Banks Didn’t Ship This, Fintech Did

Originally a thread on X/Twitter:

Guess who launched another innovative #fintech product targeted at better serving the #startup community? @GetCapchase!

Guess who didn’t? Traditional Banks.

A few thoughts on their new product launch and why Banks continue to lag the #fintech innovators:

Let’s start with the new product that Capchase just launched.

Capchase Earn is a deposit account that helps startups reduce their cost of borrowing while earning up to 3% on idle cash. It sounds simple. It’s a great product. But Banks don’t have anything like it. Why?

Banks play a very important function in how startups operate.

Products that store money (deposits), move money (payments), lend money (lending) or invest money (investments) typically require some participation of a Bank due to regulatory requirements.

And within this suite of Banking products, just about every startup uses one product that Banks provide: An insured Bank account.

Alternatives exist, but many of them don’t come with the safety that a traditional FDIC and DIF insured Bank account provides.

Another problem is that Bank accounts are typically clunky and terrible at integrating payments, providing visibility into incoming/outgoing payments or keeping complex ledgers. Most Banking products are designed for consumer or enterprise customers. Startups are neither!

This forces companies to set up multiple bank accounts with specific uses, but the additional complexity creates work around the reconciliation of payments/tracking of information. This is a problem that can be solved with software!

And at its core, Capchase isn’t a Financial Institution or a traditional Bank. It’s a software company that creates magical Banking and Insights tools for startups and high growth companies with predictable revenue streams (like SaaS companies).

These companies are very different than “Main Street Businesses”. They’re always hungry for capital because they want to grow quickly. They raise multiple quarters of working capital in batches (Seed, Series A, Series B, etc) that they then use to invest in growth.

Raised capital can’t be risked chasing yield, so startups park cash in risk-free accounts until the cash is needed. These accounts are typically traditional Bank accounts that in today’s market yield less than 0.2%. This seems really wasteful and there should be a solution.

Solving this problem requires finding a way to fully protect the money while putting it to use. Isn’t that what Banks are supposed to do? Isn’t the core business model of Banks to pay depositors interest and then use the deposits to make loans?

One major problem is that the loan-to-deposit ratio at U.S. Banks has fallen every quarter since the onset of the pandemic. In Q2 2021 it stood at 58%, the lowest reported level in S&P’s Global Market Intelligence database (which goes back to 2003).

One result is that Bank margins have been slowly drifting down. A low rate environment and excess consumer liquidity have really hurt Banks because there isn’t enough borrowing to match off against consumers who are holding surplus cash in their Bank accounts.

But guess who wants to borrow? Fast growing startups!

And guess what type of loans Banks have never mastered? Loans to fast growing startups that aren’t yet profitable.

Therein lies the problem and the opportunity.

Banks aren’t going offer great savings rates because it will make a bad problem worse.

And asking them to fix their underwriting is equivalent to asking them to crack one of the great unsolved problems in mathematics. It’s possible but I wouldn’t bet on it.

But, it’s important to internalize that these problems are Bank specific problems, not universal problems. Specialty lenders aren’t sitting on mountains of deposits and specialty lenders are very capable of underwriting fast growth startups.

This is where Capchase has stepped in to create a magical product.

Capchase Earn is a fully insured Bank account (FDIC and DIF) designed for SaaS companies and high growth startups. It comes with a built-in choice that traditional Banks don’t offer. Chose one or both!

Choice 1: Yield.

For businesses that don’t have immediate borrowing needs, the Capchase Earn account offers yield that’s many multiples of what they would earn by parking the money at a traditional Bank (currently 2-3%).

Choice 2: Growth Capital.

Businesses that want to borrow can access capital equivalent to the sum of the cash they hold in the account PLUS their annual revenue run rate. This option can dramatically increase a startup’s ability to invest in growth at a VERY low cost.

With innovative products being launched by fintechs like Capchase, why would a high growth startup park their money at a traditional Bank? I struggle to answer that question.

But who am I? I’m just a lowly fintechjunkie reporting the news…..