Silicon Valley Ripple Effects May Force Reckoning for Neobanks

After the Silicon Valley Bank and Signature Bank meltdowns, the First Republic bailout, the Credit Suisse rescue, what’s to become of the neobanks?

At this writing, the issue of trust in financial institution is front and center in ways that have not been seen since 2008.

And it may be a time of reckoning for the neobanks, the internet-only players that have ditched the physical branches in favor of a model that lets clients (whether they are consumers or enterprises) bank with their mobile phones and tablets.

At first glance, the enthusiasm to use digital-only banking options is firmly in place. As noted in the most recent edition of the “Digital-First Banking Tracker,” a collaboration between PYMNTS and NCR, consumers said they would switch banks for better technology capabilities. The appeal is especially strong among the younger generation. As many as 70% of millennials and Generation Z indicated that propensity to switch.

That was before the current crisis.

Willing to Switch — Before the Crisis

As for the inroads that have been made by the digital-only players — well, the willingness to switch, as noted above, has yet to translate into significant market share. Only 9% of the consumers that we surveyed have lodged their primary accounts with digital-only banks.

The FinTechs are going to face a reckoning, as they have been burning through cash (and cash burn, as has been widely reported, forced at least some of the deposit drawdowns that would up sending SVB into a spiral). For neobanks, the initial flight of capital away from SVB has spurred inflows of deposits at firms like Brex. Startups, after all, have had to find new places to house their money.

But, over time, the same concerns that have dominated the banking industry these past few weeks will come to bear on digital players, especially if they are getting new accounts that are exceeding the $250,000 caps currently in place on insured deposits. The question of what to do with deposits over $250,000 — especially when it comes to business banking — will gain more urgency. In a recent interview with Karen Webster, Amias Gerety, partner at FinTech VC firm QED Investors, said that one approach by regulators would be to charge for deposit insurance, perhaps on a risk-adjusted framework — that function is already in place at the FDIC.

Any increased costs on the FinTech models, which sprung up as entities that don’t hold bank charters, but partner with smaller and regional bank stalwarts to hold deposits, would hit operating lines that are already awash in a sea of red ink. As reported here late last year, some players, such as Chime, have been cutting staff, as funding faces headwinds across the entire sector. And German consultant Simon Kucher and Partners estimated that less than 5% of neobanks globally had achieved break-even as of May 2022. There are some examples of profitability, as we reported, including Monzo.

But an additional PYMNTS study, this time with Treasury Prime, reveal that roughly 50% of consumers surveyed, as 2022 drew to a close, were not considering making a digital-only bank their key provider. In the study, 34% cited satisfaction with their current bank as the most important reason, 13% wanted to retain access to physical branches, 15% cited concern for the overall security of their money and information. Turns out that being able to “set eyes” on one’s money is of value — and may be of particular competitive advantage for the traditional financial institutions that have digital capabilities but brick-and-mortar presence too.