Varo’s small-dollar loan updates include underwriting that could enrich future products

The news: Varo will make several updates to its small-dollar loan offering, Varo Advance, that range from changing the fees charged to revamped underwriting for borrowers. The US neobank, which announced the changes in an email for customers, said that they would kick in on October 1, 2021.

More on this: The existing fee structure for borrowers is $3.00 for a $50.00 advance, $4.00 for a $75.00 advance, and $5.00 for a $100.00 advance.

Under the new fee system:

• Borrowers will no longer be capped at $100.00 advances. They will pay $0.50 coupled with 4.7% of their principal amount, with the figure rounded to the closest $0.50.
• Advances of just $20 will remain exempt from the fees.

Varo Advance users who don’t repay their loans still won’t take hits to their credit and are just locked out of borrowing further, per Banking Dive.

Varo also announced that it will incorporate its borrowers’ linked bank accounts into its underwriting process for the loans. The addition will let Varo examine outside data such as direct deposit records and transaction histories.

These are substantial changes for a product that was only announced in October 2020.

• At that time, the company touted Varo Advance as a way to help people who need short-term liquidity assistance and as an alternative to making overdrafts on their accounts.
• The product’s rollout came just months after top US banking regulators, including the Federal Reserve and the FDIC, urged financial institutions to make small-dollar loans available to aid borrowers amid the coronavirus pandemic.

The opportunity: The revamps to Varo Advance give the neobank two key shots at supporting its lending operations:

• Incorporating linked accounts lets Varo test a new way of collecting data to inform its underwriting. If the process works well for small-dollar loans, Varo could incorporate it into an array of potential lending products, such as credit cards, mortgages, or auto loans.
• Lifting the $100.00 borrowing cap on advances gives Varo more flexibility to work with borrowers. This may include people who don’t use the neobank but need a forgiving short-term loan, and existing customers who may need to borrow more than a $100 limit to cover their short-term costs.