Building A Digital Bank — From Scratch

“The real ‘move the needle’ opportunity in banking is to build a bank from scratch.”

That’s according to financial services vet and Varo Money CEO and Cofounder Colin Walsh, who told Karen Webster recently that the future of banking, for millennials in particular, lies not in branches but in bots who become money coaches.

Millennials, Walsh went on to say, get very, very little, if any, advice at all from their bank about what to do with their money. In addition, said the executive, millennials also prove to be easy targets for banks levying fees since they do not have much money to keep with the banks and thus are charged overdraft fees, minimum balance fees and late fees, to name just a few. The combination of fees and no tools with which to build a financial strategy, said Walsh, is not one to engender trust in the banks. “They’d rather be dealing with a Google or an Amazon or a Facebook” as an alternative to traditional banking.

And since launching last year, Varo has been setting up partnerships with sponsor banks, cards and AI to help consumers deal with intelligent chatbots equipped to help with money decisions. Varo, he said, offers up an “all-in-one solution” that stretches across banking, savings, automation of those savings and lending — “all brought together in one app.” As of this writing, there is a small group of users on the platform, said Walsh, in beta testing, with the aim to expand that initiative in February “with a few thousand people on the platform … for further testing” and a second quarter launch to the public.

“The core bank account, plus the lending, plus the AI,” said Walsh, “brings the best of all of those into a single app … with no branches, though we do have agents who are in a call center … but right now, [all functions are through] mobile devices.”

Regulation, of course, rears its head in a scenario like this, and Walsh said that Varo is working with Bancorp under its compliance guidance on the deposit side. On the lending side, he continued, “we are the lenders ourselves,” so the firm is in the process of getting licenses in 24 states.

The first product on the lending side that Varo will offer, said Walsh, will be a line of credit, with limits of a few thousand dollars, to be launched later this year.

As for Varo’s own money-making proposition, Walsh stated that, “because of the diverse nature of the business model, there’s a pretty robust revenue path to monetization.” He said the core bank account offering helps the firm cover its operating expenses, with the lure to consumers that the fees are modest as compared to a traditional bank. “The money really comes through the lending,” and partnerships will be in the offing, with, for example, specialty cards.

There exists a paradox with brining financial services to millennials — they are large as measured by population, but as Webster noted, “their spending is quite constrained.” Some research has shown that 20 percent within that demographic make less today than their parents, and 50 percent may never make more than they do. Against that backdrop, said Walsh: “I can’t guarantee that we are going to make anybody [millennials] rich … but we can help them make better informed financial decisions. With AI … we can help them manage spending and build savings.”