Banking for small businesses in the U.S. represents an estimated revenue pool of $90-$100 billion across lending and deposits. Bank accounts play a pivotal role in company operations, from payroll, receivables, credit cards, and taxes to financial reporting and cash flow forecasting. 99.9% of all businesses in the United States are small businesses, and there were 32.5 million small businesses operating in the US as of 2021. Of these, the 75% of SMBs undergoing some kind of financial stress are the most likely to use a digital bank as their primary financial institution.

Within corporate banking, digital banking is expected to reach $2.3 trillion by 2032. Big banks have, however, avoided serving small businesses as customers because SMBs typically have low ACVs while being high churn and hard to reach. For a bank, venture-backed startups can be more attractive customers than other small businesses due to cash from venture funding. Meanwhile, both large and small banks saw a spike in digital banking usage during the pandemic. For example, Wells Fargo saw a 35% growth in remote check deposits and a 50% growth in online wire transfers in 2021. Taken together, these trends have created an opportunity to rethink the banking experience with startups in mind.

Mercury aspires to reimagine the startup banking experience by combining the stability of regulated banks with modern technology. It offers FDIC-insured accounts, virtual & physical debit cards, currency exchange, and domestic and international wires. Mercury provides an API, custom team management, and integrations with the tools like Quickbooks and Stripe. Since the launch of its first product in 2019, Mercury has grown rapidly, reaching over 100K customers across 180+ countries.

Immad Akhund (CEO), Max Tagher (CTO), and Jason Zhang (COO) founded Mercury in 2017. The trio had previously worked together at mobile ad network Heyzap which was acquired by Fyber in 2015 for $45 million.

In this previous startup, the three of them found that they were always constrained by cash flow, which inhibited growth. Akhund, in particular, found it frustratingly difficult to figure out the basic banking and accounting operations required for running his prior startups. After Heyzap was ultimately sold, Akhund became an investor in early-stage startups and saw the same banking challenges he had faced while running startups before Mercury. This included a long application process, hidden fees, untailored services, in-person branch visits, and poor UI that daunted many startup founders.

In thinking about ways to solve this problem, Akhund was inspired by the growth of challenger banks across Europe, even though they mostly target consumers. He observed that although business needs had evolved, legacy banks were not evolving to follow suit, so there was a need arising in the market for a technology-first bank that catered specifically to the needs of startups. Immad met with over 100 banking and fintech experts and founders of neobanks to hone his understanding of the problems in this space, culminating in the launch of Mercury of private alpha in April 2019. In the first week, Mercury saw a customer transferring $1 million into their Mercury account. Mercury grew rapidly, reaching 1.5K signups in its first week after launch and growing 40% month-over-month in the ensuing months.

Source: The Generalist

Bank Accounts

Source: Mercury

Mercury offers FDIC-insured business checking and savings accounts for startups. It touts a modern interface and a streamlined application process as key differentiators from legacy banks. In April 2023, Mercury announced a partnership with Stripe Atlas that enables startups to set up business banking faster. With the partnership, startups can get a bank account before the IRS issues an Employer Identification Number (EIN).

Mercury itself is not a bank. Mercury partners with existing banks that hold bank licenses and enable Mercury to build offerings on top of them. Mercury's key banking partners are Choice Financial Group and Evolve Bank & Trust. Mercury selected these banks as partners because they are 1) US-based and federally regulated, 2) have strong financial health, 3) have diverse sources of deposits, and 4) are aligned with Mercury’s desire to build products quickly and ambitiously.

Mercury also works with several other non-bank financial institutions such as Apex Clearing Corp (a FIRNA-regulated brokerage firm that powers Mercury Treasury), Patriot Bank (which supports Mercury IO credit cards), and Morgan Stanley and Vanguard mutual funds (which also help power Mercury Treasury).

Treasury

Source: Mercury

A core feature of all bank accounts is that they offer deposit interest. Mercury does so as well, and with Mercury Treasury, the company offers treasury products that offer yield (up to 4.86%) to their customers. Mercury allows customers to select one of five strategies that differ based on a customer’s runway, burn, and risk profile. These strategies are offered by Morgan Stanley and Vanguard. For customers with account balances of over $25 million, Mercury also offers strategic cash investment services with Morgan Stanley with white glove service and personalized portfolio management. Mercury does not charge account opening fees, minimum balance fees, or transaction fees for Treasury. Instead, it charges a small percentage of its customers’ total monthly Mercury Treasury positions.

Venture Debt

Source: Mercury

Mercury offers Venture Debt. Venture debt provides startups with additional capital to fund growth and operations without diluting equity. The capital raised through venture debt must be repaid at an agreed-upon interest rate. Mercury claims to offer “first-class terms” such as straightforward payback plans and competitive interest rates. Mercury offers venture debt across all sectors and all stages, even as early as pre-product or pre-revenue stages. It mainly lends to US-incorporated companies that have raised VC within the past 12 months and companies that are planning to raise VC soon. Its loan application process involves three steps: 1) filling out a confidential questionnaire, 2) submission of financial and business documents, and 3) agreeing on terms and finalizing a loan agreement.

Customers who take venture debt from Mercury typically have up to 18 months to withdraw and use the funding, and up to 48 months to pay back the debt. Founders can also apply to refinance and refresh loans. Mercury charges an origination fee to process the loan application and charges interest and small warrants (warrants are rights to purchase equity). It does not charge prepayment penalties, back-end, or final payment fees.

API

Source: Mercury

Every Mercury account comes with read-and-write API access, which allows customers to build customizable automation. This can be used to carry out key banking and accounting activities such as creating dashboards, building custom sweep rules, reconciling transactions, querying account data, and programmatically initiating ACH payments.

Credit Cards

Source: Mercury

The Mercury IO Mastercard allows customers to obtain credit cards without any annual fees or credit checks (enabled by the fact that it provides the offering to customers who already bank with Mercury). The card offers 1.5% cashback with no complex point redemption systems. Customers can create as many cards as needed to distribute to employees, and Mercury offers the ability to set spending limits, customizable user permissions, and merchant restrictions. Mercury’s credit card offering also comes with a dashboard that allows for tracking all company spending and administration of all user permissions and limits — within one interface. Other features include monthly autopayments, Quickbooks integration, no annual fee, metal cards, and merchant-locked cards which can only be used at specified merchants.

Vault

Source: Mercury

While the Federal Deposit Insurance Corporation (FDIC) offers insurance on up to $250K per bank account, Mercury Vault offers insurance on up to $5 million of deposits as of April 2023, far beyond the standard FDIC $250K limit. Mercury achieves this by leveraging partner banks and sweep networks. Mercury can spread one’s deposits across a whole network of banks instead of just one bank. This means that deposits benefit from FDIC insurance across every bank. This feature is intended to protect customers from situations like the 2023 collapse of Silicon Valley Bank (SVB), where startup customers briefly saw deposits in excess of the FDIC-insured $250K put at risk until federal emergency measures were taken to backstop deposits.

An example of how Mercury’s Vault offering works: if ACME Corporation puts $2 million into one bank account, then $1.75 million ($2 million minus the $250K FDIC insurance limit) will be uninsured and could be lost if the bank fails. However, suppose ACME Corporation puts $2 million into Mercury and uses its Vault product. In that case, Mercury can spread that $2 million into $250K chunks in 8 separate bank accounts at 8 separate banks (i.e. its sweep network). This way, every part of the $2 million is covered by FDIC insurance because no one account exceeds the $250K limit. The term “sweep network” simply means a bank that can transfer (aka sweep) amounts that exceed the $250K limit into other accounts.

Additionally, Mercury Vault also lets customers choose to put funds into a Vanguard money market fund, which allows customers to mitigate any exposure from potential bank runs and failures because money market funds are not bank deposits, but instead, funds that are invested in US treasuries and offer some degree of liquidity.

VC Banking

Mercury saw a spike in interest and signups from VC funds that were looking to bank with Mercury after the SVB collapse, as SVB had formerly been the main bank for VCs. Mercury CEO Akhund noted that before the SVB collapse, he did not see the VC space as a key focus area; however, soon after the collapse, he realized that Mercury could become an important banking partner to VCs. Given the subsequent rise in interest for banking services tailored to the needs of VC funds, Mercury has launched VC Fund Banking, offering key features such as a 10-minutes-or-less application process, relationship management, free wire transfers (both domestic and international), and support for jurisdictions beyond the US, including jurisdictions popular with venture funds such as the British Virgin Islands, Cayman Islands, and the United Arab Emirates.

Customer

Mercury’s primary target customer is venture-backed startups. Traditional banks are not well suited for the “pace and creativity” of startups. Many traditional banks have hesitated to bank or lend to startups because they were viewed as too risky. This customer segment needs a banking provider that doesn’t have red tape, a large number of rules, or potentially tedious application processes — it instead needs a bank that can provide “intuitive technology that gives founders more control, more time, and more peace of mind”, which is what Mercury seeks to provide.

Market Size

In 2019, Akhund stated that “more than 3 million businesses are created annually in the US, and banking those businesses is a $400 billion industry.” In 2022, there were 5 million new business applications in the US. Each of these businesses needs a banking partner. In 2020, small and medium-sized businesses (SMBs) spend ~$370 billion on accounting and payments services. The commercial banking market in the US is estimated to be worth ~$1.2 trillion.

Startup Banks

New players in the business banking space include many startups and software platforms. Many other new entrants in the market also seek to create a better banking product for startups and small businesses

Brex: Brex is a spend management platform that has launched a banking product as an adjacent offering to its core corporate card product. Brex was valued at $12.3 billion in January 2022 and has raised $1.5 billion in funding as of April 2023. In the aftermath of SVB’s collapse, Brex, like Mercury, experienced billions of dollars of deposit inflows. In one sampling of former SVB customers, an estimated ~9% opened a bank account with Brex in this period of time (this figure for Mercury in the same sample was ~20%). Brex uses JPMorgan and Column Bank as its partner banks, just as Mercury uses Choice Financial Group and Evolve Bank & Trust. Unlike Mercury, the banking product for Brex is relatively new, whereas banking is Mercury’s core product.

Novo: Novo is a digital banking platform for small business owners, entrepreneurs, and freelancers. It was founded in 2016. Novo was valued at $700 million as of January 2022 and has raised $170 million in total funding. It has over 200K small businesses using it for banking. It has an app marketplace that lets small businesses customize their banking experience with dozens of native integrations. As of November 2022, Novo had over $12 billion in lifetime transactions and more than 180K small business customers.

Rho: Rho is a digital banking service for startups. It was founded in 2018 and has raised $194 million in total funding. It offers up to $75 million in deposit insurance through sweep networks, which is much more than most startup banking peers, including Mercury. However, unlike Mercury, it does not have a venture debt offering. Its annualized transaction volume grew from a little less than $2 billion in December 2020 to a cumulative volume of $3 billion between January and November 2021.

Adjacent Competitors

Beyond the startup bank players listed above, many players in the broader fintech space seek to eventually become the one-stop shop for all of a business’s financial needs, including banking. These players indirectly compete with Mercury, but as they expand their product suites (potentially into banking, like Brex did), they can come into more direct competition. This category of adjacent competitors includes players like Ramp, Gusto, Rippling, and Navan (formerly known as TripActions).

Incumbent Banks

Mercury competes with incumbent banking giants like JPMorgan, Wells Fargo, Citibank, and Bank of America. Additionally, it includes regional banks that have focused on serving startups, such as Silicon Valley Bank (SVB) and First Republic Bank. These are typically slow-moving but large players that have historically not catered well to the needs of startup

Mercury primarily generates revenue through (1) revenue sharing with partner banks on deposits, (2) interchange on its debit and credit cards, and (3) international wire and foreign exchange fees (1% fee). It also gets interest payments and warrants in companies it finances through venture debt and charges an origination fee to process the loan application.

Mercury also charges fees on advanced features such as mass payments through API, accessing Treasury account management, exchanging money in non-USD currencies, and sending USD internationally with premium processing. However, there are no account minimums, overdrafts, monthly, or account opening fees for customers.

Source: Mercury

In March 2023, it was reported that Mercury had ~100K businesses on its platform. Customers include Linear, Wren, Phantom, and On Deck. In the aftermath of the March 2023 SVB crisis, it was estimated that ~20% of SVB customers opened a new account at Mercury (in comparison, the same statistic for Wells Fargo was only ~2%). Akhund stated that in just 6 days after the SVB collapse, Mercury had added more than $2 billion in deposits and thousands of customers. During that stretch, Mercury experienced more signups in 2 days than it normally would have in a whole week. Additionally, Mercury saw a spike in interest and signups from VC funds that were looking to bank with Mercury after the SVB collapse.

50% of Mercury’s customers have come through organic channels, while partners and advertising contribute 20%. As of July 2021, the company said it had $4 billion+ in customer deposits and 40K+ businesses across 200+ countries. Mercury has reported being profitable since August 2022. It said it processed over $50 billion in transactions in 2022, up from $23 billion in 2021. Over 50% of YC cohorts use Mercury as their banking partner.

In July 2021, Mercury raised a $120 million Series B at a $1.6 billion valuation led by Coatue, with participation from Andreessen Horowitz, CRV, and Sapphire Ventures, bringing the total funding raised to $163 million. Notable angels also participated, including Dylan Field (CEO at Figma), Mathilde Collins (CEO at Front), Akshay Kothari (COO at Notion), Jack Altman (CEO at Lattice), Elizabeth Yin (Partner at Hustle Fund), Hunter Walk and Satya Patel (Partners at Homebrew). Its $1.6 billion valuation represented a 16-fold increase from its Series A valuation.

Mercury also allowed customers to participate in its Series B funding round via the equity crowdfunding Wefunder. Mercury ended up raising $5 million from 2.5K investors within 90 minutes on Wefunder, and the round reached $23 million in reservations over the next 9 days after the Wefunder launch. Akhund wanted to do this community round because he felt it made sense for Mercury customers to become owners of Mercury.

SVB Collapse

Silicon Valley Bank (SVB) was previously a dominant player in banking services to startups, which is the market Mercury competes in. Historically, SVB was a bank of choice for startups, as it was willing to bank early-stage technology companies that were often seen as too risky to the bank by the traditional banking giants. Because SVB collapsed due to a bank run in March 2023, startups with hundreds of billions of dollars of deposits originally held in SVB accounts needed a new home. Mercury can fill this gap and become the new bank of choice for Silicon Valley, and it has already absorbed some of the market share surrendered by SVB.

Market Expansion

Akhund has stated that Mercury wants to expand into new segments beyond just VC-backed startups. These potential customer segments include Web3 customers, consulting firms, and real estate agencies. Additionally, as noted above, Mercury has already made inroads into capturing significant market share within venture capital firms. All of this could help Mercury continue to grow its TAM.

Product Expansion

Senior leaders at Mercury have noted the opportunity to add adjacent offerings to the core banking platform. Mercury’s VP of Finance, Dan Kang, has said that “there's so much value we can drive regarding workflow automation for accounting and finance teams. We want to give them back time.” Building offerings focused on workflow automation for accounting and finance processes could create more value for customers, entrench them deeper into the Mercury ecosystem, and drive more revenue. In the same way that other fintech companies see banking as a potential offering to build and attach to their core non-banking platforms, Mercury can expand from its core banking platform into other fintech services, and perhaps eventually become the single source of truth for all things finance and banking for its customers.

Becoming a Bank

Mercury could explore becoming a bank long-term instead of partnering with banks like Choice Financial Group and Evolve Bank & Trust. This could yield a few main benefits, namely fuller control over the customer experience, more control of risk management since it would no longer have to be dependent on the health of partner banks’ balance sheets, and improved economics from not needing to share revenue with partner banks.

Deteriorating Trust in Smaller Banks

As a result of the SVB collapse, smaller banks are losing deposits as depositors flee to safety in larger, systemically important banks that could be more resilient to any bank run risks. The 25 biggest U.S. banks gained $120 billion in deposits in the days after SVB collapsed. All the U.S. banks below that level lost $108 billion over the same period. It was the largest weekly decline for the smaller banks’ deposits. Though Mercury has benefited from this, it still is a much smaller, much younger banking provider (and so are the two banks that Mercury partners with) than the legacy incumbents, and it remains to be seen whether Mercury can result in the long-term buck the trend of smaller banks losing trust.

The balance sheets of Mercury’s partner banks Evolve Bank & Trust and Choice Financial Group are relatively weaker than the balance sheets of giants like JP Morgan, which famously has a “fortress balance sheet,” One data point on this is that back in late 2022, multiple VCs including Sequoia and Craft Ventures had advised startups to move funds away from Evolve-backed platforms, which resulted in about $200 million of deposits moving off of Mercury.

Graduation Risk

Mercury may face the risk of their customers graduating to more established banks like JP Morgan or Bank of America as they mature and grow in size. As startups grow and become more established, they may need more specialized services, such as international banking or investment management, that Mercury may not be as well-equipped to provide as larger, older banks are. Established banks like JP Morgan have larger networks, resources, and additional services that may be more appealing to startups as they grow into larger companies with more needs. This need for additional resources and services beyond what Mercury offers, but within the realm of what a big bank like JP Morgan can offer, has been cited by customers as a feature request — one Mercury customer noted that while they see Mercury as a 10 out of 10 product experience, it lacks some of the “ancillary personal services” like founder lending. It also lacks a proactive, high-touch networking service that can help with fundraising.

Moreover, Mercury's customers may be more likely to switch to a larger, more established bank due to concerns about the stability of a startup bank, especially in light of the SVB crisis. Startups may prefer to move to larger banks that have a more proven track record of stability and reliability as soon as these startups grow to the size such that those large banks are ready and willing to bank them. This risk stems from one of Mercury’s value propositions — that it makes it easy for startups to get bank accounts when they are small and thus cannot easily obtain bank accounts at established banking institutions. Mercury's growth prospects may be limited if many of its customers do end up graduating to larger banks.

Mercury is a startup bank founded in response to the pain points experienced by startup founders in dealing with traditional banks. With a user interface designed with the intent to be modern and intuitive and streamlined account opening processes, Mercury has quickly grown to over 100K customers across 200+ countries in just four years. As it seeks to become the dominant player in startup banking, Mercury can fill the large hole left by SVB and expand into new segments and offerings. Meanwhile, it must fend against competitors, graduation risk, and a broad potential decrease in trust for smaller, less established banks over the long term.