LAS VEGAS–The CEO of a company that had much of its business and corporate cash with Silicon Valley Bank has shared a first-person perspective on what the days were like leading up to and after that bank’s failure and takeover by the federal government—an experience he believes has created a “trust” opportunity for fintechs.
In remarks to the Fintech Meetup event here, Jim Magats said his Lehi, Utah-based company, MX, had kept most of its funds for day-to-day operations with Silicon Valley Bank. MX is a SaaS company that works with financial institutions, including credit unions, on the member/customer experience.
Rumors Begin
Magats said rumors of the bank’s troubles and the run on deposits by many of its commercial customers began to spread the same week MX had to make payroll and pay bonuses.
“Our account was frozen. We called several people trying to get answers Thursday into Friday and there was no answer,” said Magats. “We found ourselves in a situation that in my career was the first time I ever lost sleep at night as a CEO. I'm sure you can empathize with this. Not making payroll is a worst-case scenario. People worked really hard for their pay. We were also paying out our bonuses (which affected people) with variable comp. We did not have immediate line of sight to how we were going to pay that.”
‘Really Hard Work’
Magats credited a “lot of really hard work” by people within the company for finding an alternative for the funds it needed.
“It was really stressful sitting there. We had no information, no data, no way to actually move money at that particular point,” Magats related. “It reminded me of the idea of do we trust institutions? For all intents and purposes, with Silicon Valley Bank and with our institutions, on the surface, we trust them significantly. But if you look more and more at the stats, what's the second-least most trusted category by consumers? It’s financial services. All that is below it is social media. Financial services ranks below airlines and fast food. So, basically, people trust McDonald's more than they trust their financial service organizations.”
Not on Their Side
Magats said he believes that lack of trust is a function of the fact many consumers do not believe banks are on their side and they feel they are treated as if it almost a “privilege” to be able to access one’s own money and data.
Magats said on the Saturday when SVB’s fate was still very much uncertain, he had people to dinner at his home and while he was worrying over how to pay MX’s employees one of the guests shared how Signature Bank had also been taken over. He said he saw on the faces of those at the dinner the same thing he sees in other people.
“Money is the number-one stress in people's lives and it's not getting any easier,” said Magats, whose comments came as part of a larger discussion at Fintech Meetup around open banking (see related story).
A Call for Open Banking
He called on institutions, government and fintechs to facilitate open banking and make data more readily available.
Asked what the “ripple effects” from the failure of Silicon Valley Bank might be for community and regional banks moving forward, Magats acknowledged he isn’t sure.
“If you if you look at the seven stages of acceptance I think we're somewhere between being shocked and trying to bargain and trying to understand,” he said. “The reality is we're a week into a situation where we don't necessarily know all the different ramifications of this. We can cope and tell ourselves, ‘Hey, the government’s involved, everything's going to be good,’ and I hope that's the case.”
The Barbell Effect
One fallout, noted Magats, has been the immediate movement of money into many other institutions in what has been described as a “barbell scenario,” with money either moving to the very largest FIs, due to the perceived safety, or to smaller, local institutions where the perceived risk is lower and trust is higher.
“I think it was reported that Bank of America got $15 billion in cash in like three days, and then we saw the other barbell, which is money that went to small community banks. It goes back to trust. You’re seeing a flight to trust right now.
Opportunity for Fintechs
“I also think it means is that it'll be very interesting to see from a bank investment point of view over the course of the near term that all banks are going to have to up their reserve game, all banks are going to have to rethink where they put their money,” he continued. “I think there's a huge opportunity from a fintech point of view right now. It’s a wonderful opportunity for fintechs to think about how to build trust moving forward.”
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