Varo, a digital bank that secured a banking charter in 2020, is undergoing a leadership transition. Colin Walsh, who founded the company, has stepped down from his position as CEO but will continue to serve on the board. The company has appointed Gavin Michael, former CEO of cryptocurrency exchange Bakkt, to take over the role. Michael previously announced his departure from Bakkt, stating that he would remain as an advisor until March 2025. This leadership shift comes at a time when Varo is facing financial hurdles despite reporting revenue growth.
Varo’s financial performance has been under scrutiny, with the company reporting a net loss of $65 million last year. While revenue grew by 22% and customer acquisition costs decreased by 31%, profitability remains out of reach. The neobank continues to rely heavily on interchange fees, which accounted for 55.8% of its revenue in 2023. Earlier reports on Varo’s financial position indicated similar challenges, with the company struggling to balance growth and cost management. Despite cost-cutting efforts, analysts suggest that achieving profitability requires significant asset growth.
What challenges does the new CEO face?
Gavin Michael steps into a role that demands strategic adjustments to steer Varo toward profitability. The company has already made substantial reductions in spending, including cuts to employee compensation and marketing. Financial analysts argue that further budget cuts may not be a viable solution, as the existing cost base requires a larger asset size to justify expenses. The focus now shifts to increasing customer engagement and expanding revenue streams beyond interchange fees.
How does Varo compare to other neobanks?
Varo’s business model contrasts with other digital banks that have diversified their revenue sources. Many neobanks have expanded into lending services, targeting small and medium-sized businesses (SMBs) as a growing market segment. A recent report found that around 60% of SMBs struggle with cash flow, creating opportunities for financial institutions to offer tailored credit products. However, Varo has yet to establish a strong lending portfolio, which limits its ability to compete with rivals that have adopted a broader financial services approach.
Industry observers note that the neobank sector has gained traction in offering financial solutions to underserved markets. While Varo has focused primarily on consumer banking, competitors have been actively increasing their lending capabilities. The U.S. Federal Reserve has highlighted the speed at which large banks can approve small business loans, surpassing the efficiency of smaller financial institutions. This suggests that neobanks like Varo may need to refine their operational strategies to remain competitive in a rapidly evolving market.
Financial experts point out that Varo’s path to sustainability depends on expanding its product offerings. While the company has made strides in reducing costs, long-term viability requires a shift toward diversified revenue streams. The reliance on interchange fees presents a limitation, especially as regulatory changes and market shifts can impact transaction-based income. Neobanks that have successfully integrated lending and investment products into their platforms have demonstrated stronger financial resilience.
Varo’s leadership change signifies an attempt to address ongoing financial difficulties, but the company still faces critical decisions regarding its growth strategy. Expanding services to include lending and wealth management could strengthen its market position. The broader neobank landscape shows that customer acquisition alone is insufficient for profitability—sustainable business models require balanced revenue generation and cost efficiency. Whether Varo can adapt to these industry trends remains to be seen.
