A Champagne Toast for Varo
By Thomas P. Brown¹
Notwithstanding the growing (and, from a public health perspective, welcome) trend toward sobriety, I remain a bit old fashioned when it comes to celebrating certain milestones. For me, a glass of champagne adds an exclamation point to any celebration. Something about the layers of sweet, bitter, and yeast along with the fine bubbles of a cool glass of champagne combine to make any occasion memorable.
So it was that a couple of weeks ago, I found myself sending Colin Walsh, the founder and CEO of Varo, a bottle of one of my favorites. I met Colin close to five years ago when he was starting out on his journey to build a digital bank. Our paths cross on occasion, and I had told him some time ago that he could expect a bottle of champagne from me when got his charter. When the news broke on Twitter that Varo had cleared the last major hurdle to a charter—FDIC approval of its request for deposit insurance—off it went.
Judging from the press reports that followed the news of Colin’s achievement, the accomplishment seems worthy of true celebration. None other than Felix Salmon, one of the first chroniclers of the fintech wave that began to build a decade ago, described the announcement as “big news.”² According to Salmon, as a bank, Varo “will finally control its own deposits, and it will be able to use them to fund loans. That will give Varo a significant advantage over other challenger banks like N26, Aspiration and Chime.”
One of his successors on the fintech beat, Kate Rooney of Bloomberg, weighed in as well.³ Her piece offers a bit of context for Colin’s achievement. Although not the first fintech to get a charter — that prize went to Grasshopper Bank last year — Varo got over the charter line faster than some more notable fintechs, including Square or Robinhood. Rooney’s article also takes a swing at explaining how having a charter will provide Varo with a competitive advantage relative to other banks and FinTechs. It quotes Colin as saying “[w]e see [the charter] as a pretty big moat.” As for the source of that competitive advantage, the article identifies two things: (1) Varo can dispense with infrastructure like branches and ATMs, and (2) relative to other fintechs, it can lend and expand into “new products” like certificates of deposit.
That list of benefits is pretty meager, and almost as soon as the bottle shipped out, another story broke that got me thinking about the gauntlet that Colin had run — that Lending Club had reached terms to acquire Radius Bank.⁴ That deal, of course, is not done. It requires regulatory approval, and the parties have signaled that approval may not come for twelve to fifteen months. But Lending Club has committed to spend virtually the same amount to acquire Radius, $185 million, that Colin has reportedly raised for his de novo institution, $178.4 million.⁵ And Radius comes with an interesting business. It has served as the bank partner for several prominent fintechs, including Brex, Aspiration, and Treasury Prime.
In a way, Colin’s success in getting a charter obscured, for a moment, a truth about the banking industry in the United States that hides in plain sight. The U.S. banking club, when viewed from the outside, looks exclusive, but it isn’t.
At last count, there were almost 4,708 federal and state banks in the United States.⁶ By measures such as sales, the U.S. banking industry is much less concentrated than many other industries in the United States, including the pharmacy business, the wireless telecommunication business, and the auto industry. As of 2014, the ratio of assets to total GDP among major U.S. banks (62%) was also considerably lower than the ratio for other major developed countries such as Switzerland (308%), Great Britain (269%), France (228%), and Spain (168%).⁷
Having a charter does not solve the problem that any bank must overcome to succeed in the financial services industry. As Kevin Stiroh, EVP of the New York Federal Reserve, noted in a speech in 2018, a big and growing problem for banks is that they are largely undifferentiated.⁸ This point seems glaringly obvious at the product level. A consumer checking account from Chase works pretty much exactly the same way as a consumer checking account from Citibank. Loan terms are also pretty standard. In the pre-digital age, this was not a big problem. A bank charter effectively gave the recipient a geographic monopoly, and bank strategies in performance tracked the performance of their communities. That is no longer the case, particularly for the largest banks. As Stiroh observed, “the largest firms in the U.S. appear to be growing increasingly similar in terms of their underlying business models and strategies.”⁹
Moreover, as McKinsey has noted, banks, including startup banks, may actually be at a competitive disadvantage to their non-bank competitors in the current environment.¹⁰ The locus of innovation in the financial services industry has largely moved outside of the regulatory moat that banks have enjoyed for centuries. The major innovations in the space over the last decade have come from the development of code to automate processes that banks used to handle with humans — e.g., customer on-boarding, underwriting, risk management, transaction monitoring, etc. The rise of cloud computing infrastructure has made both the data and the computing resources necessary to automate those processes accessible to anyone connected to the internet.¹¹
Upon reflection, the decision to send Colin a bottle of champagne was an apt way to celebrate his achievement. The banking industry in the United States bears more than a passing resemblance to the champagne industry. Although U.S. consumers would have a hard time identifying more than a small handful of champagne houses, there are more than two-thousand producers of Champagne.¹² Together they produce close to 300 million bottles of Champagne each year. Don’t bother looking for them at your local wine shop, however. The production methods which distinguish the method of making Champagne from those used to make other types of sparkling wine — the introduction of carbonation through in-bottle fermentation, the addition of sugar, and the fact that most Champagne is blended across vineyards and years — are fixed by law.¹³ They also make it very difficult for all but true connoisseurs to distinguish one champagne from another when the amount of sugar or dosage is controlled.¹⁴ This means that small Champagne producers face the same scale and innovation challenge that Varo faces. They are pitted against companies with massive budgets to invest in marketing, and they cannot chase consumer preferences by changing their production methods.
The path followed by Francis Egly, the grower-producer who made the bottle of Champagne that I sent to Colin, provides some hope. After taking over management of his family’s house, Egly-Ouriet, in 1980, he devoted himself to making wines of the absolute highest equality. He brought organic farming techniques to his vineyards, extended the time that his wine spent in the cellar, and pushed to create Champagne that expressed the unique characteristics of the vineyards that have been in his family for four generations. His wines are distinct, and he is widely regarded as one of the great winemakers, not just Champagne makers, in the world.¹⁵ Putting this in terms that Silicon Valley investors might recognize, Egly’s success is a testament to his devotion to product.
Taking this back to the banking industry, the field is crowded. As with Champagne houses, most consumers can only name a handful of banks. But very little—other than branding—distinguishes one bank’s version of a product from another bank’s version of that same product. This would seem to create conditions for the emergence of product-driven companies in the financial services space. Several product-driven companies, such as Square, have already followed that path to success in the space. The big question facing Colin and the other early-stage companies that have obtained or that are chasing bank charters is whether getting one will help them build great products. Although I am skeptical, I wish him and fellows well. Santé, Colin.
 Tom Brown is a partner at a major international law firm. The views expressed in this submission are his alone, however, and they do not represent the views of the firm or any of its clients.
 Felix Salmon, Varo gets long-awaited FDIC nod of approval (February 10, 2020) (https://www.axios.com/varo-money-digital-national-bank-290d15d1-4fb9-415a-8baa-f22184a786e8.html).
 Kate Rooney, FinTech Varo gets one step closer to becoming an actual bank: ‘We see it as a pretty big moat’ (February 11, 2020) (https://www.cnbc.com/2020/02/11/start-up-bank-varo-gets-approval-to-become-a-full-scale-bank.html).
 Donna Fuscaldo, Lending Club Buys Radius Bank Marking First Fintech Purchase, Forbes (February 19, 2020) (https://www.forbes.com/sites/donnafuscaldo/2020/02/19/lendingclub-buys-radius-bank-marking-first-fintech-purchase/#71c1ba0948e7).
 Will Hernandez, Varo Money raises $100M, refills deposit insurance application, American Banker (July 16, 2019) (https://www.americanbanker.com/news/varo-money-raises-100m-files-deposit-insurance-application).
 M. Szmigiera, Number of FDIC-insured commercial banks in the U.S. 2002–2018 (November 29, 2019) (https://www.statista.com/statistics/184536/number-of-fdic-insured-us-commercial-bank-institutions/).
 The Clearing House, The State of American Banking 9 (November 2016) (https://www.theclearinghouse.org/-/media/action%20line/documents/volume%20vii/20161201_state-of-american-banking-report_tch.pdf).
 Kevin J. Stiroh, Remarks at the Financial Times U.S. Banking Forum: Charting a Course for Stability and Success (November 1, 2018) (https://www.newyorkfed.org/newsevents/speeches/2018/sti181101).
 McKinsey Global Banking Practice, Cutting Through the FinTech Noise: Markers of Success, Imperatives For Banks (December 2015)
 Id. at 3 (noting the “massive increase in the availability of widely accessible globally transparent data, coupled with a significant decrease in the cost of computing).
 World Food and Wine, The Champagne Region and Producers (https://world-food-and-wine.com/champagne-region-and-producers) (last visited February 26, 2020).
 Comite’ Champagne, Champagne: A Tightly Regulated AOC (https://www.champagne.fr/en/terroir-appellation/appellation/appellation-origine-controlee-aoc) (last visited February 26, 2020).
 See Kenneth Michael McMahon, Sensory and Analytical Assessment Of Sparkling Wine 97 (Dissertation, Washington State University, July 2016) (using panels of consumers to study preferences across different sparkling wines and noting “that consumer preference for sparkling wine was segmented based on sweetness preference”).
 See Sukirk.com (quoting William Kelly, Wine Advocate, “No winemaker in Champagne is more precise or meticulous, from vineyard to cellar” and Peter Liem “If there are any Champagnes that fit the often-used description of ‘Burgundy with bubbles,” Egly-Ouriet’s would be the leading candidates.”) (last visited February 27, 2020).