Silicon Valley Bank (SVB) has recently made the headlines – for all the wrong reasons. In a time where customers of banks value trust and security, SVB has completely undone all that they’ve worked hard to gather in recent years. How? Let’s take a look at the fundamentals of the Banking industry to understand what triggered this monumental downfall, and what HSBC’s acquisition of SVB UK for £1 means for the future of banking. 

Why did SVB fail? 

Traditionally speaking when banks receive deposits the bank will reinvest a portion of the capital into investment vehicles. This could range from equities to government backed securities and government bonds, to issuing loans to individuals and corporate clients, all for a profit. This mechanism works beautifully when everything goes to plan. The bank makes a profit off its investments, the individual/corporate who placed the deposit can withdraw the capital at any point in time. The opposite is also true – when things get bad, they can get very bad very quickly. 

SVB invested heavily into government bonds – an investment vehicle that requires a maturation period before the capital (and profit) is returned. To give a bit of context, the investment into government bonds was ~38% of SVB’s total assets – $80 billion out of $209 billion. This was perhaps a strategic decision that came from the huge influx of deposits from an emerging wave of tech companies and entrepreneurs as a result of the COVID-19 pandemic. However, as the past year has continuously fuelled the economic downturn, SVB customers looked to withdraw their deposits to make payroll and keep cashflow within their companies.

This was the start of the collapse – given the government bonds had not matured yet, SVB was facing a cashflow problem. The solution? To sell the bonds at a huge financial loss to cover their customers’ demands to withdraw on their deposits. In conjunction with a bid to raise $1.75 billion on March 8, one thing became clear – SVB was short of capital.

The capital raising news sent a wave of panic to SVB customers, with a majority of which are corporate customers with $250,000+ in their accounts to immediately withdraw their deposits en masse in light of the loss of trust and confidence in their bank. With nowhere near enough capital to cover the withdrawal demands of their customers, SVB collapsed on March 10, just two days after the announcement to raise capital.

HSBC throws SVB a lifeline

One day after SVB’s collapse, a new player entered the fold. HSBC acquired SVB’s UK arm for a symbolic £1 – citing there was strong ‘strategic alignment’ between the two parties. Noel Quinn, HSBC Group CEO, stated “This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.”

Without getting into all the financial technicalities, the acquisition makes sense. HSBC had a low-cost, low-risk method to immediately extend the reach of their commercial banking arm – specifically into life sciences, bio-medicals, technology and non-crypto fintech. HSBC’s rationale is to leverage the established customer base that SVB UK had built out. Time will tell whether this was a positive strategic decision, but we can definitely see the potential of SVB UK’s client base in HSBC’s portfolio – the tech-native entrepreneurs could become clients of HSBC’s private banking arm, while the later-stages companies considering IPOs could cross over to HSBC’s capital markets branch. And the final factor – absorbing SVB UK’s £12.2 billion in deposits and loan books is a minor dent to HSBC’s $3 trillion global net assets!

Manifesto’s take

The SVB collapse aligns with the findings from our recent research. In our recent report, we considered the strategic positioning of neobanks, challenger banks, and incumbents. Concluding that in times of economic turmoil, customers look for the ‘flight to safety’ – the incumbent banks. 

How is this relevant to the SVB? To build a trusted human experience, you first need to champion the underlying components, frictionless services, and infrastructure. With SVB, the lack of cash flow exposed the cracks within their infrastructure and decision-making.  With customers ultimately not being able to trust SVB with their capital. It is imperative that banks understand that the trust pyramid is built bottom up, meaning that without a concrete infrastructure, having frictionless services will not add up to building a trusted proposition. This exemplifies our findings: the market is currently fragmented, with incumbents dominating the market with robust backend infrastructures, while neobanks and fintechs excel in frictionless offerings. 

This analysis also highlights why, in our opinion, HSBC’s (incumbent) acquisition of SVB UK (challenger bank) makes strategic sense. HSBC has excellent infrastructure and a large cash reserve pool to reassure customers their money is safe in their hands. On the other hand, SVB UK is a challenger bank, offering frictionless services that cater to a specific niche segment (start-ups, tech companies, venture-funded companies).

SVB UK excelled at attracting the customer base they did by offering differentiated propositions: frictionless signups with no historical record requirements, networking communities for like-minded individuals, and SVB UK also acted as a part venture capital firm. There is a point to be made that the usability of these ‘new’ products from SVB (and other challenger banks) can very often lead to the misplaced trust of customers, as they look past the underlying infrastructure due to the ‘innovative’ offerings.

The challenge of HSBC (and all incumbent banks) is innovation – customers in our research listed the likes of Monzo as the best innovators in the banking industry, while the majority found incumbents to have minimal innovation. By acquiring SVB UK, HSBC will be able to combine the synergies of the established frictionless services with their existing infrastructure to build on the consumer trust pyramid. With talks about shifting SVB UK customers towards their private banking and capital market branches – the question now is, how can  HSBC combine all resources to create a human experience to successfully cross-sell/upsell its newly acquired customers?

The banking sector faces an interesting but challenging future. Emerging tech will continue to disrupt the market, with AI and decentralisation amongst the many trends that are slowly but surely paving opportunities for new entrants. As this plays out, we believe that partnerships, mergers and acquisitions will shape the landscape over the foreseeable future, as incumbents and new entrants compete for market share and positioning. However, one thing is for certain: as the financial services industry continues to become more saturated, delivering a trusted human experience will become a key differentiator.

To find out more about the topic…

Manifesto recently hosted an event “Mind the gap: have financial services lost the human touch?” where we covered the fundamentals of customer trust and discussed what we believe to be the blueprint of success. To download the full report, click the link HERE.