The recent collapse of Silicon Valley Bank (SVB) has sent shockwaves across the global fintech industry, adding further challenges to an already tumultuous year. Our thoughts are with all those affected by the situation.
While we will not delve into every intricate detail of SVB’s downfall, examining its history and extensive involvement in the fintech ecosystem can offer valuable insights for the industry, enabling us to learn from them as a community. Before we get into that, here’s a concise summary of the events that have transpired, charted out to set the context and bring you up to speed with the current state of affairs:
- Silicon Valley Bank has been a bank for startups since 1983, requiring them to pledge all their assets as collateral and maintain all their accounts and excess cash with it.
- Due to the pandemic, the US central bank lowered interest rates to nearly zero to encourage borrowing and spending, leading to growth in bank deposits from 2020 to 2022. Banks invested these deposits in government-backed securities while meeting regulatory requirements.
- Startups also benefited from this and attracted venture capital investment, leading Silicon Valley Bank to receive many of these deposits due to being a popular choice among startups.
- SVB’s deposits increased from $62B to $190B between 2020 and 2022, a threefold increase.
- While deposits grew three times due to venture capital money, loans only doubled, leaving SVB with spare cash to invest. SVB invested this cash in long-term bonds, which became a risk when the Federal Reserve began to hike interest rates in Q2 2022.
- The decline in bond value and difficulty in equity capital raising in Q3 2022 led to a decrease in deposits at SVB.
- SVB sold its investments to make payouts and pursued a capital raise, but Moody’s downgraded SVB Financial Group, followed by a string of other prominent/influencer/celebrity startup investors who began to urge their affiliates to withdraw their funds from SVB via social media. Eventually, customers of SVB attempted to withdraw $42B in a single day.
- On March 10, 2023, the California bank regulator closed SVB and assigned it to the FDIC as the receiver.
Among the numerous tech players that SVB welcomed through its doors were also over 2600 fintech clients, who regarded the bank as a trusted venture debt financier, commercial payment gateway, and online payment acceptance facilitator. As this unforeseen incident jolts many of these companies awake, we turn our attention to the myriad of potential implications (and silver linings) that the crisis could have on the fintech ecosystem in the days ahead.
SVB’s Footprint: The Fintech Universe’s Vital Connection
With 71% of all fintech IPOs since 2020 being accounted for by its fintech clients, SVB is undeniably deeply ingrained in the fintech ecosystem. This profound relationship dates back to its very past, with SVB evolving in parallel with the startup industry as it focused on understanding the entire lifecycle of capital within the ecosystem and designed a business to address the diverse needs of the community.
Throughout its tenure of over 40 years as one of America’s largest banks, SVB solidified its status as a premier financial technology collaborator for many of today’s popular fintech names, demonstrating how technology firms and financial institutions can work together to benefit the customer. One of its earliest collaborations was with Xero, a technology firm based in New Zealand. In 2014, both companies joined forces to provide startups with precise and all-encompassing insights into their finances. A cascade of strategic business interconnections only followed suit:
- Between the years 2015 and 2020, SVB broadened its range of investments, partnerships, and client acquisitions within various fintech niches. It invested a $12M line of credit in mobile remittance company Remitly in 2015, which was followed by an additional $38B in new equity and debt financing from both IFC and SVB in 2016.
- The same year, it teamed up with online payment processing and software-as-a-service company Stripe to unveil Atlas, a new Stripe offering engineered to grant aspiring entrepreneurs access to the basic building blocks for starting a global internet business.
- It also participated in major funding rounds of personal finance company NerdWallet ($64M Series A funding), leading provider of small business banking BlueVine ($102.5M in Series F round of equity financing), and credit education company Borrowell ($20M in Series B funding) during the span of these five years.
- The year 2020 saw SVB entering into a multi-million risk retention financing agreement with digital personal finance bank SoFi, providing financing to be used for SoFi’s risk retention bonds as part of its asset-backed securities (ABS) issuance requirements.
- In the past two years, SVB ventured into a diverse array of initiatives, ranging from extending $1M in debt financing to Canadian wealthtech startup Float, spearheading a $100M investment in Africa’s Chipper Cash, to recently leading a $23M growth equity round aimed at propelling the expansion of Infinicept’s embedded payments platform. SVB has equally welcomed aboard an array of clientele, among them being blockchain technology-powered payments company Circle, BNPL firm Affirm, and core banking platform Thought Machine.
SVB’s diversified portfolio through its many initiatives is a testament to its integral role in fostering the growth and maturity of the ecosystem. By venturing beyond the traditional bounds of banking and into diverse fintech sub-sectors, SVB had cemented its position as a critical player in the field, whose influence extends far beyond the geographical limits of Silicon Valley. This explains why the potential impact of recent tremors within the industry looms large, particularly for smaller fintech firms.
Beyond Banking: The Fintech World’s Affair with SVB
SVB’s focus on specific sub-sectors has ensured that it caters to the needs of fintechs of all sizes. While payments, accounting, expense management and lending were the four spheres where partnerships were most commonly forged, it also spread its wings into e-commerce, cryptocurrency and blockchain, wealthtech, insurance, as well as fraud and identity.
The far-reaching extent of SVB’s network is unmistakable, with numerous tendrils extending outward like a vast, intricate web.
- Its digital banking bona fides are evident through a number of strategic partnerships and investments, including a banking and credit relationship with mobile-only banking startup Varo. In the realm of digital lending, SVB participated in Tally’s $15M Series A funding round and supported cross-border trading platform Mundi with a $100M debt facility. The bank’s roots in digital payments are also apparent, as demonstrated by its collaboration with payment operations platform Modern Treasury to unveil Global ACH Capabilities for cross-border payments.
- For fintech infrastructure, SVB teamed up with data network Plaid to provide secure tokenised payment solutions, while also offering financing and venture debt to Liberis, a global embedded business finance platform.
- The bank’s support also extended to insurance provider Vouch with a $60M Series C round co-led by Ribbit Capital, and to European expense management platform Soldo with debt financing to help the firm deepen its focus on new markets – further showcasing its commitment to a multitude of areas, including insurance and expense management respectively.
SVB’s fallout will undoubtedly trigger a ripple effect, causing distress and concern across these segments to varying degrees. However, the payments industry may feel the brunt of the impact, given SVB’s significant involvement in this space. Payment fintechs, big or small, many of whom relied on SVB, now face the daunting task of finding a suitable replacement bank as many of them are cautious of the customers they onboard, placing greater emphasis on proof of revenue.
Amidst the tumultuous fallout that has sent shockwaves through the industry, delayed payouts, reduced trust, and implications on the bank’s lending business only compound the mounting issues. Yet, within the chaos, there are underlying opportunities for neobanks and other players in the cross-border payments space. These opportunities may prove especially beneficial for newly established fintechs seeking to capitalise on the turbulence and establish themselves as viable alternatives.
Intersection of Faith, Fear, and Fintech: Insights for the Journey Ahead
SVB’s failure has sparked challenging discussions surrounding the role of specialised banks. These banks introduce distinctive risks that require mitigation not only by the banks themselves but by the broader ecosystem. There is no doubt that difficult questions will need to be addressed to ensure the industry can move forward in a sustainable and secure manner.
SVB’s unique selling proposition was not the root cause of its downfall. Was it the overwhelming influx of deposits from startups during the tech bubble that created investment challenges for the bank? Or was it mismanagement of investments, which triggered a run on the bank and led to its closure? Alternatively, was it the rapidly spreading panic and frenzy on social media platforms that created a new social risk for banks to consider? Regardless, this serves as a stark reminder that both systemic and idiosyncratic risks must be identified and mitigated to some extent. The concept of putting all your eggs in one basket may no longer be a viable strategy, and instead, a significant reliance on enabling the broader value chain may be necessary for the future.
A shift towards decreased debt funding and further consolidation in the banking industry seems likely in light of recent events. Regulatory oversight of settlement bank relationships in the US and UK may also increase. However, the fintech sector is resilient and will require innovative entrepreneurs and supportive venture capitalists to navigate the new challenges that arise. While challenges remain, the long-term prospects for fintech remain bright, and valuable lessons learned will contribute to a stronger and more adaptable industry moving forward.