The 40-year reign of Silicon Valley Bank as the preferred provider to tech startups ended this week with a suddenness and brutality that shocked even the most veteran observers of financial meltdowns.
This was the Covid moment for financial services. SVB’s
What’s next is an accelerating shift away from traditional banks to the fintech firms disrupting them. Why? Because fintechs are not banks – they partner with them. As such, fintechs can offer diversification across multiple financial institutions and asset classes that is challenging for offline banks to achieve, all while holding zero debt or deposits on their own balance sheets.
I know this shift is underway because I’m seeing this play out in my company right now. In this column, I avoid writing about my fintech company, Arc, which is one of these “fintech software banks,” yet I need to explain that in just the last week, our customer deposits grew more than they have in the last two years. And they’re on track to double again soon. Companies that had their cash with SVB and other traditional banks have turned to Arc and other fintech firms to manage their deposits because we programmatically diversify them amid a regulatory environment which still doesn’t do enough to protect depositors.
So what’s also next is further regulatory reforms to prevent this similar scenario playing out again in the next business cycle. SVB’s over investment in long-dated government-backed securities, and their investing of deposits into venture backed loans to startups with no collateral, should probably not be acceptable going forward.
What’s also next is some important questions are yet to be answered. What were the extenuating feedback loops that caused the sudden rise in deposit withdrawals that forced the bank to sell bonds and take losses?
Why did the government step in so swiftly, and to such a dramatic degree? The FDIC seized SVB during market trading hours rather than after the close of business. This was unlike ’08-09 when regulators waited many weeks for Warren Buffet to step in for Goldman Sachs. Was it because SVB played a foundational role in pioneering the modern day startup ecosystem which is such an important economic engine and competitive advantage for the US?
SVB helped fuel the wave of technology that we all now use in our everyday lives. Hopefully a buyer can be found and SVB will be back as a division of a bigger bank to continue its mission.