Fintech Update, 3/6 - 3/12
Hi! It’s Monday, March 13, 2023.
The Rundown
Before we get to a wild week in financial services, we are thrilled to announce that Anna Kirk has joined the Fintech Update as a Writer! Anna is building a diverse career in fintech across banking, blockchain infrastructure, and VC, and we’re thrilled to have her with us to develop our weekly updates and original content. Welcome, Anna!
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The biggest stories (by far) of the past week dealt with two bank failures, Silicon Valley Bank and Silvergate. We’ve devoted most of today’s update to covering what we know so far:
Silicon Valley Bank (SVB) was shut down by regulators on Friday after the company’s earlier moves to shore up its balance sheet sparked a run in which customers pulled $42 billion in deposits out of the bank in less than 24 hours. It’s a story with broad implications for the tech ecosystem: the SVB was among the 20 largest commercial banks in the U.S. and counted roughly “half of US venture-backed technology and health care companies” as customers.
Unpacking what happened to SVB may take some time and hindsight, but the high-level consensus is that a perfect storm of factors combined to leave the bank in a vulnerable position:
First, rising Fed rates crunched SVB (like many banks across the country) as it struggled to keep deposits coming in while lending at higher rates to maintain margin…
Meanwhile, a significant portion ($21B) of the bank’s deposits were tied up in a portfolio of Treasuries and mortgage loans, which suddenly needed to be sold due to…
VC funding drying up throughout the tech landscape, which forced many of SVB’s customers to dig more heavily into their deposits at the bank.
As more customers needed more access to cash, deposits became much more short-term and exposed flaws in the bank’s cash and interest rate management strategies. It also forced the bank to sell off its available-for-sale securities at a loss to shore up its balance sheet. The combination of the $1.8 billion loss it took on this sale, plus the sale of $1.75 billion in shares that it undertook shortly after, created concerns throughout the industry that the bank was in trouble (their stock opened nearly 40% down on March 9th). And, as soon as VCs and other influential voices in tech lost confidence in SVB and encouraged firms to pull their funds out of the bank, the run was on.
So, what happens next for SVB depositors? According to a joint statement from the Fed, FDIC, and Treasury on Sunday, “Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” This is good news for every customer that held deposits with the bank in excess of the $250k FDIC insured limit (some 93% of deposits at SVB), sets out a clear timeline to access operating funds (for example, to fund payroll), and should help reduce some of the noise around the situation.
And what happens next for the bank? As we said, we’ll continue to learn more in the weeks and months to follow, but we know it won’t be a bailout: Treasury Secretary Janet Yellen ruled out a government bailout on Sunday, which means the bank will be sold or wound down by the FDIC. The bank reportedly is shopping itself to larger institutions, which would acquire SVB’s assets and debts like JPMorgan did with Washington Mutual following that bank’s collapse during the 2008 financial crisis. But failing to find a buyer (or buyers) for the bank could lead to liquidation via auction. We’ll need to wait and see – but we’re expecting a big bank to step in.
Another casualty of the SVB bank run: stablecoin USDC lost its $1 peg on Saturday after Circle, the company operating USDC, announced that $3.3B worth of its funds were held at the now-defunct Silicon Valley Bank. USDC has since regained its peg on the back of the joint statement released Sunday from the Fed, FDIC and U.S. Treasury.
Silvergate Bank halted operations on Wednesday following an ongoing attempt to cover withdrawals. The crypto-focused bank was at the center of a broader industry contagion and the collapse of FTX, which accounted for about $1B of Silvergate’s deposits. Silvergate’s failure leaves $12B worth of funds in need of a new bank. But with added regulatory pressures to reduce exposure to the industry, crypto companies might struggle to find new banking partners.
U.S. regulators announced the shutdown of NY state-chartered commercial bank Signature Bank, another prominent crypto-focused institution, that faced a “torrent of deposit outflows on Friday.” However, under the same systemic risk exception as SVB, all of the bank’s depositors will be made whole.
Railsr, a British embedded finance provider once worth ~$1B, was acquired by a consortium of its previous investors and put into administration for restructuring. Railsr had been looking for an acquisition following a significant downround in October 2022.
A month after laying off ~20% of its workforce and shutting down its cryptocurrency service, Affirm announced that it is winding down its operations in Australia in, what appears to be, its latest move to minimize costs and improve profitability.
Executives at German neobank N26 accused the company’s founders of promoting a “culture of fear” in a memo sent last year, leaked on Tuesday. The bank, valued at $9B in late 2021, has seen significant senior management attrition since the memo was released.
Brazil’s central bank announced that it is kicking off a digital currency pilot project, “aiming to replicate the success of its instant payments system Pix to popularize financial services in the country.”
The Department of Justice appealed Binance.US’s court approval to buy accounts from bankrupt crypto lender Voyager Digital.
Catch, a health and benefits provider to independent workers, shut down after six years in operation.
The Reading Nook
The Government Accountability Office released a new report on fintech:"Financial Technology: Products Have Benefits and Risks to Underserved Consumers, and Regulatory Clarity Is Needed."
The Economist explores what the downfall of SVB may mean for the broader financial system.
Marc Rubenstein wrote an excellent piece on The Demise of Silicon Valley Bank.
Selected fundings
U.K.-based consumer lender Abound raised ~$600 million in new funding to “fuel its own open banking-based business.” The mix between debt and equity funding wasn’t specified but Techcrunch reported that the “vast majority” of the funding is debt.
Retirement savings focused insurtech Assured raised $42.5 million in Series B funding.
Banyan, the financing platform for sustainable infrastructure development, raised $25 million in Series B funding.
Regulatory compliance platform Droit raised $23 million in Series B funding.
BaaS platform Synctera raised $15 million in a new funding round led by NAventures, the corporate venture arm of National Bank of Canada.
Monnai, a data aggregation and insights service that helps companies assess fraud, credit readiness and KYC of consumers across emerging markets, raised $6.5 million in a Series A funding round led by Tiger.
Crypto wallet API Tweed raised $4 million in a seed funding round raised by Accel.