As the recent collapse of Silicon Valley Bank continues reverberating across the startup community and the industries it serves, the effect has been akin to pouring salt on a wound for beleaguered mortgage technology firms.
The event exacerbated the difficult environment fintechs and other businesses in the home finance sector have been contending with for months as lending has fallen to lows not seen in decades, heightening funding and revenue worries in the industry.
But even as troubles in the banking sector remain top of mind, selective appetite for innovation in mortgage technology persists, and recent developments may even open up opportunities down the road once the dust settles, industry leaders interviewed for this article say.
Current challengesStill, the road ahead presents many obstacles in the near term.
"The fintech movement in general, I think, will start to slow down just because of the natural rising-rate environment; and then SVB and the U.S. banking crisis is going to slow that down some as well," said James White, general manager for banking at Total Expert, a digital communications and marketing software provider that works with mortgage companies and other financial services firms.
Venture capital funding's shift into a less-than-ideal market was not a situation investors had adequately prepared for, according to Josip Rupena, CEO of Milo Credit, a fintech lender that funds crypto-backed mortgages and loan products for foreign nationals. Rupena previously was a financial advisor with Morgan Stanley.
"A lot of the models that were created around proptech and real estate tech — they work in a zero-rate environment," Rupena said. "They don't work in this environment."
Silicon Valley Bank's woes are having a widespread impact on technology startups regardless of whether they have any direct ties to or accounts at the financial institution, according to Jason Harris, CEO at Button Finance, a lending platform that enables borrowers to tap into home equity. Before co-founding Button Finance, Harris previously worked as a mergers and acquisitions banker at Jefferies, and was an investor at a VC firm called Flatiron.
"I think almost every venture capital firm has a bank account at Silicon Valley Bank, and if they can't get their funds, they're not investing tomorrow," Harris said, noting that this disrupts the cash flow available to fintechs.
The catalystIt all started during a two-day period immediately following the seizure of the Santa Clara, California-based financial institution in mid March, when a few prominent venture capitalists telegraphed their panic across social media about the state of their money held at the bank.
Subsequently, the government announced it would guarantee all depositor funds, including amounts exceeding the federal insurable limit of $250,000. But despite the assurance of security of the bank's deposits, the effect of SVB's failure continues to cause investors to reevaluate and recalibrate while keeping a closer eye on their balance sheets.
"With everything that's happening, I think that probably stresses operations at some of those venture companies around how they're going to fund investments," Rupena said.
Any hesitancy among venture capitalists would likely leave newer emerging fintechs in a more precarious state compared to more established counterparts.
A conundrum for less sizable players
The situation at Silicon Valley Bank impacted smaller fintechs more acutely because of its willingness and experience in working with companies in early stages of development. More mature businesses with a stable revenue base and staff would likely find it easier to move money and start working with a larger bank, Rupena said.
But that type of opportunity is not afforded to all.
For a new startup "that is a seed stage, Series A stage, that needs the ability to open up a bank account and transact, I think there definitely will be a strain on the system," Rupena said. "The question is for how long."
According to a survey conducted by venture capital firm NFX in the days after the government seizure of SVB, 26% of startups said they had held banking accounts with Silicon Valley Bank. Meanwhile, close to 58% of founders said their companies possessed only a single banking account located at any institution before news of banking troubles made headlines.
Emerging fintechs hoping to move forward may need to rely on existing relationships to keep their operations on track, White said.
"A lot of the smaller fintechs who perhaps aren't well funded or are trying to really get established into the market. — I think that they'll have to continue to leverage partners and indirect channels to try to do that," he said, noting that some would likely struggle to survive.
More seasoned companies, on the other hand, might offer support to each other as they navigate any prolonged funding slowdown.
"A lot of the more established fintechs will be helping one another as far as trying to cross sell," White said. "You'll probably see some of that."
An accelerant for M&AWith originations down substantially year over year, several mortgage-industry mergers have been struck as well in the past few months across different segments. Fintech acquisitions would not be out of the question either, according to Chandresh Mehta, CEO of Infinity IPS, a due diligence and closing-support services firm. Mehta himself recently took over Canopy Financial Technology Partners through a different business he owns.
"It's a breeding ground for acquisitions now," he said, noting that "valuations are definitely in line."
"People probably are thinking the valuations may still further go down because there is virtually no activity in the origination market, nor in even capital markets."
Potential long-term opportunitiesThe void left by Silicon Valley Bank's failure also opens up a glass-half-full scenario for when it comes to the funding available for technology innovation once current worries subside. When that might occur is a question mark, but other banks understand that many of the businesses SVB worked with were sound enterprises, Rupena said.
"Historically, nobody wanted to compete with SVB," Rupena said. But some may be looking at the current situation and now see a market opportunity.
In home finance, the longer-term lending market holds promise for digital innovation as well, with companies hoping to capture tech-savvy younger consumers, according to White, noting that this echoes a larger trend seen in other industries. While known within mortgage circles primarily for its customer-relationship management platform and marketing services, Total Expert has expanded to serve retail banking and insurance businesses as well.
"Middle to large fintechs I think will be fine because we really do see a lot of optimism around new home buying, the younger demographics, financial wellness," White said.
Where mortgage originators might have easily earned profits when volumes were at record highs, "now they've got to lean in and start to leverage technology and separate themselves and build relationships," he added. "Fintechs are the ones that are going to be able to support them to do that."
