From Silicon Valley Bank’s Downfall to a Governance Blueprint for Fintechs

By Erika Eliasson-Noris from Beyond Governance.

The collapse of Silicon Valley Bank (SVB) has undeniably underscored the necessity of robust governance within the fast-paced, high-risk realm of fintech. The rapid evolution and innovative spirit characteristic of fintech are indeed exhilarating. But they can also cloak the precariousness of poor governance. Which will ultimately result in potentially devastating ramifications for all stakeholders, including the general public.

The fast-paced growth characteristic of fintech often leads to an unfortunate misinterpretation of governance. It is seen as a source of bureaucracy rather than an essential pillar for building efficiency and fostering long-term resilience. The pitfalls of treating governance as an afterthought become evident when the governance framework does not align with the culture embedded within the organisation, leading to catastrophic outcomes. In light of the SVB downfall, three core governance aspects emerge as crucial for fintech companies: board composition, risk management, and regulatory compliance accentuated by ethical conduct.

Board Composition: The Key to Stability

The long-term viability of any fintech hinges on the composition of its board. The repercussions of ill-suited appointments or yielding to external pressures to award board positions can be damaging. It can be leading to a destabilised and inept decision-making body. An effective board should encompass a variety of roles such as the CEO and CFO. But most importantly, an independent Chair, separate from the CEO. This separation prevents an unhealthy concentration of power and fosters a conducive atmosphere for constructive debate. Which is paving the way for informed decision-making.

The board should ideally have a majority of Non-Executive Directors too and possibly representation from key stakeholder groups. That will ultimately ensure a broad canvas of perspectives. Emphasising cognitive diversity can provide the board with a competitive edge, empowering it to challenge executives, mitigate risks, and inject innovative thought into discussions.

Risk Management: A Beacon in Stormy Seas

For fintech companies, the importance of risk management cannot be overstated. That is due to their exposure to a multitude of risks such as credit, strategic, operational, and cybersecurity risks. A comprehensive risk management process identifies, evaluates, and mitigates these risks. Initiating a risk register and regularly reviewing it with the board and other internal management is a practical step. Alongside the formulation of contingency plans to mitigate the repercussions of potential risks.

Fintech firms, given their handling of sensitive data, should prioritise cybersecurity risk and implement stringent controls. A clear mitigation process, along with an awareness of technological changes, is vital to safeguard the business against unnecessary risk.

Regulatory Compliance and Ethical Standards: The Pillars of Trust

Photo by Colin Lloyd on

Compliance with various regulations such as anti-money laundering laws, know your client (KYC) requirements, and data protection laws, coupled with high ethical standards, is vital for fintech firms. Staying informed about the evolving regulatory environment and operating with the utmost integrity and transparency are fundamental too.

Business practices should be fair, fees and charges should be transparent, and the suitability of products for the target market should be ensured. Fintechs should also reflect on their ESG impact, ensuring responsible lending practices, managing their environmental footprint, and cultivating a culture of ethical behaviour to name but a few areas. Being transparent about their governance practices, ownership structure, board composition, and executive compensation further enhances trust.

The importance of “getting it right”

“Getting it right” resonates across all stakeholders of SVB, as its failures impacted each of them significantly. Therefore, there is a shared vested interest in continuous improvement. Prospective investors will meticulously assess a fintech’s governance and risk management practices before making financial commitments. A board comprising industry experts and independent directors ensures effective oversight and strategic direction, thereby bolstering investor confidence.

Photo by Pixabay on

For customers of fintech services, trust and reliability are paramount. Emphasising regulatory compliance and robust risk management reassures customers that their data is secure, and industry best practices are followed. That will foster a positive reputation, and enhance customer trust.

Partners and suppliers collaborating with companies seek assurance of responsible operations and compliance with relevant laws. A strong board and risk management practices helps instil confidence in a company’s stability and dependability, facilitating fruitful collaborations.

Given the highly regulated nature of fintech industries, adhering to regulatory requirements is an imperative to maintain a valid operating license and avoid potential penalties. Regulators closely scrutinise compliance efforts and board governance to ensure consumer protection and market stability.

Talented employees are drawn to companies that prioritise strong corporate governance, risk management, and ethical standards. A well-composed board provides valuable guidance and mentorship to the management team, fostering a positive work environment and attracting top-notch talent.

The SVB calamity provides a sobering reminder of the importance of governance in fintech. By focusing on the key areas of board composition, risk management practices, and regulatory compliance underpinned by ethical standards, fintech firms can bolster their resilience, optimize stakeholder value, and lay a strong foundation for a triumphant market entry.

About the author

Erika founded Beyond Governance having fast-tracked her career to become one of the UK’s youngest FTSE 250 board governance advisers at 32.

She was Group Company Secretary at Low & Bonar plc (FTSE SmallCap engineering company) and prior to that Group Company Secretary at The Restaurant Group plc (FTSE 250 hospitality company). Previously she worked at InterContinental Hotels Group plc (FTSE 100 dual-listed in New York), Premier Foods plc (FTSE 250), ICAP plc (FTSE100 financial services) and KPMG.