“Last weekend felt like the wild, wild West,” Charlie Youakim, CEO of payments startup and B Corp Sezzle, told PYMNTS CEO Karen Webster in a recent conversation.
“SVB had been around forever, they had a great brand. [Its collapse} is a big shock to me,” he says.
SVB bank’s executives, he said, missed it, the banking regulators missed it — poor investments, poor timing of messaging, and poor timing of fixing things.
That was then; this is now. The conversation today, Youakim said, has shifted from deposit recovery to where businesses are banking next and bank fundamentals. A conversation that he said is happening across the entire ecosystem, one he and his board want to get ahead of. FinTechs and businesses are now doing more diligence on what banks they are using to hold their deposits or partner with.
“We’ve got a board meeting later this week to go over the set of banks that [Sezzle] works with,” he said. “We’re putting together a report of what these banks look like, their financial stability…because it’s not the case anymore that you can just trust your bank, trust that your money will be safe.”
Even though U.S. regulators have backstopped deposits, Youakim said there’s still “more than a little bit” of concern right now.
This as Moody’s downgraded all banks, citing a “rapidly deteriorating operating environment” and regulators call for a review of current regional bank regulations since the collapse of Signature Bank on Sunday.
Read More: FDIC Moves SVB Deposits to National Bank of Santa Clara
Still, he notes that it’s not always easy to switch banks, particularly for FinTechs with established partnerships.
“It’s not an easy thing to just move the money over. Your operating bank account, or your payroll vendors, sure. But our virtual card product runs through a bank partner, and in the FinTech ecosystem, not every situation allows you to change your bank,” he said.
Silicon Valley Bank worked with more than a thousand venture capital (VC) firms, and cash from countless startups made up its around $212 billion deposit base, meaning there are a lot of companies now looking for a new, safe banking partner.
Relationships that, at least for now, appear to be heading to the banks deemed “too big to fail” by regulators.
Despite billions in deposits, SVB operated fewer than two dozen branches and serviced a highly specific customer base of startups, VCs, and tech businesses.
Youakim notes that roughly 10% of the assets on SVB’s books were venture debt and that if companies are not getting any more funding, those line items in effect become “completely worthless.”
The analogy he gives is that coined by journalist Martin Wolf and economist John Kay to describe investments with a high probability of a modest gain and a low probability of huge losses in any period, “collecting coins in front of a steamroller — it worked forever,” Youakim says. “But when you trip on your shoelace, it’s not a good situation.”
Industry observers have highlighted that SVB’s troubles are tightly entangled to broader issues with the venture-backed tech sector.
“There was a lot [of due diligence] being skipped along the way [by VCs], and now you have these companies that I still don’t think are reacting fast enough toward getting to cashflow positivity,” Youakim adds.
As reported by PYMNTS, FinTechs are now being forced to decide if they’re “a business or a feature” as investors make a stronger push for profits.
Sezzle, for its part has plans to list shares of common stock on the Nasdaq Global Market.
What will be crucial for future safety, the Sezzle CEO says, is making sure businesses “have redundancy for everything” for the sake of business continuity.
“If something happens to a banking partner or supplier, it’s important to be still able to run your business, he said.
Still, Youakim says he sees a “cold winter” ahead for tech. “It’s like a cleansing … there are a lot of companies out there that raised multiples of what they actually make in revenue, but the companies that do survive will be the very strong ones. We’ll have better companies that will create the next cycle.”
And that’s what he’s looking forward to most.
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