Brex was one of the 20 companies that put their hat in the ring to acquire Silicon Valley Bank, or chunks of it, in March, newly-released Federal Deposit Insurance Corporation data shows.
The San Francisco-based neobank tried to acquire some deposits and credit cards from Silicon Valley Bank when the failed bank was seized by the FDIC, Brex CEO Henrique Dubugras said in an interview. The deposits and cards were all held by early and growth stage startup clients.
Dubugras knew Brex’s bid was a long shot because it isn’t a bank and it wasn’t aiming to buy all of SVB, but the overlap of the two companies’ focus on serving startups was attractive to the neobank.
“We understand the community really well, and we thought we could serve it really well,” Dubugras said. “We didn’t bid for the winery or the private bank, or any of these assets that we don’t understand. We only went for the ones we thought could do a really good job, and keep the ethos of SVB.”
Dubugras said that the acquisition of SVB’s early and growth stage portfolio would have brought customers and talent to Brex, but it would not have brought the company a bank charter.
Jonah Crane, a partner at advisory and investment firm Klaros Group, said acquiring a portion of SVB’s deposits could have been an opportunity for Brex to accelerate its growth with the company’s target customer base at a bargain price.
Raleigh, North Carolina-based First Citizens Bank ultimately won the auction for SVB, assuming $72 billion of loans and all $56.5 billion of deposits. The FDIC published all 25 bids, and the 20 firms who submitted them, on Wednesday, but didn’t disclose which company submitted each bid. Although nearly half the bidders were nonbanks, including Blackstone, Apollo and Sixth Street, Brex was the only neobank.
Brex declined to disclose financial details of its offer, but Dubugras said the company planned to use cash on its balance sheet to buy the deposits and cards. He added that Brex was never in contact with the FDIC about the bid. The company decided to submit its pitch at the recommendation of a Brex customer who was also a customer at SVB, Dubugras said. Brex’s executive team put together the proposal, which was approved by its board.
Neobanks that serve startups saw a massive influx in business following SVB’s failure as venture-backed businesses looked for ways to safely, quickly stash their capital. Since SVB’s collapse, Brex said it has added $2 billion in deposits. The company has also added to some products and features, including raising the amount of deposits it could protect through money sweep programs and expanding travel booking. Brex’s main strategy going forward is still focused on its spend management software.
“We’re not trying to win all the deposits,” Dubugras said. “We want to be your operating account. We want to make all your payments, run your payroll and pay your bills because our software is really good at doing that. And if you want to keep a lot of money in our treasury too, we have a product for that. But we really excel at simpler treasury use cases where you just want a money market fund, or day to day operation, like bill pay, wires, checks.”
The CEO added Brex isn’t interested in acquiring a bank charter the way some fintechs that focus on online lending like SoFi and LendingClub have in recent years.
Klaros Group’s Crane said it could make sense for Brex to try to acquire a bank charter, depending on its long-term strategy. When fintechs do try to buy banks, they usually look for small, healthy community banks.
“Brex is offering banking services to customers as a nonbank, and they found some relatively creative structures to do that,” Crane said. “But ultimately, they’re not going to be able to be the core operational account or core banking relationship with their customers without a banking license. I think it’s just too hard to run a core treasury and payments function for sizable commercial businesses as a nonbank.”
Dubugras said that Brex is still open to other potential acquisitions, but is prioritizing internal investments. He added that distressed SVB was a “very unique” situation because of its customer base’s overlap with Brex, and that there aren’t many banks that have similar portfolios, except First Republic Bank, which was also based in San Francisco and served similar clients in the startup space, but was placed in FDIC receivership last Monday following a steep drop in deposits post-SVB. JPMorgan bought all of the bank’s deposits and “substantially all” of its $229.1 billion of assets. Dubugras said Brex didn’t have a chance to look at submitting a bid for First Republic.
Bloomberg News and Reuters reported at the time that the FDIC had asked banks to place bids the day prior, including PNC Financial Services Group, U.S. Bancorp, Bank of America and Citizens Financial Group. JPMorgan Chairman and CEO Jamie Dimon said his company had 800 people working to assess First Republic’s books.
“Our government invited us and others to step up, and we did,” Dimon said in a news release at the time. “Our financial strength, capabilities and business model allowed us to develop a bid to execute the transaction in a way to minimize costs to the Deposit Insurance Fund.”
Crane said finding nonbanks able to take assets out of failed, or even healthy, banks could help the banking industry shore up capital positions. He added that he thinks if more banks fail, it will be easier for a nonbank to get in on the purchase action.
“Even if the vast majority of banks are reasonably healthy, they’re all looking at the balance sheet, and they’re all looking at the economic environment, and they’re all getting a little risk averse right now,” Crane said. “It makes sense that you would want to attract capital from outside the banking system to provide part of the solution here…J.P. Morgan can’t buy everybody.”