Is Silicon Valley Bank’s Collapse Fintech Sector’s Lehman Moment?

The hasty bank rescues and defeats of the past two weeks have raised the specter of the global financial crisis of 2008 in some quarters. It may be an overreaction, but the banking industry will definitely look back on this time as a turning point. An end to easy money will only accelerate changes in the sector that were already underway.

Most troubling is the way the collapse of Silicon Valley Bank and the quick bailout of Credit Suisse underscore how much banking depends on trust. For some, recent events have strengthened the case for central bank digital currencies (CBDCs), which would be a substitute for bank deposits and not just an alternative to private sector payment systems.

Until now, governments have been wary of undermining traditional banking with CBDCs. The public is still more skeptical about the value of private digital currencies than it was a few years ago. But a widespread banking crisis could trigger more revolutionary CBDC projects.

Remember, the original Bitcoin white paper came out in the depths of the 2008 crisis.

The tentative attempts of recent years to roll back tight regulation of large and medium-sized banks are definitely over now.

On the other hand, the rising costs of liquidity and problems in fintech can play into the hands of more established and larger banks.

The collapse of SVB is something of a Lehman Brothers moment for fintech, as it had become a systematically important bank for parts of the technology sector. Even in the UK, where SVB had a relatively small local subsidiary, many fintechs saw little other choice for funding.

The takeover of HSBC will give UK customers some protection from the fallout of the group’s collapse, but it remains to be seen whether the HSBC-owned bank will be as open to banking startups as it was before.

As prices have risen, investors have already rotated away from growth stocks such as fintech. There has rarely been a more difficult venture capital funding environment for a technology sector that has relied heavily on fresh injections of cheap capital to sustain loss-making growth.

Klarna’s downturn in the middle of last year is far from the only sign that the fintech boom is over. It is widely believed that Revolut, which achieved a $33 billion valuation in a 2021 funding round, would struggle to achieve that if it were to try to raise capital today.

The bankruptcy of FTX signaled the end of profits in the crypto market. Now Block, formerly known as Square, is facing an activist short-selling attack.

The UK Financial Conduct Authority’s recent warning to payments companies to maintain strict controls is a further indication of nervousness, particularly after UK embedded finance company Railsr recently entered into a pre-packaged administration process.

Perhaps some of these companies will end up being owned by larger banks. Perhaps the next 10 years in banking will see less innovation for innovation’s sake. The focus may move away from fintech towards sustainability.

Much will depend on the political direction in the US, but President Joe Biden’s inflation reduction law is a change for green investments, while energy uncertainty is also stimulating efforts in this direction in Europe.

Sustainable finance may still be a relatively small part of banking, but it will increasingly be seen as important to the sector’s future.