Digital banks have grown since SVB’s collapse

Photo credit: DepositPhotos
Photo credit: DepositPhotos

Since SBV’s collapse, digital banks have risen to the ocassion to function as a stopgap for thousands of customers.

Mercury, situated in San Francisco, began receiving several requests for new accounts on Thursday morning. This came a day after Silicon Valley Bank said it had sold $21 billion in securities at a $1.8 billion loss and needed more funds. While federal bank officials scrambled to ensure SVB’s loss would not spark a larger bank run, Mercury’s employees rushed to assist. Its usual account-opening team of 30 was increased to 60, and risk and compliance professionals, volunteer software engineers, and salespeople (who were given a crash course in vetting and authorizing new customers) all pitched in.

Taking extra precautions has paid off in both circumstances, at least for the time being. Regional banks have gotten back on track. And venture capitalists believe Mercury has outperformed all other digital banks that use fintech.

Immad Akhund, Mercury’s 38-year-old CEO and cofounder claims that his 470-person company has added thousands of new customers and more than $2 billion in deposits to the 100,000 accounts it already has. He claims he founded Mercury six years ago because he believed a technology-based banking platform might better assist companies than SVB.

Mercury is one of many fintech firms that have benefited from SVB’s demise. For example, Brex, a San Francisco-based credit card company with a commercial bank account, received 3,000 new customers and billions of dollars in new deposits last week. Yet, the corporation would claim something other than how much money was involved. Brex also lent money to former SVB clients to assist them in paying their debts.

Meow is a new company in New York that allows businesses to earn interest on their capital by purchasing US government bonds. According to the corporation, “hundreds of millions” of dollars have been requested every day over the previous week. Since Thursday, 500 entrepreneurs have requested more than $150 million in payroll funding from Arc. This is due to Arc’s ability to allow software companies to sell future revenue streams in return for cash now.

The void was immediately filled by digital banks

Digital banks have quickly grabbed new customers and money, but whether they can hold them is still being determined. Merritt Hummer is a Bain Capital Ventures partner and a fintech investor. That it’s far too early to declare victory. She believes that many businesses will deposit their money in the largest banks in the United States, such as JPMorgan, Bank of America, and Citi.

JPMorgan, the largest bank in the United States with more than $2 trillion in deposits, will most certainly be the greatest beneficiary from this disaster. Yet, large banks frequently take longer to open accounts.

Aside from being slower, banking behemoths may devote less attention to entrepreneurs and the venture capital ecosystem or offer less specialized goods than SVB (and the digital banks aspire to).

Because they need bank charters and FDIC protection, most digital banks are not really banks. Instead, they collaborate with regular banks, which keep their customers’ funds in guaranteed accounts. Akhund moved swiftly here as well. Mercury began offering up to $3 million in FDIC insurance coverage on Monday, up from $1 million last week.

In 2019, Mercury began offering its startup customers a corporate credit card and a company checking account. It raised $152 million from investors, including Coatue Management, Andreessen Horowitz, CRV, and others and was valued at $1.6 billion in July 2021.

Mercury’s primary partners are Evolve, headquartered in Memphis, Tennessee, which had $1.5 billion in deposits at the end of 2022, and Choice Bank, headquartered in Fargo, North Dakota, which had $3.8 billion in deposits at the end of last year. The collaborations work as follows: When a company joins Mercury, it must first decide whether to invest in Evolve or Choice. If the corporation deposits more than $250,000, Evolve or Choice will “sweep” the excess funds into the banks in its network.

For example, Evolve’s sweep network includes over 40 institutions, ranging from the large credit card business Capital One to the little Quaint Oak Bank in Pennsylvania. If a Mercury customer chooses Evolve and wishes to deposit $3 million, Evolve will distribute the funds among the 12 banks with which it works. Choice’s savings are only insured up to $1 million, but the bank is working to increase that limit.

Some fintechs, such as Brex, provide more than $2 million in FDIC coverage by dividing deposits and distributing them to various banks.

This web of interconnected enterprises raises an important question: Why should clients trust Mercury’s small banks with their money? Technically, no location is safe from a bank run because too many clients leaving the bank for no apparent reason can bring it down. Furthermore, there is no certainty that the FDIC would protect all deposits at a small bank like SVB. As a result, the digital banks divide the deposits into $250,000 increments and distribute them. Mercury suggests that clients with more than $3 million invest it in Vanguard’s Treasury Money Market mutual fund, which allows them to do so.

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Mercury works with small banks that disagree with the notion that they are riskier than their much larger counterparts. For example, choice CEO Brian Johnson claims that, unlike Silicon Valley Bank, his bank did not invest for the long term. Yet, according to Johnson, Choice received around $1.5 billion in fresh deposits last week, with approximately 90% of those deposits coming through Mercury.

On Monday, Mercury’s second bank partner, Evolve, stated it was “strong and stable” and not in jeopardy, unlike SVB.