Andreessen Horowitz backs ModernFi’s deposit marketplace for banks • TechCrunch

Image credit: ModernFi / ModernFi co-founders Paolo Bertolotti and Adam DeVita

Banks don’t let fintechs have all the fun when it comes to using technology, leaving an opening for startups to show them what they’ve got.

In the same way that companies like Flourish Fi, Treasury Prime, Savana and Amount provide software for banks, ModernFi provides a marketplace where banks can exchange deposits on demand.

Banks usually use deposits to make loans, which puts them in 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 cover the loan, explained Paolo Bertolotti, co- founder and CEO of ModernFi.

For banks that need additional deposits, some of the best solutions are to open up a new branch or hire more relationship managers to increase marketing costs.

However, Bertolotti, whose background is in financial engineering, said a trend emerged over the past 20 years of banks buying 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, which means there’s no marketplace or exchange, and the market is very antiquated and opaque,” he added. “It’s really relationships driven and driven by brokers, where you have bank CFOs essentially picking up the phone, calling other banks and brokers trying to understand market prices and trying to find liquidity.”

After seeing how bilateral relations 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 to manage their balance sheet size and earn potential income. It currently works with US-based banks ranging in size from $500 million to $100 billion in assets.

As fintechs partnering with smaller banks has become popular, they too have found themselves in this situation, Bertolotti said. They want to stay small but also enjoy the exchange revenue that comes with sponsoring a fintech.

“We’ve seen scenarios where the fintech partner grows so fast that the bank has to tell them to find another sponsor,” he added. “We can connect those sponsor banks and provide a way for them to transfer the deposits to us so they can do what they want. You need a healthy interbank market to smooth the edges, and that’s really how we see ourselves fitting in.”

ModernFi does not charge transaction, account or set-up fees, but takes some of the return that banks pay on deposits. The company has some revenue at this point, but Bertolotti declined to go into details.

The company is also the latest startup to catch some investor attention for its banking 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 increase, David Haber, general partner at Andreessen Horowitz, said in a written statement: “After over a decade of being relatively stable, this market has become increasingly dynamic, laying a strong foundation for ModernFi’s business. With its technology-enabled marketplace, ModernFi is poised to be the interbank solution for those looking to monetize excess deposits and others who need access to on-demand balance management.”

Bertolotti intends to use the funds for growth, including hiring across engineering, banking partnerships and compliance, and product development related to integrations with banking partners and expanding the types of financing available through the marketplace.

Investments will also go into banks on both sides of the market that benefit from diversified and stable funding sources from several banks. For those banks on the receiving end, ModernFi works to help them eliminate any counterparty risk while increasing the amount of FDIC insurance it can provide.

“Today we do demand deposits, which are a source of funding for banks, but we are very happy to roll out term deposits, which are a second source of funding,” he added. “There’s quite a lot to do on the analytical side, as well as helping the banks manage their balance sheets.”