How the Collapse of SVB is Impacting FinTech Globally
When COVID-19 hit in 2020, it caused a massive boom in FinTech, resulting in 2021 being the highest valuation in funding for the sector. We saw hundreds of hopefuls starting their own FinTech companies, but they had trouble sustaining their company’s growth. As the industry has slowed in the past year, we’ve seen a shift in comfort within the sector.
The Silicon Valley Bank, better known as SVB, was the go-to financial partner for investors in the innovation system and beyond. With billions of dollars in investments, this seemingly regional bank was where many companies stored their funds. They catered specifically to startups, venture capitalists, and tech firms.
Banking regulators shut down SVB on Friday, March 10, after the bank suffered a sudden, swift collapse, marking the second-largest bank failure in US history. Historically, when large banks suffer from these catastrophic collapses, it causes customers to panic and withdraw their money before it’s too late – which is what we saw with SVB.
Although located in the United States, SVB sent shockwaves globally. Many companies around the world held money in the bank and were left to scramble to find solutions. This is where FinTech companies were able to step in.
Even though so many startups have been affected by the collapse of SVB, could this be a positive for FinTech? As of December 2022, SVB stated they had $348 billion in client funds, with $173 billion held in deposits. 30% of this is held in early-stage tech companies. As many are feeling weary about depositing money into traditional banks, where else could the money go? We’re seeing a massive push from FinTech’s rallying to extend credit to startups that have been impacted by the crisis.
Lending in FinTech
Those who kept their money in Silicon Valley Bank were scrambling to find payroll solutions in the upcoming week, and we saw several FinTech’s step up to help out. Two companies, Mercury and Brex, spent the weekend diversifying their platform to accommodate lending capabilities for those who need it.
San Francisco-based FinTech Brex has temporarily entered the lending business to try and help those affected by the SVB shutdown. Historically a corporate credit card and spend management business, the company’s shifted to ensure companies make payroll in the coming weeks. They have already received more than $1 billion in requests for an emergency credit line announced.
Mercury provides banking services to startups, and just launched a new account option that provides customers with FDIC insurance of $3 million. Customers, existing and new, with more than $3 million in their accounts will be prompted to move funds into Mercury Treasury’s Vanguard money market funds, which are 99.5% invested in U.S. government-backed securities (mutual funds predominantly composed of T-bills) and held 100% in the customer’s name.
Could it Be the End of the Crypto Winter?
Cryptocurrency has been under heavy scrutiny since the downfall of FTX, which has led to a regulatory crackdown. Although not fully recovered from this shake-up, could the downfall of SVB be the beginning of a crypto resurgence?
Cryptocurrency prices rose on Monday as markets recalibrated their expectations of future rate hikes by the Fed. Bitcoin surged 13.5% to around $24,280 and Ethereum rose 8.1% to just over $1,680.
Fed Chairman Jerome Powell has signaled that interest rates will remain high until inflation in the U.S. is well on its way to 2%. If interest rates have peaked, a change in the Fed’s monetary posture could result in investors allocating more money to risk assets such as stocks and crypto. Higher interest rates have made risk assets less attractive compared to conservative ones like U.S. Treasury Bills, which have seen their yields trend upward as the Fed tightens.
Whether or not crypto winter could be thawing out isn’t certain given the regulatory headwinds that the digital assets industry currently faces. The New York Attorney General’s office recently claimed Ethereum is a security as it announced a lawsuit against the cryptocurrency exchange KuCoin.
Insights from our experts
The collapse of SVB has affected most of the US in some way, but what are the banking experts, startup founders, and venture capitalists feeling currently? We asked trusted sources what they think this means going forward, gaining more insight into how these parties will be tackling the next few months.
“I think it’s unfortunate but given the FED will cover all deposits, I think the risk can be minimized. The main consideration is that these fintech’s don’t lose their deposits (which is VC investment) as this would have a catastrophic impact. The FED will not cover any investors’ losses - remember they were public and as for the jobs, everyone loses their jobs unfortunately.”
- Interlock Capital
Conclusion
SVB’s unfortunate demise has led to some initial successes in FinTech, and we hope to see more of this in the coming months. Acceptance of cryptocurrency will globally be a big win for borderless payments, and lending outside of traditional banking could be what’s best for these startups. Though we don’t think this is the nail in the coffin for traditional banks, this is an awakening for many that the introduction of FinTech innovations in traditional financial practices could be necessary.
Your Partner in Growth
As the FinTech industry continues to grow, so does the need for talent to facilitate this. At Storm2 we have specialized in connecting FinTech talent with disruptive FinTech players such as yourself. We are able to assist in any stage of your growth by connecting you with the right people. Please don’t hesitate to get in touch and we would be more than happy to see how we can help and support you in your journey.
