Why We're Leading ModernFi's Series A

The banking industry is navigating through a period of tremendous pressure and uncertainty. The Federal Reserve’s aggressive rate hike cycle, compounded with recent high-profile bank failures, has led to the most aggressive deposit runoff from the sector in modern history. Since Q1 2022, over $1 trillion, roughly 7% of the total deposit base, has left the banking sector – to contextualize just how unusual this is: 2022 was the first full-year decline in total deposits since the FDIC started releasing data in 1992. Low-friction alternatives offered by fintechs, increased regulatory scrutiny, and warning signs in commercial real estate have only increased pressure on the banking system.  

The deposit runoff has disproportionately affected regional and community banks that have been more prone to concerns about stability. Amidst this rapidly evolving environment, we believe that innovative solutions are crucial to help community and regional banks retain and grow deposits. That's why we're so excited to partner with ModernFi, a cutting-edge deposit network built on a modern tech stack that enables banks to seamlessly reciprocate, broker, and sweep deposits. With ModernFi, regional and community banks can better protect the lifeblood of their organizations – deposits – and fundamentally improve the way they operate and serve their communities.

The Importance of Community and Regional Banks

The United States boasts a unique and robust ecosystem of community and regional banks. These institutions, many of them being Canapi LPs, undeniably constitute the bedrock of the American economy, accounting for a significant share of the nation's credit. Smaller banks, outside the top 25, are responsible for approximately 40% of total lending across various sectors in the country, as per data from the Federal Reserve. With 4,672 FDIC-insured institutions, the U.S. far surpasses any other nation in the number of banks. These banks play a pivotal role in our economy, providing substantial credit and financial services. They specialize in various geographic regions, demographics, and industries, ensuring that no area or sector is overlooked or underserved. In essence, community and regional banks form the heart and arteries of the American economy.

However, recent events have raised concerns about the future of these banks. Rising interest rates and high-profile bank failures have triggered a significant deposit runoff from the sector, with large-value depositors seeking the security of larger institutions and money markets.

Challenges Retaining Deposits

A critical component in retaining deposits is the utilization of reciprocal deposit networks. Reciprocal networks allow banks to offer FDIC insurance on deposits over $250,000, a crucial offering for retaining large-value consumer and commercial depositors. In a reciprocal product, deposits are swept into a network of banks in increments of less than $250,000 in order to provide a depositor with extended insurance. Receiving banks reciprocate, or send back matching amounts, so that the originating institution does not lose deposits in aggregate.

While usage of reciprocal deposits has grown over the past two decades, recently reaching an all-time high of $302 billion, their utilization is still very low relative to the number of uninsured deposits in the United States (there are currently $4.8 trillion of uninsured deposits held outside of the largest four institutions). The primary reason stems from a lack of modern, integrated technology solutions. Today, to access reciprocal deposits, banks and depositors undergo a manual, paper-and-email-based onboarding process that is time-intensive. The ongoing monitoring and managing of these programs is similarly manual and cumbersome. Altogether, the current reciprocal solutions create a high-friction and outdated experience that contributes to their low utilization.

We believe that reciprocal products will continue to grow in importance and prevalence over the coming years. They offer a non-rate value proposition to attract and retain key clients, enhance depositors' security, and stabilize a bank's deposit base. However, to become the default product for large-value depositors, improvements in the depositor experience are essential.

A Modern Solution to Increase Usability

Enter ModernFi. ModernFi has built a modern deposit network that enables banks to effortlessly reciprocate, broker, and sweep deposits.

With ModernFi, banks now have access to a modern, cloud-first platform that streamlines onboarding and operations for banks and their clients. The platform includes capabilities such as: integrated digital onboarding, state-of-the-art ledgering and reconciliation, and balance sheet analytics and optimization. The platform is elegantly designed with the sole purpose of increasing utilization of key deposit programs that ultimately better serve and retain the customer.

When we first met Paolo and Adam, we were instantly aligned with their vision and passion to build a best-in-class offering that is fully aligned with the way banks think about deposit management. Paolo's background as a Ph.D. from MIT in machine learning and algorithm development for deposit optimization, combined with Adam's profound experience at a top five financial institution working on cash and collateral management, gives ModernFi a unique edge in crafting a solution well-poised to lead the market. Their blend of technical proficiency and practical experience positions ModernFi as a game-changer in the financial industry.

Improving the Banking Industry

With everything that has happened in the banking industry over the past year, the need for a modern deposit platform couldn’t be stronger. We believe ModernFi has built just that.

By empowering banks to reciprocate, source, and optimize deposits, ModernFi is fundamentally improving how banks across the country operate and who will therefore be even better able to serve Main Street businesses and consumers. As we navigate these turbulent financial waters, we're confident that institutions adopting ModernFi's platform will be better positioned to weather the storm, keep pace with the industry's evolution, and secure a prosperous future.

We couldn’t be more excited to partner with ModernFi alongside leading banks Huntington, First Horizon, and Regions; and investors Andreessen Horowitz and Remarkable Ventures, as they transform the way community and regional banks grow and retain deposits.

Note: Deposit data according to government records compiled by BankRegData.