How the collapse of Silicon Valley Bank could shape fintech

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 clients.

While the authorities intervened to prevent thousands of job losses, the aftermath of the events will have lasting consequences. Our industry will be shaped by the two weeks in March for some time to come.

What went wrong

On the face of it, both banks were very different. SVB served mostly venture capital (VC) backed companies, a niche, specialized 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 the same: mismanagement and human error.

As already well documented, SVB was overexposed to interest rate increases. This left it unable to pay out to depositors with realized fatal losses.

While many of Credit Suisse’s financial indicators looked good – 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 resulting in a crisis of confidence in the Swiss bank.

Taken in isolation, these two events are not a cause for mass panic. SVB’s dangerous overexposure to interest rate increases was not widely repeated in the industry. Credit Suisse had looked like 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 failures in the banking system.

Then there is Deutsche Bank. Still somewhat unfairly regarded as the weak link in European banking, the German giant has reinvented itself in recent years and is much stronger than many give it credit for.

Why are we not out of the woods yet?

The good news is that, for the most part, we’re not headed for another 2008-style meltdown. The bad news for fintech is that we don’t have to go that far for it to have lasting consequences. Indeed, for those firms that are already reporting problems accessing lines of credit, the crisis feels very real.

Even before SVB’s collapse, the funding environment for startups had undergone a dramatic change. The VC winter, brought on by rising interest rates and a gloomier economic outlook, has cooled the appetite for riskier plays. Companies that could take years to get close to a profit, that would likely have received 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 the very early stage companies, years away from maturity, that rely on external funding (angel/VC investors or family and friends). We will live with the consequences for many years.

SVB’s demise will make this shift even more dramatic. The loss deprives startups of the biggest bank that understood early business models. Startups will now have to explore options with larger, more established banks, but they may find less favorable terms, require repayment over a much shorter period, or simply refuse to offer credit outright.

To make matters worse, the collapse of Credit Suisse is likely to make banks even more risk averse.

Some would say that a dose of healthy skepticism is exactly what the startup world needed. There are some advantages to this: who can argue with business models that focus on making money rather than paying over the odds to acquire as many customers as possible?

But there’s an important difference between VCs who lay down the Kool-Aid and do more thorough due diligence, and startups of all sizes find it harder to secure lines of credit. Simply put, a VC winter is only healthy in the long term if it forces efficiency into companies where there is some slack. Without the start-up-friendly conditions of SVB, the chance of otherwise healthy, promising companies being left out in the cold has increased considerably.

What can the fintech industry learn from this?

Savvy entrepreneurs value the stability of their suppliers—a principle that should apply whether they’re supplying semiconductors or lines of credit. But there is a need to be realistic about how much entrepreneurs can do to buffer against this kind of thing.

Startup founders are too busy to go through every line in the bank’s financial reports, and as we have established, it was SVB’s relatively unique position in the market that made so much of the industry dependent on one bank. There weren’t many options.

That SVB was one of the only banks that properly understood the startup world was a problem in itself. Policymakers should work with industry to establish a more diversified supply of credit that reflects the variety and vibrancy of the startup ecosystem.