USA

The Impact of Silicon Valley Bank’s Collapse on Fintech

With over 2,600 fintech clients, Silicon Valley Bank (SVB) is more than just bank and venture debt lender. Beyond banking and financing, SVB is also a technology partner to many fintech companies, serving as a gateway for commercial payments and online payments acceptance, a new analysis by tech market intelligence platform CB Insights shows.

Overall, SVB has been a key stakeholder in the local fintech startup ecosystem, serving more than 2,690 fintech clients, the report says. These companies account for 71% of all fintech initial public offerings (IPOs) since 2020.

According to the report, the bank’s sudden collapse on March 10, 2023 has affected 45 fintech partners and customers that span over a dozen areas within the sector.

Data show that payments, accounting, expense management and lending are the four areas where partnerships have been the most common, with partners and clients that include Affirm, a buy now, pay later (BNPL) service provider; Settle, an all-in-one payment solution serving e-commerce brands; and Soldo, a payment and spend automation platform for businesses.

E-commerce, banking, blockchain and cryptocurrency, wealthtech, insurance as well as fraud and identity are other fintech segments SVB has been involved in, having built ties with the likes of Payoneer, a payment platform for cross-border digital businesses; Shopify, an e-commerce company; Thought Machine, a fintech company that build cloud-native core banking and payment technology; Circle, the company that operates the popular stablecoin USD Coin (USDC); Hometree, a home services company offering cover plans to UK homeowners and landlords; Stash, a personal finance app that combines banking, investing and advice; and Onfido, a digital identity and authentication specialist.

The collapse of SVB

On March 10, 2023, SBV collapsed after a bank run, marking the second-largest failure of a financial institution in US history.

Founded in 1983, SVB specialized in banking for tech startups, providing financing for almost half of US venture-backed tech and healthcare companies, as well as banking and loans to venture capital (VC) firms. It was also an investor itself into a number of blue chip venture funds, as well as tech startups. SVB was, just before its failure, America’s 16^th largest commercial bank, with US$209 billion in total assets at the end of 2022.

SVB imploded after being forced to sell securities at a loss amid higher interest rates. Spooked investors and depositors rapidly began pulling their money, leading a staggering US$42 billion of deposits being withdrawn the day before the bank shut down.

The California Department of Financial Protection and Innovation seized SVB on March 10, and placed it under the receivership of the Federal Deposit Insurance Corporation (FDIC).

First Citizens BancShares eventually agreed to buy SBV earlier this week, taking on all deposits and loans in a deal that includes the purchase of about US$72 billion SVB assets at a discount of US$16.5 billion, according to a Bloomberg report. In the UK, HSBC has stepped up to purchase the local arm of the bank for GBP 1 in a rescue deal.

Impact on fintech

The collapse of SVB has had significant consequences for startup companies in the US and abroad. In the UK, it’s estimated that some 3,000 UK tech firms were at risk of going under without a rescue, according to Fortunes.

“[Silicon Valley Bank] was really the heart and lungs of the tech startup community in Silicon Valley – and worldwide,” Dan Ives, an analyst at Los Angeles-based investment firm Wedbush Securities told the Guardian on March 15. “The ripple effect will be felt for years to come.”

In the fintech sector, the failure of SVB will have a profound impact on the industry, says to Flagship Advisory Partners, a fintech consultancy and merger and acquisition (M&A) advisory firm. It will prompt many companies to take deeper looks at the risks inherent in their operating models, and begin mitigation.

“SVB’s collapse serves as a strong reminder that fintechs typically have highly concentrated operating models clustered around a few key partners,” the firm wrote in a recent report. “This presents both systemic and idiosyncratic risks that need to be identified and at least partially mitigated.”

According to Flagship Advisory Partners, many fintech companies disclosed their deposit exposure to SVB in the days that followed the bank’s collapse, revealing that several of them had concentrated their cash there.

Circle, for example, revealed that it had US$3.3 billion of its US$40 billion USDC reserves were held at the bank; Xero, an Australia accounting software provider, said it had a total of exposure of US$5 million; and Payoneer said that less than US$20 million of its US$6.4 billion total cash balances were held at SVB.