Image Source: Bloomberg
Digital banks so far are the biggest beneficiaries of the fallout of the Silicon Valley Bank.
Mercury, based in San Francisco, started getting a lot of requests for new accounts last Thursday morning. This was a day after Silicon Valley Bank said it had sold $21 billion in securities at a loss of $1.8 billion and needed to raise more money. So over the weekend, as federal bank regulators rushed to make sure SVB’s failure didn’t cause a wider bank run, Mercury’s workers rushed to help.
Its normal account-opening staff of 30 was doubled to 60, and risk and compliance professionals, volunteer software engineers, and salespeople (who were given a crash course on verifying and approving new customers) all pitched in.
In both cases, taking extra steps has paid off, at least for now. Regional banks are back on track. And venture capitalists say Mercury has done the best out of all the digital banks using fintech.
Mercury’s 38-year-old CEO and cofounder, Immad Akhund, says that in six days, his 470-person company has added thousands of new customers and more than $2 billion in deposits to the 100,000 accounts it already had. He says that he started Mercury six years ago because he thought that a banking platform based on the technology could serve startups better than SVB.
Mercury is one of many fintech companies to profit from SVB’s failure. For example, Brex, a credit card company based in San Francisco with a business bank account, got 3,000 new customers and billions of dollars in new deposits in the past week. But the company would say something other than how much money it was. Brex also helped former SVB customers pay their bills by giving them loans.
Digital banks are the biggest beneficiaries
Meow is a new business in New York that lets companies earn interest on their funds by buying U.S. government bonds. The company says that “hundreds of millions” of dollars have been asked for every day over the past week. Since Thursday, 500 startups have asked Arc for more than $150 million in payroll financing. This is because Arc lets software companies sell their future revenue streams in exchange for cash now.
Digital banks have quickly gained new customers and deposits, but it’s hard to say if they can keep them. Merritt Hummer is a partner at Bain Capital Ventures and a fintech investor. Says it’s way too soon to call it a win. She thinks, though, that many companies will put their money in the biggest banks in the U.S., like JPMorgan, Bank of America, and Citi.
The biggest winner from this crisis will most likely be JPMorgan, the biggest bank in the United States, with more than $2 trillion in deposits. But the big banks often take longer to open accounts.
Aside from being slower, the banking giants may pay less attention to startups and the venture capital community or offer as many customized products as SVB (and the digital banks aspire to).
Most digital banks aren’t technically banks because they don’t have bank charters or FDIC insurance. Instead, they work with traditional banks that hold their customers’ money in insured accounts. Here, too, Akhund moved quickly. Starting on Monday, Mercury started offering up to $3 million in FDIC insurance coverage, up from $1 million last week.
Mercury started offering its startup customers a corporate credit card and a business checking account in 2019. It has raised $152 million from investors like Coatue Management, Andreessen Horowitz, CRV, and others and was worth $1.6 billion as of July 2021.
The main banks that Mercury works with are Evolve, based in Memphis, Tennessee, which had $1.5 billion in deposits at the end of 2022, and Choice Bank, based in Fargo, North Dakota, which had $3.8 billion in deposits at the end of last year. The partnerships work as follows: When a business signs up with Mercury, the customer first chooses whether to put its money in Evolve or Choice. Then, if the company deposits more than $250,000, Evolve or Choice will “sweep” the extra money into the other banks in its network.
For example, Evolve’s sweep network includes about 40 banks, from the big credit card company Capital One to the small bank in Pennsylvania called Quaint Oak Bank. If a Mercury customer chooses Evolve and wants to deposit $3 million, Evolve will split that money among the 12 banks it works with. Choice’s deposits are only covered by the FDIC up to $1 million, but the bank is working to raise that amount.
Other fintechs, like Brex, also offer over $2 million in FDIC coverage by splitting deposits and sending them to multiple banks.
This web of connected businesses brings up an important question: Why should customers feel safe putting their money in the small banks Mercury works with? Technically, no place is completely safe from a bank run since too many customers running out of the bank for no reason can bring it down. In addition, there’s no guarantee that the FDIC would cover all deposits at a small bank as they did at SVB. So, the digital banks cut the deposits into pieces of $250,000 and give them out. Mercury recommends that people with more than $3 million put it in Vanguard’s Treasury Money Market mutual fund, which gives customers a way to do that.
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But the small banks Mercury works with disagree with the idea that they are riskier than their much larger competitors. Choice CEO Brian Johnson says that his bank, unlike Silicon Valley Bank, didn’t invest for the long term. Johnson says that Choice received about $1.5 billion in new deposits last week, and about 90% of those deposits came through Mercury.
Mercury’s other bank partner, Evolve, said on Monday that it was “strong and stable” and that, unlike SVB, it was not in trouble.