Why Varo Money wants to become a full-service bank

Mobile banking startup Varo Money is getting ready to become a full-service bank, having applied for a national license late last month. It's the second financial services startup after SoFi that's taking on the banks by aiming to become one. Varo Money, which launched in the Apple App Store in July, offers customers bank-type products through partnerships. The Varo deposit account is possible through a partnership with The Bancorp. The app has a dashboard where customers can monitor non-Varo accounts. Val, a Kasisto-powered bot, provides financial advice. Varo pitches itself to millennials as a low-fee banking option. It doesn't charge overdraft fees, card replacement fees or foreign transaction fees, and customers can access 55,000 Allpoint ATMs with no fees. "Seventy-five percent of millennials are hands-off with their finances and would rather be doing almost anything else than creating a budget, categorizing transactions, or analyzing their spend," said Varo CEO Colin Walsh. "We want to democratize access to financial guidance." Getting a full-service banking license would let Varo offer its own deposit products without the need to partner with other institutions and offer other products including credit cards, home equity loans, mortgages, certificates of deposit and IRAs, he said. Varo has no plans to open brick-and-mortar branches. Becoming a bank adds additional revenue streams for Varo through deposits and lending products, said Aite Group Senior Analyst Kevin Morrison. The lack of physical branches also lets it save on overhead costs, he added. "The only way to make this work is if they're able to lend," he said. "You have to take deposits to be able to lend, and you have to be able to offer competitive rates on those deposits." Varo could also generate revenue through interchange fees merchants pay. Down the road, it plans to add peer-to-peer payments, possibly through a partner. "Our plan is to create a digitalized version of what banks used to be: integrated, personalized, low-cost financial solutions built around a bank that has your back," said Walsh. Like SoFi, Varo also wants to broaden the services it offers. Varo is likely aiming for people of varied incomes, while SoFi is known to target higher-income customers, said Morrison. Ryan Gilbert, partner at Propel Venture Partners, said Varo's move makes sense given that it's well-funded (it raised $27 million in Series A funding led by private equity firm Warburg Pincus) and has an experienced team led by Walsh, a seasoned banker with experience at Lloyds and American Express. Varo's move doesn't necessarily mean other fintech companies will follow suit, he added. "Applying for a bank license is a Herculean task, unless you're exceptionally well-funded," he said. "SoFi and Varo are going to be able to get there along with only 10 eligible companies."