Varo Bank, the first neobank to be granted a national bank charter by the Office of the Comptroller of the Currency, could run out of funds by the end of the year, according to a recent regulatory filing.  

The bank, which raised $510 million at a valuation of $2.5 billion last year, had $263 million in equity for the quarter ending March 31, according to the bank’s Q1 call report.

Varo reported a burn rate of $84 million in the filing, meaning the bank, which is not yet profitable, could run out of funds by the end of the year without securing an additional round of funds or initiating cost cuts. 

Varo, which has been operating as a nationally chartered institution since 2020, has already made cuts to its employee count.

The bank had 768 employees at the end of March, according to its latest call report, down from the 833 it reported the previous quarter. 

Salaries for Varo employees totaled $32 million for the quarter ending March 31.

In an email to Banking Dive, Varo Bank CEO Colin Walsh said the bank does not need to raise capital. 

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

The call report does not offer context around the bank’s business strategy or plans, Walsh said, calling Varo’s current burn rate “variable, discretionary investment cost to help us scale faster.”

“This investment can be dialed up and down based on our business plans and priorities,” he said. “With changing economic conditions, we are adjusting our earnings drivers appropriately to run a successful business to meet the needs of our growing customer base.”

Walsh said the bank used the funding from its capital raise last year to invest in marketing, engineering, product development, operations and risk management — “all in line with our plan.”

Varo spent roughly $38 million on marketing during the quarter, Jason Mikula, a fintech analyst, noted Sunday, adding “the marketing spending hasn’t been for naught.”

“Varo has managed to significantly boost its number of deposit accounts,” he wrote. “The company added some 2.7 million new accounts in 2021, though it’s unclear how many of these remain active.”

Any attempt to raise an additional round of funds in the current environment would be a significant challenge, Mikula speculated.  

“Based on Varo’s approximately $22.5 million in revenue in Q1, a 5x multiple would value the company at around $450 million — a sharp drop from its last round, but not inconsistent with the corrections in other public and private market fintechs,” he wrote. “Between the changing market dynamics and its regulatory capital requirements, Varo finds itself in an incredibly weak position to negotiate a fresh round of funding.”

Worth the charter?

Last year, Wesley Wright, Varo's chief commercial and product officer, touted the bank’s $510 million funding round as a testament to the digital bank’s decision to pursue and successfully obtain its own bank charter, an effort that took three years and cost $100 million. 

“It’s a key moment in our journey, fulfilling our mission, and an external validation of our decision to seek a bank charter and become a bank that combines a regulated stable banking institution with cutting edge technology, and data and design capabilities of a Silicon Valley company,” Wright told Banking Dive last year. “It shows that investors really see the value of what we’re doing and are willing to support it.”

Lending has been a key component of the company’s efforts to gain a charter.

"[The charter] has definitely paid off in terms of the path we see ourselves on,” Wright said last year. “When we lend, we can do that off of our own balance sheet. We don’t have to raise money from outside investors.” 

But Varo has yet to generate success on the lending front, Mikula wrote.

In its latest call report, Varo reported $9.4 million in credit card balances for Q1 and $3.6 million in “other revolving” loans.

“[B]ut Varo’s card offering is secured and does not generate interest income nor significant fee income, apart from interchange,” Mikula wrote.

Like other neobanks, Varo continues to remain dependent on revenue generated from interchange, with 98% of Varo’s income derived from interchange and fee income, Mikula wrote.