever want to do with my money is now vastly easier.

I’m sure there are potential downsides - if I trigger some opaque security process and find my account locked that’d be annoying, but that happened in the last week with both my company’s and my wife’s accounts, both with brick and mortar banks, and both were extremely painful to correct over multiple days. Having to go to a physical place with opening and closing times to talk to someone face to face is not something that I consider a positive feature of traditional banking. Nor is trying to do the same online or by telephone with any bank I’ve ever had, especially when the battery on the security single they sent me has run out.

Not only is the friction of every interaction lower, this also leads me to being far more engaged with my finances which is great. If there’s a bank that provides identical services via mobile to Monzo then that’s great, but I couldn’t currently be happier (and I can integrate other accounts in the app if I happen to need them). Personally I’m amazed Apple hasn’t bought one/many of these banks, it feels so natural on mobile.

The advantage is that they aren't burdened with decades of legacy. I use a few neobanks and one traditional bank, and it's day and night. Guess which ones have better terms in fees and insurances, don't charge for foreign currency payments and withdrawals, offer lounge access, allow you to buy stock for free/low rates, have usage mobile apps, etc.? It's not the traditional bank. They're the ones that still require signature on paper+scan for documents.

So, the neobanks have more services, for cheaper, and with better UX. The only reason I keep my bank account at the traditional bank is because i have a house loan through it and it's a requirement to keep their sweet low interest.

Banks nowadays are driven by software and are equivalent to SaaS. You probably don't want/need your email provider to have a brick & mortar presence in all cities, so why would you need your bank to do so?

Keep in mind that because banks are driven by software, at least in the UK, branch staff have very little power above what you can do yourself - they won't be able to help you if "computer says no". I'd rather have the computer say no to me directly than having to waste time going in-person just to get the same outcome.

This may be different to US credit unions, but even then, the writing is on the wall and it's only a matter of time before they get reduced to being mere servants of the computer.

I haven't been able to find a credit union near me that doesn't have cult-like behavior. As in the president showing up at my home several times to ask why I didn't activate my debit card yet. Or an application with fine print about them pulling my credit report and reaching out to every credit card listed and cancelling them so I can use their card exclusively.

I lot of the comments hating on digital banks here have very "Why should I use dropbox when I have rsync" energy.

People hate traditional banks because their physical location adds a cost which means they have to charge more. Just look at how many people have opened up accounts at neobanks in the last two years

I was unfamiliar with the bank, but figured I should be based on it appearing in HN front page.

It looks to be a branchless/online-only American bank (despite living here for many years, I don’t know if branchless is common/uncommon here?)

> "It’s a key moment in our journey"

Next time he'll be calling it their "incredible journey".

Averaging the number of employees at the end of the first quarter and those at the end of the current quarter and applying the salaries reported paid I arrive at a quarterly salary expense of 40,000$ a quarter or $160k a year, which surprised me a bit.

So does anyone have a sense of what this means if you have an account with Varo? I mean, they are FDIC insured, so if they go under, is it just a matter of time until one gets their funds back?

FDIC reopens the bank after a day or two, but the bank gets sold or closed after, which usually means the people banked there would have to open new accounts somewhere else.

Thanks!

wonder if there is a possibility that the traditional banks brought them out and if that is a win-win vs what might the risks be

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