The collapse of Silvergate Capital, Silicon Valley Bank and Signature Bank suddenly forced many fintechs to switch banks. Most have gone to the largest banks, thinking they're too big to fail and therefore their money will always be safe. The 25 biggest U.S. banks gained $120 billion in deposits in the days after SVB collapsed, according to Federal Reserve data.
But many are rethinking what they look for in a bank.
"It's been an eventful time for a lot of us," says Eytan Bensoussan, co-founder and CEO of NorthOne, a challenger bank for small businesses and a Silicon Valley Bank customer, of the recent banking crisis.
Bensoussan is fortunate. His company raised $67 million in October. This brought NorthOne's total financing to more than $90 million and let him navigate the current tricky environment for fintechs, "as opposed to having to refuel the ship," he said in an interview.
NorthOne kept money at several banks, partly because it operates in Canada and the United States.
Silicon Valley Bank's collapse "definitely kept us for a few days full-time trying to figure out what to do," Bensoussan said.
He credits his chief financial officer, Alison Zwerling, with managing the financial fallout. "She's very strategically minded," he said. "When she started, she said we should work with several banks. So fortunately, there's no existential threat right now."
Another fintech, Stratyfy, was not a client of Silicon Valley Bank, "but we were evaluating them as a banking partner because they offered really fantastic products and service for startups," said CEO Laura Kornhauser.
The bank had attractive interest rates on deposits and SVB bankers had "a deep understanding and appreciation for startups in the venture capital community," she said. The bank put a lot of work into enabling strong connections between startups and capital providers.
In the end, she opted for the safety and stability of a former employer, JPMorgan Chase.
Kornhauser worries about the community banks that are "being disproportionately hurt in a way that they don't deserve by the fallout of this crisis," she said. "One of the things that we're going to be looking at is looking to figure out how we can start relationships with community banks off the back of this."
Fintechs like these are looking at banks in a new light.
Safety and soundness
Banks' soundness is something most fintechs used to not worry about.
"Unfortunately, I want a bank that is too big to fail," said Haydar Haba, a former startup founder and current founder and managing partner at venture capital firm Andra Capital. "Entrepreneurs have enough problems to deal with on a day-to-day basis. The last thing you need to worry about is your banking. So I would highly recommend you split it between two banks."
Haba recommends to startups that they only leave cash in banks up to the FDIC insurance limit. Everything else should go in Treasury bonds and money market funds, he advises.
NorthOne now analyzes whether a bank's assets match its liabilities and tries to understand its business model and how exposed it is, Bensoussan said. It even tries to put its banks through five or six scenarios to ensure they could withstand a change in the macro environment like rising interest rates.
Venture debt
Andra Capital, a funder of pre-IPO but late stage tech startups, also did not use Silicon Valley Bank.
"As part of our fiduciary duty, we need to protect our limited partners and invested capital, so we bank with the two big banks, JPMorgan and Morgan Stanley," Haba said. "And we don't leave a lot in cash; everything in excess we put it in short-term Treasuries."
A previous company he ran did use Silicon Valley Bank.
"We needed this kind of service from a really good bank like Silicon Valley Bank, which was geared mostly for tech companies," Haba said. "So we used them and they were pretty good up to a certain level. When our receivable financing got to a size where they couldn't take care of it, we had to go to a bigger bank."
One thing Silicon Valley Bank offered that Haba appreciated was venture debt financing.
"It's really hard to get that from the bigger banks or even the midsize banks," he said. "There were two banks who were really big in that: Bridge Bank [a unit of Western Alliance] and Silicon Valley Bank. Venture debt was one of their signature differentiators."
Some fintechs like venture debt because it gives them access to more money if they need it, without having to give up equity and without having collateral to offer.
Startups by nature grow quickly, Haba noted. "So you need all these facilities in place and you need to have them in place before you use them, because during hard times, like now where the markets are shut down, even for equity, you really need to exercise your debt financing or venture financing."
Startups that do manage to get venture debt elsewhere may find they cannot get as good a deal as what they got from Silicon Valley Bank.
"It's different when you go to a bank and you are a new customer; you don't have any cash with that bank," Haba said. "They're going to look at you differently and they can take a bigger chunk of fees and warrants to provide you with any kind of financing."
Why bank tech matters to clients
All fintechs have a bank, but many startups also offer banking-as-a-service to their own clients. These companies have also had to reevaluate how they choose a partner.
NorthOne has switched baas partners a few times. It originally launched with Radius Bank. When Radius was bought by LendingClub, NorthOne became a LendingClub partner. In May 2021, NorthOne began working with The Bancorp Bank.
As Bensoussan thought through his company's switch to The Bancorp Bank and Galileo Technologies, technology was the first critical factor.
One thing he was looking for was what he calls a "Lego kit" model, where his company could piece together the banking services it needs.
"When you build with Lego kits, you can take things in interesting directions you've not seen before," Bensoussan said.
Some banks let their fintech partners create checking and savings accounts, and that's about it.
Others can do escrow accounts, trust accounts and other products.
The ideal bank would let partners tell it what kind of accounts they want and it would provide them on an as-needed basis, Bensoussan said.
NorthOne serves a lot of lawyers who need trust accounts and escrow accounts and is considering offering these accounts, he said.
He is also looking for flexibility in compliance. Some banks will insist on taking care of all compliance, leaving the challenger bank with nothing to do but marketing.
"That's great, but if it's not a shared effort at the very least, then you can't bring this concept of fraud engineering and compliance engineering to the front," Bensoussan. "If that becomes a black box to you as a fintech, you're very limited, because some of your best opportunities are to create uniquely strong fraud programs by developing controls and fraud defenses right into your product."
Banks need to have forward-looking executives and make the right architectural choices that allow for this kind of flexibility.
"It becomes very difficult to retroactively re-architect your banking platform to allow fintechs to do something slightly different," Bensoussan said.
Pricing and time to market
The next thing Bensoussan looks for in a baas bank, after technology, is economics.
"How will the pricing allow us to build a business?" he said. "I've probably entertained over a dozen partner bank conversations in the earlier days of the company."
In many cases, he thinks about how to build a meaningful business on top of what the company is paying its partners.
"That just comes down to, what's the vector for your own growth and how do you make money?" he said. "As long as that partner is aligned with that, the economics work great."
Time to market for new products is important to all fintechs because until they have profitable products out in the market, they are burning through cash.
"It's about how long from the day that we start discussing a commercial plan forward to actually having a customer use something," Bensoussan said. "Because every month that you're not out in the wild, it's just oxygen you're not going to get back."
Culture and customer service
"I run a business that has so many critical partnerships, you start realizing over time just how foundational a strong cultural fit with your partners is," Bensoussan said. "The ability to be honest with each other, the ability to understand, this is our interest, this is how we make money, this is how you make money, let's not be coy about it. That transparency and just feeling good about the people in the room helps you navigate."
It's easy to work with your bank when everything is happy and the world is calm, he said.
"But we live in an age of black swan events," Bensoussan said. "So you need to have a partner who you trust enough that you're able to buckle down together and navigate all of these uncertainties."
The personal touch
Silicon Valley Bank was beloved by its customers for its local presence and personal service.
"Their customer service was great," Haba said. "They were friendly. They were in touch with you for your needs. And they didn't mind taking some risk with you. If you left your cash with them, they would stand up for you when you needed it. So they did have the reputation, the customer service, the kind of loans and credits that you need for a startup. The fees were reasonable and you got all the banking and services that you need for a startup."
Big banks are less likely to provide the personal service of a midsize or smaller bank.
"You're not one phone call away from that service," Haba said.
The one thing Silicon Valley Bank didn't do was risk management, he added.
