Large regional banks invest in startup deposit network

ModernFi, a newcomer to the deposit brokerage space, garnered interest from several large regional banks in fundraising for its Series A.

On Tuesday, ModernFi, which runs a network for banks to source and sweep funds and provide insurance to depositors above Federal Deposit Insurance Corp. levels, announced that it raised $18.7 million in Series A funding led by Canapi Ventures, a venture capital firm that focuses on early to growth-stage fintechs. Huntington Bancshares, First Horizon Corp., and Regions Financial also participated in the round. The company has raised $23 million to date.

Co-founder and CEO Paolo Bertolotti said in an interview that the company will use this funding to improve product functionality, invest more in compliance and increase headcount in areas such as engineering, customer support and regulation. 

ModernFi has entered a space that includes IntraFi, R&T Deposit Solutions, and StoneCastle Cash Management, which differs from the others in that it does not reciprocate deposits. Instead, depositors can open a Federally Insured Cash Account through StoneCastle, and the platform will then direct deposits in excess of FDIC limits to its network of banks. It also sells deposits to banks. 

The story of why financial institutions are turning to these deposit placement networks has changed, said Tony DeSanctis, senior director at Cornerstone Advisors.

Shortly after the failure of SVB and Signature, "the [FDIC] insurance angle was perhaps the most important aspect," he said. "Now I think the most important thing is the ability to manage and grow deposits. The war for deposits has escalated quickly." 

DeSanctis is unsure how much market share ModernFI has gained outside its investor base, but "in terms of products banks and credit unions need, anything that can help manage and maximize deposits right now is a home run," he said.

Leo D'Acierno, senior advisor at Simon-Kucher & Partners, points out that banks wondering if they can trust the network can look to the banks investing in the business. 

"ModernFi's deposit network delivers critical features and capabilities around deposit management for the industry," Igor Cerc, chief enterprise strategy officer for the Columbus, Ohio-based Huntington, and head of Huntington Ventures, said in a press release. Its technology has the potential to help Huntington differentiate its wealth management services, he said. 

"We are thrilled to partner with ModernFi to bring a next-generation deposit network to market," said Tyler Craft, director of transformation for fintech and emerging technology at First Horizon in Memphis, Tennessee, in the same release. "ModernFi's technology to streamline onboarding and operations for depositors and banks provides an innovative additional way for our industry to serve clients."

ModernFi launched in January 2022. Bertolotti declined to name any customers or how many financial institutions are clients of ModernFi, but he said the smallest bank in the network has about $40 million of assets and the largest has $200 billion of assets.

In many cases, new ModernFi users have an existing relationship with a similar service, but "we aim to and often win market share over time," he said. 

Bertolotti noted he saw a huge amount of interest from banks in using ModernFi's network immediately after the Silicon Valley Bank and Signature Bank collapses in 2023. "That remains incredibly strong and is still growing," he said, although he acknowledged, "the speed of that growth has tapered off."

Other players in this space report similar patterns.

"We are still seeing increased demand for our insured deposit products, although not at the same heightened levels we experienced in the late first quarter and early second quarter [of 2023]," said Kevin Bannerton, chief product officer of R&T Deposit Solutions. "The overall trend is that deposit balances have continued to increase within the network."

IntraFi also saw unusually high demand last year, with triple the number of banks joining its network in 2023 compared with the number that typically join in a year. StoneCastle also increased the number of banks in its network last year.