Silicon Valley Bank’s (SVB) shocking collapse has paved the way for other banks and financial institutions to step up and meet the growing demand for venture debt. Following the SVB collapse, consistent with their entrepreneurial spirit, dozens of startups raced to provide alternatives.
Platforms like StartEngine raced to expedite funding raises for affected startups, and one bank specifically made it their mission to become the new and improved SVB.
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While renowned financial institutions including JPMorgan Chase & Co. and Citigroup Inc. have picked up the slack as tech CEOs take their business elsewhere, several smaller financial institutions have been stepping up to fill the void and emerge as the next big lenders in Silicon Valley.
Financial technology (fintech) company Mercury has been popular in the venture debt sector, with many startup CEOs using its accounts as a backup. In the wake of SVB’s $42 billion bank run, many venture capitalists had been advising their startup owners to withdraw funds from Silicon Valley Bank accounts. Acting on advice from angel investors and big-name venture capital funds, many startup founders, including Polymath Robotics CEO Stefan Seltz-Axmacher, withdrew roughly half of the company’s funds from SVB and put them into Mercury.
Mercury CEO Immad Akhund tweeted on March 10 that because his direct messages and emails were “going a little crazy,” he couldn’t provide the same level of personal service he normally does and directed potential customers to a link where they could quickly open an account.
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Bypassing The FDIC Limit
The Federal Deposit Insurance Corp.’s (FDIC) instantaneous response to the SVB collapse and coverage of deposits above the $250,000 limit rejuvenated confidence in the American banking system. But Treasury Secretary Janet Yellen told Congress that all banks will not receive similar aid from the federal agency.
While blanket insurance for uninsured deposits has not been discussed, Yellen stated that such additional coverage would be provided if “failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.”
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More coverage is needed to protect against banking collapses so neobank Mercury has curated a product — the Mercury Vault — that provides up to $5 million in FDIC insurance. This is 20 times the standard $250,000 limit. The fintech leverages its sweep network and partner banks to provide higher coverage.
Mercury works with two FDIC-insured U.S. banks — Choice Financial Group and Evolve Bank & Trust — and has a sound sweep network that allows partner banks to spread total deposits across up to 20 different accounts. For instance, if you have $2 million in deposits, only $250,000 is FDIC insured. But Mercury spreads the total deposits into eight different accounts through its partner banks, thereby insuring 100% of deposits.
Extra funds are invested in Treasury bills and Securities Investor Protection Corp.-insured products.
“If you need to have $2 million in your operational account, we’ll make sure there is $2 million there so you can make payroll and things like that and the rest will be swept into the U.S. government, T-bills and mutual funds,” Akhund said during an interview with TechCrunch.
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