Banks aren’t letting fintechs have all the fun when it comes to using technology, providing an opening for startups to show them what they got.
Banks typically use deposits to make loans, which puts them into one of two situations: either they have too many deposits and not enough lending or investment opportunities, or they don’t have enough deposits to meet the loan, explained Paolo Bertolotti, co-founder and CEO of ModernFi.
For banks that need additional deposits, some of the go-to solutions are to open up a new branch or hire more relationship managers to increase marketing spend.
However, Bertolotti, whose background is in financial engineering operations research, said a trend emerged over the past 20 years of banks purchasing deposits directly from other institutions through the wholesale funding market, which has grown into a $2.3 trillion market.
“It’s an over-the-counter market, meaning there’s no marketplace or exchange and the market is very antiquated and opaque,” he added. “It’s really relationships driven and run by brokers, where you have bank CFOs essentially picking up the phone, calling other banks and brokers trying to understand market pricing and trying to find liquidity.”
Seeing how bilateral the relationships were, ModernFi was founded in 2022 by Bertolotti and Adam DeVita to build a transparent marketplace that connects banks to exchange deposits on demand. It also helps the banks manage balance sheet size and earn potential revenue. It is currently working with U.S.-based banks ranging in size from $500 million to $100 billion in assets.
As fintechs partnering with smaller banks have gotten popular, they’ve run into this situation, too, Bertolotti said. They want to remain small but also enjoy the interchange revenue that comes with sponsoring a fintech.
“We’ve seen scenarios where the fintech partner grows so quickly that the bank has to tell them to go find another sponsor,” he added. “We can plug into these sponsor banks and offer a way for them to offload the deposits to us so they can do what they want to do. You need a healthy interbank market to smooth out the edges, and that’s really how we see ourselves fitting.”
ModernFi doesn’t charge transaction, account or setup fees, but does take some of the yield that banks pay on the deposits. The company does have some revenue at this point, but Bertolotti declined to go into specifics.
The company is also the latest startup to grab some investor attention for its bank software, raising $4.5 million in seed funding. Andreessen Horowitz led the round and was joined by executives and founders from JPMorgan Chase, AWS, Coinbase, Q2 and BlackRock.
Commenting on the raise, David Haber, general partner at Andreessen Horowitz, said in a written statement, “After over a decade of being relatively staid, this market has become increasingly dynamic, laying a strong foundation for ModernFi’s business. With its tech-enabled marketplace, ModernFi is poised to be the interbank solution for those looking to monetize excess deposits and others that need access to balance sheet management on demand.”
Bertolotti intends to use the funds for growth, including hiring across engineering, bank partnerships and compliance, and product development related to integrations with bank partners and expanding the types of funding available through its marketplace.
Investment will also go into banks on both sides of the marketplace benefiting from diversified and stable sources of funding from multiple banks. For those banks on the receiving side, ModernFi is working on helping them eliminate any counterpart risk while also increasing the amount of FDIC insurance it can offer.
“Today, we do demand deposits, which is one funding source for banks, but we’re very excited to roll out term deposits, which are a second funding source,” he added. “There’s quite a lot to do on the analytic side, as well as help banks manage their balance sheets.”