Crisis Meets Opportunity In Fintech

In the $30 billion rescue attempt of First Republic on Friday, Too Big To Fail Banks led by J.P. Morgan Chase, Citi, and Bank of America
BAC
finally stepped up to help stave off a crisis. Days earlier, in the stunning government seizure of Silicon Valley Bank and crypto lender Signature Bank
SBNY
, the Fed, FDIC, and Treasury were the stars.

But a separate cast of unsung heroes also was at work, and this shows what private enterprise can do. Soon after SVB’s shares took a tumble in the after hours market on Wednesday night, March 8, sending a wave of fear across thousands of customers, fintech firms started working to help cash-strapped startups meet payroll—and win new business for themselves.

JP Morgan, Bank of America, Citi and other giants have always seemed reluctant to serve Silicon Valley tech startups that have limited collateral and who burn more cash than they make. In this crisis, the traditional banks lacked the technology to do so, anyway. This is why Silicon Valley Bank was so integral to so many nascent companies and their funders—and why its overnight collapse was so devastating.

We watched in real time as capitalism’s invisible hand snapped into action. Fintech firms created, overnight, innovative payroll financing programs for cash-strapped startups. They offered SVB clients creative ways to spread cash across many different accounts at many different financial institutions to maximize insurance coverage, all at once.

My San Francisco-based startup, Arc, was one of them. It all happened so fast.

At Arc, we had some of our cash at SVB, and we admired it as a pillar of the industry. At the same time, this crisis offered an opportunity: we provide practically instant access to banking services and loans to the very startups that were threatened by SVB’s tragic tumble.

Flashback to Tuesday night of last week: I meet a hedge fund guy at the Four Seasons in San Francisco, and the CEO of an ed-tech firm joins us. Both of them ask me the same question: Why would any startup use Arc rather than Silicon Valley Bank?

I try to explain that we aren’t a bank, we’re a software business that partners with banks. And this is a good thing, because we can help tech companies diversify their deposits across many traditional banks without sacrificing user experience. They are less than sold.

A day later, SVB stock plunged after hours on a surprise $1.8 billion loss that amounted to less than 1% of assets. An Arc manager blasted an urgent Slack to our 40 employees:

“The next two business day(s) present a rare opportunity for us. SVB is about to endure more churn & outflow over the following quarter than any moment in time over the last decade…” He added: “We need to answer the call.”

On Thursday morning, we received a digital deluge of texts, emails, WhatsApp messages, and phone calls from tech founders with cash at SVB. We already had reassigned most everyone to a new role: onboarding panicked customers.

“This is rly rly bad,” one CEO texted to an Arc exec on Friday morning. Said another: “Hey I’m wiring $250K to (another fintech), is it possible to open an arc account today to move $250K. … Just trying to diversify.”

An email from the CEO of an AI media startup cut to the chase, seeking “an Arc advance of say $1M while SVB is a mess ($0.5M would be fine if that’s easier for any reason)? … we don’t want the cash to land in SVB, which is not reliably accessible for us right now.”

That is when we realized a payroll crisis loomed for thousands of startups. I quickly responded: “Sorry to hear this. Yes, we’re happy to support you in this challenging time,” and looped in two other staffers to open his new account and expedite approval.

CEO: “Awesome to hear this… Thank you!”

At 1:17 p.m. California time on Friday, we proudly tweeted out a bold offer: “Get funding to make payroll in less than 24 hours with Arc.” Thirteen minutes later, one of our peers, Brex, tweeted out their own offer. Others tech companies, including Gusto and Pipe, also quickly spun up solutions to help startups make payroll over the weekend. Ah, capitalism.

Later that day, our programmers gathered at the Palo Alto home of an Arc engineer, who interrupted his vacation to host a weekend hackathon. They worked around the clock to code new infrastructure to help customers securely diversify deposits and access instant payroll financing. On Saturday, our Chief Credit Officer and I worked through the night, personally approving new accounts.

Upshot: some 500 startups applied to Arc for hundreds of millions in payroll financing. We ended up funding only a fraction of this sum, however, before the feds on Sunday night guaranteed SVB’s $175 billion in remaining deposits, easing the panic. I’ve never been more relieved to discard so much hard work – the startup payroll crisis was averted.

In the week since the SVB crisis erupted, the amount of cash deposits we collected at Arc was up 15-fold from a typical week. While the feds have quelled the crisis, SVB customers continue to sign up with us and other fintech firms rather than return to the fold.

I am happy for the “backstop” the feds provided to SVB customers and beyond. It has cauterized contagion fears, while protecting depositors who were guilty only of keeping their cash at a top-20 bank that invested it in “safe” government securities.

Still … it is intriguing to ponder what the private markets might have accomplished if left to their own devices.