As readers are well aware, Silicon Valley Bank collapsed during a bank run March 10, throwing its 40,000 customers — including a large portion of climate tech startups — along with the U.S. banking system into a frenzy over the subsequent weekend as we waited to see what would happen.
Fortunately, the federal government stepped in and guaranteed the 97 percent of SVB’s deposits that were uninsured. It is impossible to know what the outcome would have been in the absence of this support, but it’s safe to say it could have been catastrophic to the startup and climate tech communities, not to mention the entire U.S. banking system.
Even if we don’t enjoy thinking about it, it’s important to note that banks do fail and not just Silicon Valley Bank. In fact, there have been 73 bank failures in the past 10 years with at least one bank failing each year except for 2018, 2021 and 2022.
Many people wonder why SVB’s customers didn’t do more due diligence on the bank, which they were storing millions of dollars in uninsured accounts. The reality is most startups don’t have the capacity or competency to evaluate banks in their early days. Instead, many outsource that responsibility and hope for the best. Evaluating one bank can be a time-consuming process, evaluating the dozens or hundreds of banks that would be required to store a startup's millions in insured $250,000 increments and then opening accounts at each of those banks would be a full-time job.
Consider using insured cash sweeps
As the details behind SVB’s demise emerged, the revelation that many successful companies with talented and capable leadership exposed themselves to annihilation by keeping up to hundreds of millions of dollars in uninsured accounts at a single bank has shone a spotlight on a neat little fintech risk management tool called insured cash sweeps.
Insured cash sweeps are a service offered by banks that have joined together to form a network of deposit holding institutions. When a client at one of the network banks has deposits in excess of the $250,000 insured by the Federal Deposit Insurance Corporation (FDIC), the uninsured cash is "swept" out of their checking account and deposited in $250,000 increments at other banks in the network.
The bank does all of this each day with minimal/no effort on the part of the client — for a fee, of course.
Reconsider the impact of that cash
Now this is GreenFin Weekly after all and not just Fin Weekly, so how can startups take those insured cash sweeps and use them to create a sustainable, prosperous and equitable world?
Instead of working with a traditional bank to sweep uninsured funds into insured accounts at its partner banks, you could work with institutions focused on impact investing to make impact cash deposits.
What are impact cash deposits? They are basically insured cash sweeps, but instead of being managed by a network of big banks, impact cash deposits use networks of credit unions, community development financial institutions (CDFIs) and low-income designated (LID) financial institutions. This practice supports improving access to capital for financially underserved communities.
Due diligence, diversification and insurance
That’s where impact platforms such as CNote and Impact Deposits Corp. come into play. Both organizations evaluate and cultivate networks of banks, credit unions, CDFIs and LID financial institutions and then manage the opening, transferring and monitoring of accounts at each institution so that you only have to worry about one account.
CNote CEO Catherine Berman said: "It can be very hard to do on your own. If a corporate treasury team actually has to call all these banks and open all these accounts, it is very cumbersome and arduous. However, our platform really brings the easy button. We make it very easy for the team to get started. And in fact, we can go from the first conversation to your first deployment within a matter of two weeks."
Too good to be true?
Cameron Turner, a fund manager at Oxford Angel Fund and an early CNote investor, described impact cash deposits as "... a win-win from the standpoint of having a non-concessionary product." Turner later characterized the competitive rate, downside protection and positive impact as a "triple win" for clients.
On Monday, Vice President Kamala Harris highlighted the important role CDFIs play in supporting the small businesses that employ half of all American workers, when she announced that $1.7 billion of grants will be distributed to more than 600 community lenders through the CDFI Equitable Recovery Program. The Vice President and senior Biden administration officials emphasized the need for improving access to capital for underserved communities in order to close the racial wealth gap and create an economy that works for everyone.
With over $1 trillion of uninsured deposits held in U.S. banks, it’s time to put that money to work.