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The US neobank’s no-fee overdraft program will allow customers to overdraft up to $50 without being charged an overdraft fee, CNBC reports. 
This contrasts with typical bank policies that require customers to choose between declining overdraft protection — in which case their card will be declined if they attempt to overdraw their account — or paying a fee when they overdraft, usually around $30-$35.
The neobank is likely betting that what it’ll miss in overdraft fees will be made up for in other ways. It can’t be denied that overdraft fees are a lucrative source of revenue for banks: Customers of large banks paid over $11 billion for bounced checks and other overdrafts in 2017, per the most recent data from the Center for Responsible Lending as citedby CNBC.
By offering no-fee overdrafts, Varo will be missing out on a portion of that money, but it may make up the loss in other ways. For example, it could see an uptick in new customer acquisition as customers are drawn to the prospect of not being punished for losing track of their account balances.
The eligibility requirements of Varo’s no-fee overdraft service are tailored to encourage customers to use their Varo account as a primary account. In order to qualify for no-fee overdrafts, Varo customers have to keep their accounts relatively active, spending with their debit card at least five times a month and directly depositing at least $1,000 in that same time frame.
This elevates the chance that customers seeking free overdraft will make their Varo account their main checking account, since they already have to meet those spending and deposit requirements. Additionally, by requiring customers to direct deposit at least $1,000, but not necessitating that they maintain their minimum balance at that level, Varo can still remain a feasible option for consumers whose income is volatile and who may move money into and out of their account quickly as they get paid and subsequently cover their monthly costs.
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Source: Business Insider – feedback@businessinsider.com (Gregory Magana)