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SVB collapse may boost UAE startup business for neobanks

UAE startups and neobanks Truly Financial
UAE-backed digital-only bank for small businesses Truly Financial saw a 20% rise in new customer accounts following the SVB collapse
  • SVB has long been go-to lender for tech startups and VCs
  • Traditional banks often reluctant to risk business with small business
  • Neobanks pose added competition to traditional lenders

One thing is more certain than not in the ongoing confusion caused by last week’s Silicon Valley Bank collapse: traditional lenders in the Gulf are likely to make it even more difficult for UAE startups to open bank accounts and borrow money. 

Emerging digital lenders in the region are hoping that this creates a big opportunity for their services instead.

California-based SVB has long been the lender of choice for tech startups and venture capitalists (VCs) around the world. Most conventional banks prefer not to do business with higher risk borrowers with little in the way of collateral or a demonstrable track record.

For this reason, thousands of founders and VCs from the UAE and wider Gulf region held accounts with SVB.

“The real contagion spread by this is that regional Gulf banks have even more excuses not to work with them,” Prashant Gulati, a Dubai-based angel investor, told AGBI referring to start-up companies. Gulati targets companies in India, Middle East and the US.

“Now the bankers will point to what happened to SVB and say there’s a reason why mainstream banks, even in the US, don’t deal with this segment.”

Gulati, who holds accounts with SVB, said Gulf banks are also deterred by the power of the tech founders on social media. The panic over SVB was triggered when posts that the bank had lost money on some of its investments sent shares in its parent company SVB Financial Group tumbling. 

This fuelled one of the biggest US bank runs in more than a decade, as depositors attempted to withdraw $42 billion in a single day, according to reports.

Before its failure, SVB was the 16th largest US bank with assets of $209 billion at the end of 2022. Its demise was the second-biggest bank failure in US history and the biggest US bank failure since the 2008 financial crisis.

As a result, startups need to have multiple banking accounts, Gulati argued, but added that UAE banks were “being hard and difficult”.

“It’s almost impossible to open the accounts,” he said.

A 2022 study by identity verification platform IDnow Middle East found that nine out of 10 UAE respondents think it takes too long to open a local bank account. Eighty-six percent of UAE non-bank account holders said they had started an application but gave up as the process was too cumbersome.

So-called neobanks are the answer, according to Kanchan Kumar, co-founder and CEO of Truly Financial, a US-based ‘challenger institution’ for small businesses and startups backed by UAE-based investors including Gulati.

Neobanks or challenger banks typically have little in the way of a branch network but are regulated to the same standards as their conventional peers.

Kumar told AGBI that his digital-only bank saw a 20 percent increase in new customer accounts and 40 percent increase in deposits from frantic SVB customers in the four days before the Federal Deposit Insurance Corporation seized SVB.

Truly Financial, which charges per transaction for its global banking facilities, also extended an emergency credit line to founders of tech companies against their deposits in SVB. It received $25 million worth of requests within four hours.

Around 10 percent of its requests came from founders in the Gulf.

“What will certainly happen is that every startup is going to have a second account and they will bank with a neobank,” Kumar said.

“Initially, neobanks were competing for business with traditional banks. Now traditional banks are going to compete with neobanks.”

Kanchan argued that two clear new categories of challenger banks will emerge to take on the traditional players: one will provide higher yield treasury accounts, and the second will provide transactional banking and give better money movement capabilities.

Dubai-based Gaurav Dhar, CEO of Marshal FinTech Partners and a Mena FinTech Association board member, said change is already in progress in the region.

He pointed to the launch of the Emirates Development Bank (EDB), which provides direct and indirect financing to UAE-domiciled businesses. EDB targets investors in manufacturing, infrastructure, advanced technology, food security and healthcare.

“Alternatives are evolving and will evolve even faster as a result of SVB,” he said.

Dhar, also an investor in Truly Financial, added that while banks want to have more customers they need to also “limit their exposure”.

“The view point of regulators and service providers is a steady one,” he said.

“No instability has taken place to a large degree in our ecosystem, and that’s because they [the regulators and providers] move perhaps a little bit slower but they are also less risk averse.”

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