SVB's Demise: The Hidden Cost of Overcharging in the Competitive Banking Landscape

the real explanation on SVB's collapse

Let's crack the mystery behind the fall of Silicon Valley Bank (SVB). Though the web is filled with narratives around this collapse, a critical missing piece from these tales is the spotlight on the overcharging frenzy that steered this disaster.

So we all know that Silicon Valley Bank collapsed.  Yes, it fell - but not with a bang, more like a series of disapproving sighs from customers who found themselves on the wrong end of the deal. 

SVB was NOT a classic bank run. 

Contrary to popular belief, the collapse of SVB was not due to a sudden frenzy of withdrawals, a classic bank run scenario. Rather, SVB, like a short-sighted pied piper, led its own downfall by overcharging customers. This overcharging saga would have driven SVB out of business anyway - just in a slightly slower motion than the weekend collapse that we witnessed in March 2023.

prompt: “People running to the banks to get there money realistic, headline news on a newspaper, newspaper, article, realistic, picture in color”

SVB's business model was predicated on over-charging depositors -- and at a certain point, customers did not want to be over-charged anymore.  It was a situation akin to buying an all-you-can-eat buffet ticket only to find out you’re paying extra for the forks. 

SVB historically paid lower interest rates on deposits than most other banks. It had a habit of tossing out interest rates on deposits that were lower than a snake's belly in a wagon rut.

Imagine this scenario: A Series B start-up parks $10 million in the bank. In the glory days of late 2021, most banks would be doling out a 1% interest on this tidy sum. That's a cool $100K every year. Now SVB, being the "special" one, decides to halve that – a miserly 0.5%.  Essentially, you're coughing up $50k/year for the privilege of having your checking account with SVB. 

$50,000 is a lot of money to charge for a simple checking account ... but not so much money that companies would leave SVB -- because SVB had such a trusted brand among tech companies.

When interest rates went up, SVB decided to continue pay about half the rate of interest as competing banks. When most banks were paying 4% (at the start of 2023), SVB was paying less than 2%.  So now that same start-up is essentially being charged $200k/year for a checking account ... talk about price inflation!

prompt: “Marvel comic book style 2D outdoor bank robbery with gangster shootout with generic superhero” 

So SVB customers started window shopping around for better deals.   Some customers switched banks completely. 

But most customers adopted a clever maneuver.  They kept their main account with SVB but set up sweep accounts with other more generous banks like Morgan Stanley. In the example above, the start-up would keep about $500k in the SVB checking account and move the other $9.5 million to a Morgan Stanley sweep account earning the prevailing market rate. SVB would still make a little money on the sweep account (getting a few basis points vig for the processing to and from Morgan Stanley) but earning far less than the spread they were making previously. 

That $9.5 million was technically accessed via SVB (and likely still listed as part of their deposits in some way) ... but it was no longer earning significant fees for SVB. 

Now, remember the part where I said SVB had expensive habits? Well, SVB really needed those fees. A LOT has been written on how its assets were long-dated and earning low interest ... but SVB also had a ton of fixed costs with expensive bankers and relationship managers. SVB was like a socialite with a taste for luxury. With its high fixed costs and a dwindling revenue stream, SVB was heading towards a financial fiasco.

Picture McDonald's suddenly having to cough up $2 to make a burger they used to produce for 50 cents, and yet continuing to sell it for a dollar. The once-profitable equation turns into a loss-making venture. That's exactly what happened to SVB - it was starting to lose money on every single customer.  Profit margins flipped faster than pancakes at a breakfast buffet. And all because customers have a funny dislike for being overcharged.

Of course, SVB was in a pickle (keeping with the McDonald’s hamburger analogy).  SVB could have cut the overcharging game back in 2022. But with long-dated loans hanging over their heads like a sword, SVB rolled the dice, overcharging their depositors.

It was almost like a magic trick. At first, depositors didn’t notice. Interest rates rose, and still, the majority sat quiet. But, eventually, like a rabbit from a hat, they realized they were being taken for a ride, and they jumped ship. 

Remember this happened well before SVB's infamous collapse.  Customers weren't scurrying away fearing the bank's insolvency, they simply decided they’d had enough of being milked.

SafeGraph (where I work) moved our money to a sweep account many months before SVB went bust.  So did thousands of other start-ups.  We did not do this because we thought SVB would go bust ... we did it because we wanted to earn a decent interest on our deposits. 

prompt: “People in patagonia vests running away from a bank on a street in Sunnyvale, CA”

The downfall of SVB wasn't a classic, movie-style bank run à la “It’s a Wonderful Life.” Nope, this was more like watching a soufflé collapse - SVB was on its way out anyway. They were losing customers because SVB was charging too much (because that was the only way they could sustain their business).  

SVB was not a local cable operator or a power utility who has a monopoly and can take advantage of their customers forever.  SVB is a bank -- and banking is super competitive.  Banking is cut-throat.  Every Goldman Sachs analyst hears the same speech on their first day of work: “we are in a SUPER competitive business and the only way to win is to outwork the other 1000 companies.” 

And in the banking arena, customers are free agents. They have options and boy, will they exercise them.

Here's a life lesson: You can't squeeze your customers indefinitely. They will eventually find out and move ... especially if they have alternatives (and there are HUNDREDS of competitive banks).  

In today's business landscape, there are countless entities (looking at you: landlords, cable monopolies, defense contractors, some SaaS companies, and even certain government services) playing the overcharge game. But here's the catch - unless you're a bona fide monopoly, overcharging is a ticking time bomb. Like a poorly run Ponzi scheme, it's only a matter of time before the whole operation implodes.