Could the future of banking be with a fintech that’s not actually a bank at all?
That’s what Immad Akhund, CEO of Mercury, argues. He founded Mercury six years ago with the goal of making banking more user-friendly for startups. Akhund said he considered Mercury’s rival to be SVB, but up until March, it certainly was not a fair fight. While SVB had about $175 billion in deposits before its bank run, Mercury had about 100,000 customers and was a far lower profile entity compared to the forty-year-old SVB.
But that all changed quickly. In the weeks since SVB crashed, former SVB clients and jumpy depositors across Silicon Valley have been dispersing in search of a new banking home. Digital banks like Mercury, Brex, and Arc have seen a huge influx of customers, with Mercury seeing the highest deposit rush at over $2 billion in the weeks since SVB fell. Brex, which offers a business banking account, said it added 3,000 new customers in the week after SVB collapsed. “We’re still getting an elevated amount of signups and deposits every week,” Akhund explained.
Mercury’s client base consists largely of early-stage startups that historically have not been serviced well by big banks like JPMorgan Chase. “Big banks just don’t really understand that the needs [of early-stage startups] are unique and a little weird,” Akhund explained. Another group he’s targeting are emerging managers, who are newer partners with smaller fund sizes who also were served well by SVB and First Republic but are wary of service at bigger banks. To woo them, Immad explained that they’re doing a range of services to make their user experience easier. For example, Mercury is allowing VCs to have one email address attached to multiple organizations, a small adjustment that will help avoid a common hassle, according to Akhund.
Yet getting deposits and keeping them are two different things, especially when startups, VCs, and retail customers are in a flight to safety across the board. To keep their influx of customers and stand out from the crowd, Mercury raised their FDIC insurance ceiling up to $5 million up from $1 million before SVB collapsed.
How? Mercury is not a chartered bank, and therefore can’t lend against deposits. To operate like a bank, they partner with regional bank networks and hold deposits there. Mercury’s two main bank partners are North Dakota-based Choice Bank and Tennessee-based Evolve. Both of these banks have a network of regional banks in its network, so they can spread out a customer’s $5 million across multiple accounts that are each under the $250,000 FDIC insurance threshold.
“When you think about the future of serving a startup and getting safety for uninsured deposits, the only way they get that is either they go to a big bank that’s ‘too big to fail,’ or they go to somewhere like Mercury where they can get a larger set of FDIC insurance,” Akhund explained.
Even while regional banks are the exact lenders that have been facing instability in recent weeks, Akhund still sees their strategy as fail-proof because their deposits largely stay in FDIC-insured accounts. He says that the amount of uninsured deposits across Mercury is “relatively small.”
Yet not everyone is sure that Mercury will be able to keep its depositors happy long term. “Mercury is basically building a bank on a lot of third-party rails,” said fintech investor and general partner Matt Streisfeld at Oak HC/FT. “There were a bunch of deposits into Mercury and I think that’s great, but is there going to be another big slug of funds transitioning to them? I’m not sure,” he said. He explained that until their lending programs are more robust, and for some fintechs, until they’re lending at all, it’s hard to see them becoming the bank of choice for a majority of startups. “I just don’t know how sticky that’s gonna be,” he added.
Akhund explained that Mercury started its venture debt lending business about a year ago, but isn’t yet able to meet the amount of demand. “We’re scaling it, but we’re not going to totally fill that SVB hole,” he explained. However, Akhund said he sees customers sticking around. “There was definitely a lot of flux at first and people were concerned about what is safe after SVB fell, but I would say recently, after that first week, our response with the increased FDIC made people feel really good about where we were positioned,” Akhund explained.
For Akhund, he doesn’t see other fintechs as competition. “Strangely, we’re in a very uncompetitive space, and that’s the weird thing for people to see,” he explained. “You know, SVB was our main competitor.”
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FUNDS + FUNDS OF FUNDS
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