Saturday, July 13, 2024
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What does the collapse of Silicon Valley Bank mean for Fintech?

The reverberations of Silicon Valley Bank’s collapse will be felt for a long while. For forty years, it was the preferred provider to tech start-ups. However, its end was sudden and brutal, and it shocked many. Financial meltdowns can be long and drawn out or short and sharp. SVB was the latter.

Action was taken quickly in the UK, for example, and it was sold at great speed to HSBC. UK tech firms are said to have breathed a collective sigh of relief. However, there were real fears that failure to secure a deal would have plunged customers into immediate crisis, which could have spiralled into other markets.

In the US and UK, the government stepped in to protect companies with funds deposited in the bank: loans and financial instruments from SVB funded other businesses. Company founders had been concerned about how they would pay their employees. However, fintech digital banks launched emergency payroll financing products. These solutions provided instant capital to entrepreneurs and their employees who found themselves caught up in the scramble. Fintechs were catapulted onto best business terms with large tech operators who might previously only dealt with traditional offline banks.

So, in a way, the collapse has been a gift for many fintech institutions. It could accelerate the shift away from traditional banks and drive business into the arms of disruptive fintech start-ups. Fintechs have the advantage of not always being tied to the same rigorous regulations as conventional banks. Even companies that offer banking services to businesses like ANNA are not actually banks.

Most banking fintechs are partnered with the traditional banks. This means they can offer diverse products spread broadly across multiple financial institutions. Moreover, they can do this while holding zero deposits and debt on their balance sheets. In addition, fintechs can tap into a wide range of lenders allowing rapid innovation to meet the evolving needs of their customers.

Fintech is a phrase which covers a broad range of industries. However, the essence of a fintech is that they are businesses which use technology to provide financial solutions for businesses and customers. The granddaddy of fintechs is, without a doubt, PayPal. At its launch, it was revolutionary as there was no secure way to make financial transactions online. People used to have to send individual texts with bank card numbers in one and expiry dates in another. Then they were entered manually on the card machine. Then, along came PayPal, and all you needed was an email address.

We now access tens of thousands of fintech products without thinking about it, from split payment methods like Klarna to payment processing platforms like Stripe. There are also mobile-first payment solutions that allow players at Boku casinos to use their UK mobile phone number to make deposits without linking their bank account.

Silicon Valley Bank was the biggest go-to financial institution for tech companies. It serviced nearly half of the USA’s venture-capital-backed start-ups. Therefore, securing its financial future was essential. When customers got wind of the trouble, they withdrew $42 billion in just 24 hours. This could have led to a full-on bank run, but fortunately, regulators seized control, and the FDIC took control.

This was a great relief to the start-up community in both the USA and the UK. However, it has also led to some red faces and people asking how things were allowed to get so bad. As a result, the tech community has been left divided. Some fintech companies have benefitted from the situation by bringing forward rapid solutions, as mentioned earlier. However, others had a nervous couple of days, unsure if their funding was secure.

Companies affected by the collapse included the gaming company Roblox which had about five per cent of its $3 billion held with SVB. The digital media firm Buzzfeed had most of its $56 million in cash held at the bank. In addition, several crypto and blockchain operators had significant deposits with the bank. Sixteen tech and life science companies in Europe had $190 million in exposure at the time of the collapse. Names included Trust Pilot and UK-based PCI-PAL.

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