Is This the Death of the Neobank?

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Is This the Death of the Neobank?

Luke Wakeling, Editor

With the collapse of one of the USA’s most significant technology lenders and 16th largest bank, Silicon Valley Bank (SVB), confidence in smaller, regional, and neobanks is dwindling. A Financial Times report claims that large US banks are being flooded with new requests to transfer funds from smaller financiers in what executives are saying is the “biggest movement of deposits in more than a decade”.

Banks such as 花旗 and 摩根大通 Chase are speeding up their onboarding processes to deal with this new wave of transfers; they are also being warned by their executives to not take advantage of this turmoil and actively take customers away from smaller lenders.

The fall of SVB, which was the greatest US bank failure since 2008, coincided with the collapse of Signature Bank and First Republic, causing extreme market volatility. All of this begs the question: Is this the death of the neobank?

For individual customers, the answer is probably not. The US government currently covers uninsured deposits up to $250,000, which most people do not exceed. As such, customers who are understandably concerned about the impact of the instability on smaller banks are safe — if they have less than this amount deposited.?

However, what about fintechs and startups who deposited more than this amount? This is part of what happened with SVB; more than 90% of the deposits into the bank were above the $250,000 threshold which made them vulnerable in a bank run. Consequently, the technology sector is also taking a hit as a lot of those companies still have money in SVB, which is massively devaluing their stocks.

Social Media and Bank Sprints

Being exposed in a bank run is more devastating than it once used to be. Bank runs are being replaced by bank sprints in the modern age of social media, according to a Guardian article, which points out that the largest US bank failure, Washington Mutual in 2008, took eight months. SVB’s fall occurred in two days.

Cumulative fear from depositors losing their savings was multiplied by anxious Twitter posts and WhatsApp messages, making it extremely difficult for regulators and bank officers to respond. Widespread panic ensued, in a way that paralleled scenes at supermarkets when a shortage of a certain good is announced. The result? Customers withdrew $40 billion of funds (one-fifth of SVB’s deposits) in a few hours.

In short, SVB’s pandemic-based decision to invest $91 billion gained from the tech investment boom into long-dated mortgage securities was flawed, as they were susceptible to plummet in value when interest rates rose. SVB were then faced with huge losses, resulting in the bank releasing a $2 billion equity offering, which only fed fuel to the fire and confirmed their dire position. The rapid withdrawal of funds confirmed the bank’s fate, and social media played a huge part in this.

Should Customers Trust Smaller Banks?

Does this make it harder for challenger and smaller banks, who are not established enough to provide the securities that JP Morgan and co possess, to gain the confidence of their customers? Potentially. Although, as many mention, less competition in the banking sector is not a good thing for the customer either.

As large US banks speed up their onboarding processes to take advantage of the new influx of customers, neobanks must regain the trust that has been lost over the last week and reiterate the benefits of a competitive market. The big banks are generally not supportive of startups due to their risk, and many businesses rely on smaller banks for loans and schemes like the Paycheck Protection Program which kept many afloat during the pandemic.

These banks and fintechs must now ensure that the trust in them is regained, through more developed customer experience (CX) strategies to compete with the larger banks, a closer look from regulators at the smaller banks and an emphasis on the advantages to the customer that increased competition provides.

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The CX BFSI West Exchange, May 17-18, is North America’s premier invitation-only meeting for CX leaders in financial services, and will delve into themes such as financial wellness, transforming CX with data, keeping digital transformation human, the next generation of CX strategy and employee experience.

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