The collapse of Silicon Valley Bank (SVB) and Credit Suisse in March sent shockwaves through the fintech industry. Many neobanks are vulnerable to similar forces to those that drove SVB and Credit Suisse to the brink, and much of the wider fintech industry
counts banks as partners or customers.
While authorities intervened to prevent thousands of job losses, the aftermath of the events will have lasting consequences. Our industry will be shaped by those two weeks in March for some time to come.
What went wrong
On the face of it both banks were wildly different. SVB mostly served venture capital (VC) backed companies, a niche, specialised offering; Credit Suisse was a 130-year-old institution and a symbol of the Swiss banking elite. Yet the cause of death in both
cases was fundamentally similar: mismanagement and human error.
As has already been well documented, SVB was overexposed to
interest rate rises. This left it unable to pay out to depositors with materialising fatal losses.
While many of Credit Suisse’s financial indicators looked fine - the firm employed some very smart people who ran some successful business practices - years of mismanagement and scandal at the top had left its reputation rotten. SVB was the first domino
to fall, leading to greater investor scrutiny of the banking sector and ultimately resulted in a crisis of confidence at the Swiss bank.
Viewed in isolation these two incidents aren’t a cause for mass panic. SVB’s dangerous overexposure to interest rate rises wasn’t widely replicated across the industry. Credit Suisse had looked as though it was in a death spiral for years. The risk of panic-led
“sentiment” contagion is serious, but much easier to squash than contagion driven by real, systematic flaws across the banking system.
Then there’s Deutsche Bank. Still somewhat unfairly considered the weak link of European banking, the German giant has reinvented itself over recent years and is much stronger than many give it credit for.
Why we’re not out of the woods yet
The good news is that, big picture, we’re not heading for another 2008-style meltdown. The bad news for fintech is that we don’t have to reach that far for there to be lasting consequences. Indeed, for those firms that are already reporting difficulty accessing
lines of credit, the crisis feels very real.
Even prior to SVB’s collapse, the funding environment for startups had undergone a dramatic change. The
VC winter, caused by rising interest rates and a gloomier economic outlook, has cooled appetite for riskier bets. Companies that may take many years to come close to a profit, that would have been likely to receive funding through most of the past decade,
now look less appealing.
This has already had a chilling effect on late-stage valuations and will even reach down to those very early-stage firms, years away from maturity, that rely on external funding (angel/VC investors or family and friends). We’ll be living with the consequences
for many years.
The demise of SVB will make this shift even more dramatic. The loss deprives startups of the largest bank which understood early-stage business models. Startups will now have to explore options with larger, more established banks, but they may find less
favourable terms, repayment demands over a much shorter period, or just refuse to offer credit outright.
To make matters worse, the collapse of Credit Suisse will likely make banks even more risk averse.
Some will say that a dose of healthy scepticism is exactly what the startup world needed. There is some merit to this: who can argue with business models focusing on turning a profit rather than paying over the odds to acquire as many customers as possible?
But there’s an important difference between VCs putting down the Kool-Aid and doing more thorough due diligence, and startups of all sizes finding it harder to secure lines of credit. Put plainly, a VC winter is only healthy in the long-term if it forces
efficiency at companies where there is some slack. Without the startup-friendly terms of SVB, the chance of otherwise healthy, promising companies being left out in the cold has gone up significantly.
What can the fintech industry learn from this?
Savvy entrepreneurs pay attention to the stability of their suppliers - a principle that should hold true whether they’re supplying semiconductors or credit lines. But there is a need to be realistic about how much founders can do to buffer against this
sort of thing.
Startup founders are too busy to go through every line of their bank's financial reports, and as we’ve established, it was SVB’s relatively unique position in the market that meant so much of the industry was reliant on one bank. There weren't a lot of alternatives.
That SVB was one of the only banks that properly understood the startup world was a problem in and of itself. Policymakers should work with the industry to establish a more diversified supply of credit that reflects the variety and vibrancy of the startup