Here’s how Varo’s No Fee Overdraft feature could attract more users

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Varo Money has announced a new feature, dubbed No Fee Overdraft, that allows users to take out an overdraft of up to $50 without having to pay a fee or interest, according to a press release.

To be able to benefit from the new feature, users have to receive payroll or government direct deposits of at least $1,000 into their Varo account every month. Additionally, they have to make at least five Varo Visa Debit Card purchases every month. Once qualified, users simply have to turn on No Fee Overdraft within their Varo app.

Here’s what it means: Consumers have been paying significant overdraft fees, and this latest feature may help Varo attract more users to its services.

Banks in the US earned a total of $34.5 billion in overdraft fees throughout 2018. The typical fee associated with overdrafts is around $30-$35, per CNBC, while the average overdraft amount in the US is $50, according to the Consumer Financial Protection Bureau. Bank of America, for example, charges a fee of $35, while Chase’s overdraft fee is $34. As such, consumers will likely be keen to use a bank that allows them to cut back on such fees.
Additionally, four out of 10 millennials — Varo’s target group — have incurred at least one overdraft fee in the last year, according to findings from Varo. Of those, 41% paid over $100 in fees, while 15% paid over $200. Moreover, six out of 10 millennials have less than $500 in emergency savings, making it harder to stay out of their overdrafts, and 63% of them reported having to cut back or give up something to pay for a tank of gas, for example.

The bigger picture: As competition in the US neobank space heats up, Varo has to ensure it offers competitive services, but it needs to be more forward-thinking to keep its edge.

While Varo tripled its user base in the past year, it’s still lagging behind other competitors. The neobank expects to reach 750,000 registered users by the end of this month, but competitors like Aspiration and Chime already boast 1 million and 4 million users, respectively.

And both Aspiration and Chime don’t charge for overdrafts. Hence, it seems that with the latest feature, Varo is playing catch-up with other neobanks in the space, rather than challenging the status quo. Further, while Varo’s move to set spending and direct deposit requirements for this new feature makes sense in theory — neobanks struggle to convince customers to use them as their primary banking account providers — Chime and Aspiration offer no overdraft fees with no strings attached, potentially making them likelier candidates for attracting new customers.

Being the only neobank in the US that has preliminary approval for a de novo national bank charter by the Office of the Comptroller of the Currency (OCC) likely gives Varo a competitive edge, but it also needs to focus on rolling out services that further differentiate it from the competition.

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