Varo Bank launched its first small-dollar loan product called Varo Advance, the digital bank announced Friday.
The new offering allows qualified Varo account holders an advance of up to $20 for free, with a maximum charge of $5 for a $100 advance. Customers can choose when to repay the loan within a 30-day window, the bank said.
- Varo is the latest bank to offer a small-dollar loan product, following the launch last week of Bank of America's Balance Assist, and comes as regulators have encouraged financial institutions to issue small-dollar loans amid the ongoing coronavirus pandemic.
Varo Advance is fully integrated into Varo Bank accounts, and qualified customers can access the loan without needing a credit check, the bank said.
To qualify for Varo Advance, customers must have had at least $1,000 in direct deposits in the previous month. If a user fails to repay the loan on time, there are no penalties assessed, and no impact to the person's credit. Users can't take advantage of Varo Advance again until they pay back an existing cash advance.
Chief Operating Officer Wesley Wright said Varo, which recently obtained its national banking charter, had planned to launch a small-dollar loan product long before the start of the pandemic.
"I do think that with the pandemic and the current situation with unemployment and the economy, there's even more need for it now than there was before," he said. "But there's always been a need."
Advocates pushed for more banks to offer small-dollar loans long before the pandemic's economic disruption, citing them as an alternative to high-interest payday loans. Regulators have also encouraged banks to enter the space.
The Federal Deposit Insurance Corp. (FDIC) released a request for information on small-dollar lending in 2018, seeking input on consumer demand and the supply of small-dollar credit products that banks offer.
The regulator said it wanted to know what it could do to better enable banks to offer "responsible, prudently underwritten credit products to consumers to meet demand."
More recently, the Federal Reserve, Office of the Comptroller of the Currency (OCC) and National Credit Union Administration (NCUA) joined the FDIC in May, issuing principles to help guide banks offering small-dollar loans.
U.S. Bank has offered a small-dollar loan product since 2018, but the industry as a whole has yet to fully embrace the model.
U.S. Bank's Simple Loan product allows existing customers to apply online for a small-dollar loan of up to $1,000, repayable over three months at a 70% to 88% annual percentage rate (APR).
Bank of America announced last week it will begin offering loans of up to $500 for a flat $5 fee to customers who have had checking accounts with the bank for more than a year.
The Charlotte, North Carolina-based lender said Balance Assist, which the bank plans to offer in select states beginning in January, will be available in increments of $100, and can be paid back in three equal installments over 90 days.
"I think we will continue to see more movement in this space," Wright said. "My guess is maybe we'll see some experimentation, but I don't see larger players committing to this sort of thing on a large scale right now."
Wright said he expects to see fintechs and digital players move ahead of traditional banks when it comes to launching small-dollar loan products.
Square is testing small-dollar loans offered through its peer-to-peer Cash App among a group of 1,000 users, according to TechCrunch.
"We welcome innovation from other players. It benefits American consumers by creating new options for people," Wright said.
Wright said Varo has received positive feedback from regulators regarding Varo Advance.
"They've been very encouraging. They give you guidance, they want you to do it in the right way and they want to ensure that you've got proper disclosures," he said. "As a nationally chartered bank, they're looking to us to drive innovation as well and they're supporting us in that."