Crisis meets opportunity in Fintech

In First Republic’s $30 billion bailout attempt on Friday, the Too Big To Fail Banks led by JP Morgan Chase, Citi and Bank of AmericaBAC finally stepped up to help avert a crisis. Days earlier, in the stunning government seizure of Silicon Valley Bank and crypto lender Signature BankSBNY, the Fed, FDIC and Treasury were the stars.

But a separate cast of unsung heroes were also at work, and this shows what private business can do. Soon after SVB’s shares fell in the after-hours market on Wednesday night, March 8, sending a wave of fear across thousands of customers, fintech firms began working to help cash-strapped startups meet payroll — and win new business for themselves.

JP Morgan, Bank of America, Citi and other giants have always seemed reluctant to service Silicon Valley tech startups that have limited security and spend more money than they make. In this crisis, the traditional banks lacked the technology to do that anyway. This is why Silicon Valley Bank was so integral to so many new companies and their financiers—and why its overnight collapse was so devastating.

We watched in real time as the invisible hand of capitalism set in motion. Fintech firms created, overnight, innovative salary funding programs for cash-strapped startups. They offered SVB customers creative ways to spread cash across many different accounts at many different financial institutions to maximize insurance coverage, all at once.

My San Francisco-based startup, Arc, was one of them. It all happened so fast.

At Arc, we had some of our money in SVB, and we admired it as a pillar of the industry. At the same time, this crisis provided an opportunity: we provide practically immediate access to banking services and loans to the very startups that were threatened by SVB’s tragic fall.

Flashback to Tuesday night last week: I’m meeting a hedge fund guy at the Four Seasons in San Francisco, and the CEO of an ed-tech firm joins us. Both ask me the same question: Why would any startup use Arc instead of Silicon Valley Bank?

I try to explain that we are not a bank, we are a software company that works with banks. And this is a good thing, because we can help tech companies diversify their deposits across many traditional banks without sacrificing the user experience. They are less than sold.

A day later, SVB shares plunged after hours with a surprise loss of $1.8 billion that represented less than 1% of assets. An Arc executive blasted an urgent Slack to our 40 employees:

“The next two working days are a rare opportunity for us. SVB is about to endure more churn & outflow in the next quarter than at any point in the last decade…” He added: “We have to answer the call.”

On Thursday morning, we received a digital flood of texts, emails, WhatsApp messages and phone calls from tech entrepreneurs with cash in SVB. We had already reassigned most everyone to a new role: onboarding panicked customers.

“This is really bad,” a CEO wrote to an Arc boss on Friday morning. Another said: “Hi, I’m linking $250K to (another fintech), is it possible to open an arc account today to move $250K. … just trying to diversify.”

An email from the CEO of an AI media startup, seeking “an Arc advance of say $1M while SVB is a mess ($0.5M would be fine if it’s easier for some reason)? … we don’t want the money to land in SVB, which is not reliably available to us right now.”

That’s when we realized that a salary crisis was emerging for thousands of startups. I quickly replied, “Sorry to hear this. Yes, we are happy to support you in this challenging time,” and tapped two other employees to open their new account and expedite the approval.

CEO: “Great to hear this… Thank you!”

At 1:17 PM California time on Friday, we are proud tweeted out a bold offer: “Get funds to make payroll in less than 24 hours with Arc.” Thirteen minutes later, one of our peers, Brex, tweeted out their own offer. Other tech companies, including Gusto and Tube, also quickly spun up solutions to help startups pay payroll over the weekend. Ah, capitalism.

Later that day, our programmers gathered at the Palo Alto home of an Arc engineer, who interrupted his vacation to host a weekend hackathon. They worked around the clock to code new infrastructure to help customers safely diversify deposits and access immediate salary funding. On Saturday, our credit manager and I worked through the night personally approving new accounts.

Result: around 500 startups applied to Arc for hundreds of millions in salary funding. We ended up funding only a fraction of this sum, before the central bank on Sunday night guaranteed SVB’s $175 billion in remaining deposits, quelling the panic. I’ve never been more relieved to discard so much hard work – the starting salary crisis averted.

In the week since the SVB crisis broke out, the amount of cash deposits we collected at Arc was 15 times higher than a normal week. While FB has stopped the crisis, SVB customers continue to register with us and other fintech firms instead of returning to the fold.

I am happy with the “backstop” that FB gave to SVB customers and beyond. It has caused fears of contagion, while protecting depositors who were only guilty of keeping their cash in a top-20 bank that invested it in “safe” government securities.

Still… it’s exciting to think what the private markets could have achieved if left to their own devices.

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