What’s next for Fintechs after SVB and Signature?

The failures of Silicon Valley Bank and Signature Bank earlier this month can, in many ways, be chalked up to circumstances and mistakes unique to those two financial institutions. SVB’s balance sheet was over-reliant on bonds in the face of rising interest rates. When SVB sold those bonds at a $1.8 billion loss, it spooked its customer base of VC backed technology companies to such a degree that it led to a bank-run. Signature’s failure can be traced in part to the panic caused by SVB’s collapse and in part to Signature’s own decision to maintain digital asset related deposits, a position that left the bank weakened in the face of FTX’s collapse.

Given the unique circumstances surrounding these two bank failures, one may conclude that they do not reflect a broader weakness or issue in the market more generally. This notion is evidenced by U.S. Treasury Secretary Janet Yellen and President Joe Biden both making numerous statements over the past few weeks touting the strength of the U.S. banking sector following SVB and Signature’s collapse.

Nevertheless, given (1) these are the two largest and highest profile bank failures since the economic crisis of 2008 and (2) each bank has some relation – no matter how tenuous – to the fintech community more broadly, fintechs and their bank partners should each expect to experience some significant fall-out stemming from SVB and Signatures collapse.

Below are two of the most likely immediate impacts of the failures for the fintech community:

A Difficult Market for Fintechs is Going to get More Difficult

In recent months, a poor economic outlook and continued predictions of a looming recession have, among other things, resulted in a significant decrease in investment in the fintech community. The failures of SVB and Signature will likely it make it even more difficult for fintechs to attract VC firms. Moreover, given that many, if not most, fintechs relied on SVB directly for banking services, its failure creates a vacuum for such services. The end result is a dearth of available funding and banking services for start-ups, which may imperil their existence.

Prepare for Increased Regulatory Scrutiny (yes, that is possible)

Another impact of the SVB and Signature failures for fintechs will be increased scrutiny from state and federal banking regulators. While it is hard to imagine that bank and fintech relationships could be subject to even more heightened scrutiny than exists in the market today, fintech banks will now have to contend with heightened scrutiny of how these relationships affect the safety and soundness of the bank and its balance sheet risk in particular.

Notable here is the FDIC’s brokered deposits rule. An archaic set of requirements that, as applied to deposits sourced through fintech-bank partnerships, often results in those deposits being characterized as “brokered” on the bank’s call-reports and subject to heightened scrutiny and cost. In recent months, the FDIC has been particularly critical of attempts by banks to characterize fintech sourced deposits as “core,” rather than “brokered.” In the wake of SVB and Signature, those criticisms are likely to increase together with heightened scrutiny on third party relationships and the risks they may pose to the bank’s balance sheet more generally.