Traditional Bank Run And Modern Day Social Media And Mobile Banking — How To Be Prepared

The Silicon Valley Bank crisis has been a nail-biting, real-life thriller unfolding over the last five days.

The drama began with SVB booking huge losses on the mortgage-backed securities and going in for a capital raise in today's environment. Depositors started to withdraw and transfer money out of SVB, while top brass assured them not to panic.

Influential figures, such as Peter Thiel, urged their funds and companies to get out of SVB. Stock prices crashed, a "run" on the bank started a vicious cycle and the Federal Deposit Insurance Corp. took over the bank. Fortunately, they backstopped full deposits, making them accessible to depositors on Monday morning while the creditors and shareholders stand to lose their money. 

It's interesting to see how the rise of social media and the ease of the internet and mobile banking contributed to the current challenge, which perhaps would not have happened a decade back. 

The escalation of the crisis was facilitated by social media's role in an always connected world and frictionless, instantaneous money transfers and withdrawals, thanks to the prevalence of the internet and mobile banking.

In the past, the challenge at SVB would have taken a few days to disseminate through traditional media outlets, allowing time for fact-checking, verification and obtaining expert views. However, with social media, every user is a journalist and an author, producing, forwarding, liking and spreading news instantaneously, leading to a viral cycle that spreads like wildfire. 

Similarly, the traditional banking system had limitations on how many customers could be handled and catered to, and how quickly. In contrast, mobile banking allowed customers from across the globe to initiate transfers at the first whiff of a potential problem, causing a downward spiral that was difficult to control. The banking system, regulators and governments worldwide need to prepare for this new reality and recalibrate their triggers and metrics. The monitoring and governance mechanism needs to change to address this change. The swift, decisive action by the U.S. government to guarantee full deposits is a welcome move to arrest potential loss of confidence and contagion effects. But this is a wake-up call for global banking regulators.

While there has been a fair bit of news about SVB's impact on Indian startups, it's essential not to sensationalise every news item. Investments by SVB in Indian companies, such as Paytm, TutorVista and Bluestone, were made 10 to 20 years ago. The money came from SVB into these companies and not the other way around. They do not have any deposits or funds with SVB.

SVB exited these investments fully by selling them off during monetisation events, so there is no impact of SVB on these companies. However, some Indian startups have operations in the U.S. and their bank accounts with SVB caused concern since any amount above the insurance limit of $2,50,000 was at risk of not being immediately available. However, the FDIC has now backstopped and assured full deposits would be accessible, and depositors would not be at risk. So, for now, the bullet has been dodged. 

The crisis has also led to an interesting new business idea for fintech entrepreneurs: Can a startup create a product that helps companies with deposits exceeding $2,50,000 to place them in chunks of $2,50,000 with multiple banks worldwide to de-risk themselves? This would be a way of avoiding potential crises in the future when FDIC may not provide a full backstop. 

Finally, the crisis has revealed the true character of investors, who have been constructive, supportive and communicative with founders and portfolio companies. Swift action and communication during such times are essential and it is heartening to see the support given to startups in this difficult situation. As someone rightly said: investors make their money during the good times and build their reputation during the tough times.

Hope we don’t see the same movie again any time soon!

K Ganesh is a serial entrepreneur and promoter at BigBasket, Portea Medical, BlueStone and HomeLane.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.