Silicon Valley Bank demise sends chill through global payments

George Lekakis

An emerging concern flowing from the dramatic collapse of California’s Silicon Valley Bank is the extent to which settlement risks are set to impact ecommerce transactions involving Australian-based merchants, consumers and payments gateways.
 
The operations of Silicon Valley Bank were seized by the Federal Deposit Insurance Corporation last week after a customer run on its US$170 billion deposit base.
 
SVB came under extreme liquidity pressure following the release of its full year accounts in late February in which it reported sharp falls in the market value of investment portfolios that were skewed to long-term mortgage-backed securities.
 
The collapse of depositor support for the bank resulted in the FDIC taking control of the business on Friday and freezing customer accounts.
 
SVB’s demise is almost certain to impact Australian startups and venture capital funds who were supported by the bank in their efforts to globalise their activities.
 
As speculation swirls over which local startups might have deposits stuck in the stricken bank, the focus of local investors this morning will be on disclosures from ASX-listed fintechs clarifying their ties with SVB.
 
There are some high-powered local connections with the Californian bank.
 
Perth-based firm, Venture Capital Consultants, has promoted itself as the “exclusive Australian adviser for SVB Financial Group” and one of its partners Larry Lopez is a former managing director and president of multiple SVB businesses.
 
Lopez, who is a sought after adviser to Melbourne and Perth based venture capital firms such as RCF Jolimont, is believed to have played a pivotal role in linking Australian startups with SVB.
 
SVB’s global head of payments Kathleen Pierce-Gilmore is a director of struggling ASX-listed buy now pay later provider Sezzle Inc.
 
It is not clear whether Sezzle uses SVB for transaction banking and deposits in its US operation, however the board connection might force Sezzle to clarify its business relationship with the bank.
 
Any negative impact on Australian fintechs might end up being negligible if the FDIC finds a buyer for SVB’s asset and liabilities or achieves a carve-up of its operations.
 
Meantime, SVB’s failure has created uncertainty and disquiet in the US and international payments market. 
 
A swathe of the world’s leading online marketplaces such as Etsy and Shopify and payments companies such as Square use SVB as a transaction bank.
 
CNBC reported on Saturday that Etsy began notifying US-based sellers on its platform of delays to remitting payments to their accounts.
 
“We wanted to let you know that there is a delay with your deposit that was scheduled for today,” Etsy told merchants in an email.
 
“We know that you count on us to help run your business and we understand how important it is for you to receive your funds when you need them.” 
 
“Please know that our teams are working hard to resolve this issue and send you your funds as quickly as possible.”
 
Etsy has 7.5 million merchants operating on its platform, including at least 5000 across Australia who rely on local payment gateways such as Worldpay, Adyen and PayPal to facilitate card payments and disburse funds to their accounts.
 
It is not clear whether Etsy’s gateway partners in Australia are wearing the risk of settlement problems relating to the SVB collapse or whether local merchants are already missing payments on sales to US consumers.
 
Arizona-based payments investor and commentator Patricia Carlin on Sunday highlighted another looming impact of SVB’s demise.

Under an arrangement between Stripe and SVB that was terminated three years ago, Carlin observed that merchants subscribed to the Stripe service were able to open bank accounts at the Californian bank.

The accounts allowed them to accept payments from around the world.

Carlin warned in a LinkedIn post the arrangement could now pose a threat to Stripe’s business if its most successful merchants kept their money at SVB.
 
“If companies used Stripe for their payment processing and went with SVB for their bank, all payments processed were deposited in their SVB bank accounts AND they didn’t send those funds off to other banks…their money is frozen,” wrote Carlin.
 
“This means they have no funds to pay their employees, fulfil their products and services, or pay for basic operational costs.”
 
Carlin also highlighted Shopify’s payments arrangements with SVB.
 
Shopify encourages merchants to hold their funds in so-called “master merchant accounts”.
 
It is not yet known what proportion of Shopify’s US merchant base stored proceeds from online sales in such accounts held at SVB.
 
In response to a Twitter user’s enquiry on Sunday, Shopify chief executive Tobi Lutke said the SVB impact would be “minor” for the company.
 
“We use SVB as one of around12 or so banks spread over mostly Canada and US,” the Shopify boss posted on Twitter.
 
“Canada has stricter banking risk regulations.
 
“A small portion of our US operational fund flows is tied up in SVB but we are working around it and it should be business as usual.”