Unlikely Winner Emerges from SVB Bank Run

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Here at Crowdscale, I talk about investing in startups. Which up until recently, was only accessible to wealthy individuals. But as you can see in the above chart, $6.6M million was invested by regular people in the last week alone.

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Let’s Run to the Bank!

For most of us, last weekend was the first bank run we’ve witnessed. While it’s not an overall positive sign for the economy, some entities were able to capitalize on the situation in a big way. The equity crowdfunding industry could wind up being a big winner as a result. But I’ll get to that later.

Bank runs seldom occur in the US, but that wasn’t always the case. Up until the creation of the of the Federal Deposit Insurance Corporation (FDIC) in 1933, bank runs occurred much more frequently.

It’s difficult to overstate how successful the FDIC has been. We rarely have bank runs anymore, but in the year leading up to the FDIC’s creation, 1/3 of all US banks failed, leading depositors to run on thousands of banks

FDIC helps bolster consumer trust in banks by insuring the banks deposits. In 1933, FDIC insured up to $2,500 per account. That amount has gradually risen over time to $250,000 today.

For most depositors in the US, this insurance threshold would be plenty to cover their assets at the bank. But Silicon Valley Bank was in a unique postition. A bulk of the bank’s depositors were small businesses and venture-funded startups, many of which had deposits in the millions of dollars.

With the majority of their deposits uninsured, a panic was set off after the bank reported heavy losses in its quarterly earning report. The pace of withdrawals was staggering. To put things in perspective, the largest bank run up until this point happened in 2008, when customers withdrew $16.7B from Washington Mutual Bank in a ten-day span. With SVB, depositers withdrew $42B in just one day.

Thousands of depositers were desperately trying to move funds out of the bank - to wherever they could. It can take several days to set up an account with one of the big 4 banks, so regional + digital banks mainly stepped in to accept the SVB outflows.

Mercury Bank was perhaps one of the main recipients of the outflows - the bank claims account setup can be done in just 10 minutes. CEO Immad Akhund reported that over $2B flowed into its coffers in a 2-day stretch, along with thousands of new accounts.

Many of you have likely heard of Mercury - some may even be investors. Mercury Bank conducted a Community Round on Wefunder alongside its $120M venture raise. Within 90 minutes of launch, the round reached its $5M investment max from 2,450 investors.

The bank is aiming to retain as many of its new customers as possible, and this will be a tough challenge. Many new depositers probably have the intention of moving to a big 4 bank once their new account is created, as these institutions are perceived to be safer.

Mercury has a secret weapon, however.

Last weekend, they rolled out Mercury Vault. Whereas typical banks are FDIC insured up to $250,000, Mercury Vault promises that deposits are insured up to $3,000,000 (12x the standard!).

How can they do this, the FDIC is an independent government organization that they have no control over. Well, it turns out Mercury Bank technically isn’t even a bank. You can think of it as a smooth digital interface that’s layered on top of a couple of traditional banks.

When Mercury takes in funds, it’s really just funneling them to the traditional banks who act as the actual custodians. And because it works with a network of banks, Mercury Vault essentially spreads deposits of $250k each across 12 different banks. Each account at these banks is covered up to the full amount, and in totality Mercury is able to claim that FDIC protects up to $3M through them.

It’s a clever solution, and Mercury is hoping this will entice new depositers to keep their money with them. But competitors are catching up with this clever tactic - Betterment now offers $2M in FDIC protection through its partner banks, and Robinhood just rolled out $1.5M in protection.

For now, Mercury and its shareholders can be content with a huge growth spike from their savvy maneuvering during a crisis.

This could also be a huge win for the equity crowdfunding industry. Mercury Bank is already a case study for crowdfunding excellence, and a successful exit in the future would provide a stamp of validation for the nascent industry.

In the meantime, I’m on the hunt for startups that are currently raising. Tune in next week to see what I’m able to find!