• Jeremy Almond, CEO at Paystand


• 04.05.2023 03:45 pm
#banking

Despite all of the supposed innovation in fintech over the last decade, literally, all of the startups and top players alike rely on just a handful of banks to actually power their backend. It's insane that the $100 billion+ fintech and payment industry that powers our whole economy relies on basically five banks and two centralized networks. 

And we just saw what happens when one of them fails. The smallest one!

We now know the customer deposit risk, but less obvious was the wider infrastructural risk, the contagion. It's publicly known that at least two major payroll providers were built on SVBs payment infrastructure. When those payments became stuck, that alone impacted 60,000 businesses and hundreds of thousands of employees were set to not get their paycheck. The vast vast majority of those affected would have had absolutely zero association with SVB.

That's a centralized systemic risk!

There were many many other fintech companies built on SVB that were also in similar red alert situations privately. That was just the smallest of the central fintech banks going down. Imagine if one of the two bigger back-end banks had similar screw-ups; it would literally derail millions and millions of people, through no fault of their own. 

Centralized risk is deeply embedded in the incumbent payment ecosystem operations that we rely on every day.

Some view this risk as a strategic and deliberate approach to our economy and national interest, think again. 

Keep in mind, that the same deposit risk by SVB is endemic throughout the whole banking industry right now. In March U.S. Banks lost $400 billion in deposits – the largest deposit removal in U.S. history (think systemic bank run) – by almost 300%!

This is not limited to just the banks, the federal reserve runs the main ACH clearing house. Last year the federal reserve was materially down – for all of us. Every payment company, every bank, every fintech company, everyone. In *a single day* they move $3 trillion in US payment transactions. Last year's downtime – it being offline for an hour or even minutes is literally billions lost to the economy AND are not even capable of even processing on nights and weekends.

I haven't even mentioned the risk presented by the credit card cartels- two main credit card networks control $15 trillion in annual transactions and have had similar outages in years prior.

This is why decentralized financial infrastructure is so important. If one entity is down, people should still be able to access their deposits, payment instructions should still be able to be made, and our economy still should flow. 

The fintech industry has for too long been just a pretty UI or an API built on the same tired central banks and networks.

SVBs, Signature, First Republic and Credit Suisse' failure could be for the fintech industry, what Fannie Mae, Freddie Mac, and Lehman's failure was for the housing industry- A catastrophic harbinger of a system too big to fail, but too brittle, too full of risk, and too centralized to not fail. 

I know blockchain, bitcoin, and DeFi networks have their share of problems, but they represent a fundamental shift away from the same central banking system that's been in place since the 30s. 

Yes, today we now have unicorn fintechs, pretty UIs, apps, APIs, core digital banking software, new same-day networks, and proposed CBDC, but at a fundamental level, they are all prone to the same problem in our financial infrastructure that SVB laid bare: centralization! 

One bank, one risk, one bad actor, can take the whole central system down. 

I think it's time fintech companies start getting bolder by investing in real system changes in DeFi instead of pretending traditional fintech is anything more than covering up a rusted car with a fresh coat of paint.