The a16z Show - Can Community Banks Survive the Next SVB? | ModernFi CEO Paolo Bertolotti and Former Comptroller Gene Ludwig

Episode Date: November 20, 2025

The former bank regulator who invented deposit networks just revealed why SVB's collapse was inevitable—and why the solution that could have saved them is finally being rebuilt. Gene Ludwig ran the OCC during the Clinton administration, created a half-trillion-dollar market solving a problem his Aunt Betty faced riding buses between banks, then watched his invention fail to save Silicon Valley Bank because the technology, economics, and incentives were fundamentally broken. Now he's partnered with Paolo and ModernFi to build what could become America's eighth systemically important financial utility: a bank-owned consortium that's signing 25 institutions per week and racing to protect the 4.8 trillion in uninsured deposits that make the next crisis inevitable. Resources:Follow Gene on LinkedIn: https://www.linkedin.com/in/gene-ludwig/Follow Paolo on LinkedIn: https://www.linkedin.com/in/paolombertolotti/Follow David on X: https://x.com/dhaber Stay Updated: If you enjoyed this episode, be sure to like, subscribe, and share with your friends!Find a16z on X: https://x.com/a16zFind a16z on LinkedIn: https://www.linkedin.com/company/a16zListen to the a16z Podcast on Spotify: https://open.spotify.com/show/5bC65RDvs3oxnLyqqvkUYXListen to the a16z Podcast on Apple Podcasts: https://podcasts.apple.com/us/podcast/a16z-podcast/id842818711Follow our host: https://x.com/eriktorenbergPlease note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures.  Stay Updated:Find a16z on YouTube: YouTubeFind a16z on XFind a16z on LinkedInListen to the a16z Show on SpotifyListen to the a16z Show on Apple PodcastsFollow our host: https://twitter.com/eriktorenberg Please note that the content here is for informational purposes only; should NOT be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security; and is not directed at any investors or potential investors in any a16z fund. a16z and its affiliates may maintain investments in the companies discussed. For more details please see a16z.com/disclosures. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

I remember reading the Cold Star problem when we were getting this going together and thinking, you know, trying to solve the Cold Star problem in a network affects business with financial institutions has to be the worst idea of all the time. But now that we're on the other side, it's worth it. Once you get the flywheel going. Exactly. It's hard to get the going. Exactly. Zero to the first 20. That's the thing for it.

Two and a half years ago, Silicon Valley Bank collapsed at 48 hours. Not because of bad loans or fraud, because customers could move money faster than regulators could. react. The internet had turned a manageable problem into a systemic crisis. Here's what almost no one noticed. SVB was already a member of the deposit networks that could have prevented the run. They just weren't using them. Ninety-four percent of their deposits sat uninsured while the solution gathered dust. That failure revealed something bigger. America has nearly 10,000 banks and credit unions, in order of magnitude more than any other country. This fragmented system is either our greatest economic advantage or a ticking time bomb, depending on who you ask.

Community banks fund the small businesses and startups that make America different, but without the right infrastructure, they can't compete. In today's discussion, A16Z general partner, David Haber, sits down with Gene Ludwig, former U.S. comptroller of the currency, and Paolo Burtolotti, founder and CEO of Modern 5, a company that could become one of the most systematically important financial institution utilities in the United States. Not by replacing banks, but by getting hundreds of them to work to do. together. We're talking about the cold start problem in financial services, why the biggest

opportunity in FinTech might be the least sexy, and what happens when you turn former competitors into co-owners? Gene, Palo, thank you so much for joining me. It's great to be with you. Thank you for having us. Gene, it's two and a half years since the SBB crisis. You were a former bank regulator as the former head of the OCC, and I thought you'd have a sort of unique vantage point on that crisis, but maybe banking regulation, obviously, and its impact on the economy, maybe just walk us through kind of what happened two and a half years ago with the SVB, because I think it kind of conserved as an interesting backdrop for some of the other conversations that we'll have. Well, the SVB crisis, in one sense, was inevitable. On the other hand,

is peculiar, and it's a real example of what we call tail risk. It was inevitable because people make mistakes, and the dynamism of the economy means that somebody's going to be out of match. They had an asset liability mismatch that was considerable. And if anybody had really thought about that and said, look, I don't want to ride along with the bank that is that out of balance. And if the Fed was actually doing its job, it would have noticed an meeting and said, look, I don't care what you do. We're getting this back and bail. But they didn't. On the other hand, it is a tail risk and unique event because it's the first time that I know of in American banking where the technology itself, that is the Internet.

and the ability to transfer funds more rapidly conspired together to put that kind of instantaneous pressure on a bank. And the regulators weren't ready for it. The whole problem would have been solved, irrespective of the asset liability mismatch if the Fed had simply opened the discount window wide enough, early enough to stop the run. They actually did do that on Sunday.

But unfortunately, the bank was gone. Totally. Yeah, early. And I guess two and a half years later, what's changed from your perspective? Well, really, it was Biden who stopped the run. Against all advice, he got on television, looked into the camera and said, oh, your deposits are safe. Your deposits are completely safe. They're insured.

You don't have to worry about anything. Now, he knew at the time. That wasn't exactly true. There was truth in it. because he as president with getting the group together could have done what they ultimately did, which is basically put everybody under a sort of either a stop order or a fund order. Or cause the Fed to open the window wide and if it wouldn't happen. But it was a bold move.

People listened to him and they said, well, the president said our deposit, and sure to cool it right down. However, the system remains vulnerable over the long term because deposit sizes get bigger. the economy becomes more dynamic, the internet problem hasn't been solved. And as it turns out, there is one real solution to this problem that exists today. It's modern fine. Clearly. And we're with the man.

And we're going to get into that. I think America and you guys are deeper experts on this than I am, has such an interesting banking ecosystem, right? It seems to be much more federated. There's a much longer tale of institutions in our country than in many other markets. You go to Brazil, and it's an oligopoly. of, I don't know, four or five large banks you go to the UK or Canada. Similar story, I guess either of you, like, what is sort of the history of that? And then maybe more importantly, like, what role from your vantage points do, you know,

community, regional banks, even credit unions play in kind of the vibrancy in America's economy? So I think the history comes from, I mean, the history is pre-internet, it's pre-tech, right? I think before we had the connectivity, specific community, specific in industries needed access to credit. they needed access to banking products, which allowed for this wide diversity of institutions, and some of that has remained. Even as we have these digital products, these digital services,

you still have these institutions that very much specialize in their pockets of the country. And we have modernized our big believers that those institutions are actually a huge part of American differentiation, a big part of American excellence, a big part of the American engine, because these are where folks get credit to start small businesses, get their mortgages, car loans, whatever it may be.

And that sort of differentiation compared to other countries. I mean, you mentioned it, but we have an order of magnitude more institutions than the next country. It is a very special thing, and I think SVB that you mentioned is a perfect example of that as well, where SVB was very good at and very focused on supporting a very vibrant and thriving tech ecosystem. And two and a half years later, I think, unfortunately, one of the things that hasn't changed is there hasn't been another institution to fill that gap.

And I do think that's something that the ecosystem, the tech ecosystem specifically has suffered from. That's an excellent answer, and I totally agree with it. Let me take you down memory lane. So our founding fathers were not just patriots, not just warriors. They were actually businessmen. Right? They were the businessmen of the day. They owned land.

They owned this. Benjamin Franklin had a printing press, et cetera. And the problem was in the United States, there were no banks. So the banks they had to really bank with were the British banks. And they were the big, oligopolistic British banks that constantly took advantage of them. So the British banks and the central bank were absolutely anathema to our founding fathers. And they, beyond setting up a federal system to govern us, They wanted very much no central bank at a fractured banking system

that could deal honestly and fairly with business people like themselves who weren't, again, the biggest business people, the banks in England were dealing with, but were important business folks. So we ended up with this multi-bank system. And as Paolo said, and I agree with them entirely, it served us very, very well because we have an enormous economy that's incredibly diverse, and we are very innovative.

I think it is not an accident that Andresen Horowitz and canopy and all kinds of venture companies exist in the United States. Now, as a practical matter, I'll give you this example, why we don't want to let the country sink into a one-size-fits-all, three banks, four banks, five-bangs system. So I'm a businessman, say, in Indianapolis or Baton Rouge, And I have a problem with my business, and I want to basically talk to the bank CEO

to get advice and get a loan. I pick up the phone. I'm going to call Jamie Diamond. Do you think that Jamie Diamond, who is one of the most talented people that ever lived, has the time to call every little small business all over the United. Of course he doesn't.

And so he has very talented people around that help and do this, but you're not going to get the CEO. Totally. But if you're dealing with your local community in regional bank. Totally. And that telepicks up the telephone and says, I want that's who he gets on the phone.

And that matters, both in terms of the flexibility of the institution, the advice, et cetera. So America's great. It has great institutions like JPM that are huge and fulfill an important role. And it has small and medium-sized institutions that fit our own.

And it makes our economy unusually dynamic. Totally. And we want to do everything possible to keep that. Did Gene also sort of, tied it back to VC. And I also love that analogy because something that Andresen does are you have this sort of little tech manifesto, right? One of the things that is so special about Andresen, but VC in general is it allows little tech to get started and to dream and to execute and become big tech, right? And that's a key part, obviously, of so much of American

economic success. But banks play that role on the credit side. It allows small businesses to get started and grow and thrive and whether they stay small businesses or eventually become business, big businesses. So that access to credit, I mean, credit in a lot of ways is the lifeblood of any economy. And it's very easy when these institutions go away, the Fed, you have what the Fed calls banking deserts. It's just whole, not just communities, not just geographic areas, but actually verticals as well, industries, whether it's agriculture or merchants or wine or VC or whatever you have that becomes a little bit underbanked and that has larger downstream effects. So as we see consolidation in the space, we don't know what the end number may be.

It's not going to be four. I think having access to a wider range of institutions that provide a wider range of services is going to be a critical piece of the picture. And that's why I wanted to start with like the SVB crisis because I, you know, I mean, I remember we were actually as a GP group all in Las Vegas at an offsite when that whole thing was going down. I remember, you know, the CEO of SVV being on state, on a big screen saying, you know, don't panic, you know, like,

it was just a wild weekend, and many of our portfolio companies, you know, freaking out, you know, that they couldn't make payroll, you know, that Monday. But, but I think, you know, at the end of the day, I wasn't that concern that their deposits would be gone. I think the bigger kind of ripple effect concern was that, that, you know, people would lose faith in community and regional banks, right? That the market would sort of consolidate into the G-Subs. And that was the reaction that many companies, like our portfolio companies, were having,

which was taking their deposits out of SUV and then putting them into, you know, one of the largest banks in the country. And so, yeah, the fear was that it would sort of hurt some of that dynamism and the kind of local context that I think a lot of these institutions, you know, play such an important role, you know, providing. Yeah, and to that point, I mean, you know, we're here talking about the importance of and regional banks and something that I remember well from that weekend was, you know, one of the arguments, I'm sure there are arguments for and against the regulators stepping in that weekend,

but one of the arguments for was, look, this is this institution or this concept of an institution so important that if we don't support this institution, you know, what does American startup ecosystem look like? What does the American tech ecosystem look like? So I think it is a reflection and a good example of how important these institutions actually are to the economy as a whole, specific areas of the economy. Maybe we just take a step back. What is a deposit network? Well, a deposit network is,

let me just give the concept, is each institution has a certain amount of deposit authority. Yep. And often a certain amount of that is not used. A deposit network, in essence, allows one institution that has capacity that's unused to allow its fellow institution of the same size

to use that capacity. And so it's basically a pooling of the capacity. Now, the way it has to be done is different than just simply trading insurance chips. But the concept is really taking a certain amount of unused capacity and sharing it. And maybe, pal, just, you know, for those that aren't familiar with ModernFi, can you kind of describe what the business does and, you know, how you got into this?

You know, why did you choose to start this company in particular? So ModernFi helps financial institutions grow. That's the mission. We're talking about the importance of these institutions, regardless of size, regardless of location, and our mandate is to provide software infrastructure services to help them grow compete and thrive. And you can do that through a lot of. of different angles. Our core product is a deposit network. And a deposit network to Gene's

point is you can almost think of it as a market for deposits. Institutions are really sweeping, sourcing, or reciprocating deposits or buying, selling, exchanging deposit. And folks use that for different reasons. Gene sort of touched on the insurance piece. One of the key pieces is, we'll get into it through the conversation is what's called a reciprocal deposit. Gene invented the market, invented the idea in 2003. So a few years ago, now, but the whole idea is through a reciprocal deposit, a community bank, a regional institution

can provide access to more deposit insurance to their customers. So you're a community bank, you want to bank a business, they have 10 million of deposits. Normally, that's insured up to 250,000. With a deposit network through these exchange mechanisms, by placing deposits

at other institutions, you can actually provide 10 million, or access to 10, million, 20 million, 30 million, and that is so critical because for that institution is the difference between being able to serve that customer and not being able to serve that customer. So, you know, we talk a lot in VC about is this a, you know,

a nice to have or a must have. It's a must have for those institutions. Without it, they just don't serve those segments. And to Gene's point about that exchange mechanism, you can also use these in interesting ways in the sense that, you know, some folks are exchanging deposits one-for-one. Some folks, a lot of sponsor banks want to remain a certain size due to regulatory requirements, things like the Durbin Amendment, which we can get into. So they have an incentive to just sweep deposits.

You have folks on the other side willing to accept deposits for liquidity and lending purposes. And that's one of the beautiful things about deposit networks and just markets in general is that you have that efficiency, right? You're making connections, you're clearing the market. So that's the core of what we do. We have some analytics, some data services around that as well as we expand and grow. But, no, this has been a field and a topic that the team and I and me personally have been involved with and fascinated by for a long time now. I was in finance previously. I was at a hedge fund.

Really enjoyed it, fixed income, doing funding markets. So thinking a little bit about these problems. And the firm was well known for robust portfolio optimization. tools. So really enjoyed those market clearing problems and went off to grad school. I was fortunate to do my doctorate in ML and did a few different things, but was fascinated by a few things, but was fascinated by bank balance sheet optimization, talking about SVB. These institutions, the banking business model, as Gene and you know so well, is a fascinating business model because you are using short-duration deposits to make long-term loans. You're using money in a checking

or savings account to make a 30-year mortgage. So how you do that matching, how you do that asset liability matching, the modeling, the optimization, how you source that funding is a fascinating problem. And unfortunately, we see from the SVB situation, the First Republic situation, you can get it wrong, and you can get it wrong in a big way. And when you do get it wrong, it's critical or it's vital. And so I think you know this being, both of you know this being founders, you kind of start to see these ideas and they become like onions, where it's like you peel back a layer and it's

interesting and you peel back another layer and it's even more interesting. And that was definitely the story of modern fire where, okay, it's a huge market. There's, you know, 20 trillion in deposits in the U.S. There's nearly 10,000 institutions. Roughly four and a half trillion of that is wholesale funding where banks are just buying and selling these deposits. Turns out there's no real great deposit optimization. Turns out there's no real great deposit infrastructure. Their firms like the ones that Gina founded that have really been paved the way and have been vanguards in the space. But we're 25 years past the founding of a lot of those firms. So the opportunity set to build something so meaningful, so critical, and so impactful to these institutions was just too good

of an opportunity to pass up. And that's how we ended up starting the firm and partnering all together. I remember when we first met. I think you were the only person ever met that did a PhD machine learning at MIT on bank balance sheet optimization. Like, you're an N of one, Paolo. It's a little niche. It's a little niche. That's important. It's an important expertise.

This is critical for America. It is a wonderful time for modern FI to start this because the mechanism that is being used to reciprocal deposit mechanism is now widely understood and accepted by the regulators, and indeed accepted broadly as a real contribution to American finance. And so now that it's understood

both by the banking system that uses it and more broadly, it means that the ability for modern FI to grow and prosper is dramatically different than it was when I started. Creating it. Oh, nobody was against it. There was no regulatory negatives, but it seemed to people peculiar,

one that smaller institutions had on occasion, had larger institutions, neighboring institutions, say, well, you can't really take your business, Mr. businessman down to that bank because I'm sure they're fine people, but you have a fiduciary obligation, and I'm the big one that doesn't save. Maybe for our audience who isn't as, you know,

aren't as familiar with your career. You've had such a fascinating, you know, career in different capacities, both as an entrepreneur, regulator, I want to come back to the modern-fi, you know, business in particular and the unique approach you've taken. But maybe for folks, can you kind of share a bit more of, you know, your trajectory and, you know, even take us back also to like 2002, 2003 and, you know, first starting in Trump. I was headed, I thought, to the Justice Department to be a Justice Department

official when President Clinton got elected. But as it turns out, there was a huge problem. And that was that the banks in the United States have it coming off difficulties of the late 80s and early 90s had almost stopped lending. And in some parts of the United States, in California and New England, they had actually stopped lending. And Clinton, who was devoted to getting the economy rolling again,

remember James Carvel, who I just saw it the other day, said, you know, it's the economy stooped if you're going to be elected. So Benson and Clinton cooked up the idea that they had to do that, and the person to do it was, of all people, me. Now, I do not know to this day why they decided to do that. And they also, Benson was a very shrewd fellow. He decided the way to do that was to put me at the controller's office, because one, we control the majority of the banking assets the United States at the OCC,

and two, that if they didn't confirm anybody else to any other positions, which they didn't, that I, in essence, would have the authority to control the financial system and turn this around, which we were able to do. And that got me deeply into banking and regulation and banking regulation of all sizes. And, you know, it was five wonderful years, that's the term of the office, to really try to make a difference to turn things around. But I was on the FDIC board, Well, in essence, the only confirmed, well, not in essence, the only confirmed member of that board for a period of three and a half years who were really running the FDIC.

And in terms of these kinds of issues of deposit insurance, they were day-to-day, you know, sort of real to me. Now, oddly enough, as I know I've bored you guys with before, the idea of creating reciprocal network came to me because of two factors. One was the little bank, and it was actually a little bank in a disadvantaged community in Kansas City that couldn't get a decent deposit flow because the big banks kept saying, you know, they're wonderful people, but, you know, you have a fiduciary responsibility. And if they didn't get 100% deposit insurance, they weren't going to get decent deposits, even though they were a wonderfully run bank. But the second reason was how it affects the individual.

So I had an aunt, Aunt Betty, Betty Chadwick in Philadelphia, who both by aunt and my father were both immigrants, sons and daughters, and themselves almost immigrants. And so they were very conservative, and they saved every penny, and they put it in the bank. But the problem was, as she got older, she realized, oh, my God, the bank only has 35, in those days it was 35,000 of deposit insurance. And she had a couple hundred thousand dollars.

That's all. She was able to save as a secretary to a brokerage house. But she still wanted every penny insured. So she used to get on the bus and go from bank to bank to get a CD that was insured, including interest up to the limits. When she got older, to this day, I believe she forgot where she put it. And I don't think the family's ever. figured out where the money is.

But it was an essential safety net for her. And it dawned on me that this is crazy. You can solve both problems one way. If a bank was in essence collecting for Aunt Betty all the deposits and basically parceling it out, her deposits to the other banks in terms of CDs, but it was actually doing the, creating the mechanism, it was solving Aunt Betty's problem. And if it did that, but there were other Aunt Betty's around the country

with similar problems, that reciprocating mechanism would allow for deposit insurance, as I said earlier, using the unused capacity to be broadly shared and satisfied the need of the consumer for safety, not just Ann Bettys, but small businesses. And on the other hand, creating a larger funding, safety funding source or a deposit gathering source, for smaller banking organizations. And we created early models and algorithms to make it happen.

I'll tell you, things were so early then that when we started to do our own, our match, computer technology had not advanced to the degree that it could actually accommodate the complexity of a serious amount of money flowing. And we had to invent the use of resident memory as opposed to normal memory to basically be able to do the match instantaneously. So it grew from there and it was a lot of fun, getting the network together and running around the country to banks hither and yon, taught me a lot to.

This whole, because you learned about the banks and their communities and their needs. And so I got myself the first 450 banks, bank by bank, and then I got a team together to sales, and I was pretty well exhausted. He's stronger. Hunger is stronger. He's already exceeded 450. Fire powers combined, you know. That's awesome.

you know, obviously it was an incredibly successful business. You know, my understanding is, you know, I don't know, 75% EBITDA margin, you know, style company and ultimately sold, you know, sold the business to private equity very successfully. Yeah, maybe we come back, you know, to modern file. I think, you know, describe kind of your business at a high level on. You kind of have two businesses, you know, today, you know, both powering credit unions, which is kind of a new market and then, you know, also serving, you know, the bank ecosystem. maybe describe the company today.

And also, I think people would be very interested in some of the technical challenges of actually building this. Yeah, absolutely. Yeah. And, you know, I think Gene's far too humble as well with the story because reciprocal on the bank side has grown now to roughly $450 billion in reciprocal. And so that's, you know, a half trillion dollar market using these networks. But I think there's some interesting takeaways from that as well in the sense that, you know, It's a huge market, yet for the average person, for the average business, no one really has heard of these products. No one really utilizes these products.

And why is that? Yeah, it's a few reasons, all of which we set out to solve, but it's technology, it's economics, it's alignment. And so I think SVB is actually a great example in the sense that SVB was a client. It was a member of these existing alternatives, of these existing networks. yet SVB had 94% insured deposits, meaning no one at the institution was using these products, which again raises the question of why, because if they were, the institution would have had no trouble, right? Because people were afraid that their deposits were uninsured and therefore that sort of positive to blood capital. That's the sort of classical bank run where everyone wants their money at the same time,

and the bank on paper is solvent. You know, it has enough assets, but if everyone wants their funds at the same time, there's not enough liquidity. Right. And that liquidity crunch causes a huge. And to show how very important this is, and what Powell is doing is essential is SVB didn't have like a lot of junk assets on the other side. What was on the other side, the mismatch was with U.S. Treasury bills,

good as gold treasury bills. It was just a duration mismatch. So that just imagine a normal bank that is actually supposed to lend and support the economy that way. and the durations are longer. So you really can't have the magic of banks, the generation of business if you don't have confidence in the deposit system. Yeah, absolutely.

Yeah, and so, you know, we've done two things really to start and can get into the longer-term vision. I do think we view these deposit numbers as maybe the most incredible, profitable, impactful wedge because then there's so much more you can do. But what we've done so far is a couple things. First, you know, the U.S. has call it roughly 5,000 banks, roughly 5,000 credit unions. These solutions exist for banks, but they don't exist for credit units. And so one of the first things we did was we built the first

reciprocal now for credit units. And again, sort of that binary value proposition has been so powerful because if you're a credit union, you know, you're very mission-focused or very member-focused. now, you know, without these products, you cannot serve public funds, you cannot serve small businesses, you cannot serve nonprofits, and that is very detrimental to the execution of their mission. So bringing reciprocal to credit units has been a wonderful step change for the industry, and there's so much more work to do around public funds and all these different pieces, but now these institutions are able to serve a wider member base in a more meaningful way. And so that's been a wonderful network to grow and to scale.

But that's been an interesting, you know, an interesting process because it's a lot of education. It's, you know, you've never had this product before. The alternative is do nothing. On the bank side, it looks very different because these products exist. But as we were talking about, you know, they're not utilized in the way that they really could be, both to the benefit of the end customer, you know, the business or the VC firm or the, you know, the tech company or that. a high net worth individual, but they're also not utilized to the benefit of the institution, because there's a little bit of a hesitation to use them. And the hesitation to use them

comes from, I would call it three things. The tech, the economics and the alignment. The tech is the sense that, you know, we live in a digital age for everything, but banking has historically been a little bit behind the times. And so digital banking, you know, it's so second nature to to many of us in the younger generation, but for a lot of institutions, they're still catching up with a digital experience. And historically, these reciprocal products have not lived within the bank's existing digital experience,

meaning the bank has a web app, they have a mobile app, but to access these reciprocal products, you're not going through those apps. You're going through third-party portals and whatnot. So if these products truly are going to become the default for large value accounts, you're going to need checking, you're going to need savings,

you're going to need an insurance suite account. Right, and so it needs to be integrated, it needs to be digital. Not a crazy idea, but definitely didn't exist before us. So the idea is like I can open up a digital account and as simple as like checking a box, I can have to have to have to see coverage. And that's how you make it the default, right? Because, you know, let's say you run a business and you're going to want, you know,

an operating account, maybe you want a high yield account and then, you know, maybe a reserve account. And you want the reserve account to be 10 million of insurance. Perfect, right? That seems like a very natural product tech staff. And so that's it, right? Really simple. The second piece, and I'm sure we'll talk about the Enbit Coalition and some of the genius that Gene's been able to put together as well, is this notion of these, when you have these markets where there are only a few providers, sometimes you get some of these undesirable outcomes, and a lot of the undesirable outcomes come from pricing.

And so the margins and the existing pricing structures have just been to the detriment of the clients, and they just haven't been. been existing alternatives. And that's why competition's great, because competition leads to better products, better service, better tech, better pricing. And so, you know, we came in with, look, it's going to be better products, it's going to be better service, and it's also going to be better economics. And that makes a huge difference for these institutions that are so margin sensitive. And then the last piece is, we can talk about the end of its structure, but you have this beautiful opportunity to say, look, this is actually, in our mind, really a utility service where you have all these institutions coming together,

really the value of a reciprocal network at the end of the day is the banks themselves. They're the ones providing the insurance or the ones providing liquidity. So is there a way that we can build a coalition model where the banks have a notion of oversight, have a notion of ownership, have a notion of true membership? And if you can get that right,

that is a very, very powerful, a very, very powerful, vector here and there's so many wonderful historical precedence for this. Something that we had talked about a lot when we got this going together, all three of us was, look, if we think about V's in the early days, if we think about DTCC,

if we think about Swift, clearinghouse, Zell, early morning systems, these are all member-owned coalitions for utility services. Totally. And we had the opportunity to do something very similar with reciprocal, which I know is something that, you know,

Gene back in the day was already thinking about And so to be able to finally make that vision happen, I think has been very, very rewarding. When I started this activity, what I had assumed would happen is that I would have the banks have ownership stakes in it and that they would help run it because it does have a, you know, really national significance. Yep. And I also recognize that one really had to make sure that it wasn't just safe and sound. in terms of a good operating, but it had to be safe and sound in terms of what the regulators would,

you know, view as a really well-run organization. So you had to do two important things that were a little bit less common than you had another business. But in the original days, people didn't take it seriously enough. They thought this was a nice to have, not a must have.

that while they cheered it on, they didn't feel that it was necessary or desirable even to spend a time, you know, being part of it in an ownership way and also having, you know, some governance rights. Things have changed dramatically. That's since SVB has been a, you know, sea change event because banks can't pretend anymore.

They know they can't pretend. they really have to take this on full-throatedly. And DePaolo's great credit, and yours, David, my thought that we really ought to create a board of banks that would both have ownership stakes in the company and have governance rights in the company is something that I said a lot of entrepreneurs and other VCs wouldn't have the courage to do or the foresight to do.

So we've done that. and we've created a robust bank board and ownership governance structure. And that, and then priced it sensibly. So what that does is it really not only makes for a better organization, but it also means it creates the enthusiasm to do what they should be doing, which is basically using this mechanism to ensure all their deposits. because it's theirs. And, of course, the volume and the benefits to the company are profound.

To the banks, it's profound. And to the public, it's profound. Now, the other thing we've done, which, you know, happened from the beginning, thanks to Palo, but now even more, you know, doubled down, is making sure that in the regulator's eyes, this is really, you know, a first-class, well-run, respectful from a regulatory perspective, operation. And, you know, we've done that in every conceivable way. But in addition, it's we got people in the organization who are former FDIC regulators and who actually have been senior people understanding how this is to be done correctly. And maybe just walk through kind of like

end bit. Like how does it, how does it work, you know, at high level, you know, again, why did these banks want to participate in this kind of new network? Yeah, absolutely. So, So Enbit is a bank-owned, bank-managed consortium that Core does the deposit network for banks. And what has been so nice about that is, you know, we were talking about these financial market utilities. Like I had mentioned, you know, the banks themselves are the ones providing the value to these networks

in terms of the insurance, in terms of liquidity. So building a structure where they can actually benefit from the value that they add. And so they benefit in terms of alignment and oversight. They have, you know, oversight over the firm, financials, things like that. They have a say in the direction and the management. They have better economics from these networks.

We talked about how the margins in these business, not the margins per se, but just the economics have never been institution-friendly, which has actually been short-sighted because it limits the actual total addressable market. It just limits the adoption of these products. And then finally actually having some notion of a revenue share. I think all the best consortium models,

the members, whether it's modern, whether it's the institutions, have alignment and an upside and you align the incentive so that everyone wants to do well. And what's been so exciting about that is, to your point, it is this

orthogonal approach that is so well aligned with what the institutions actually want. And I think for any folks building firms, right, sometimes you think, oh, just better tech is going to be enough, but that's not always a solution, right?

I think to your point about competing against entrenched incumbents, you have a better search than Google. It doesn't necessarily mean you're going to upset Google. So there needs to be more. There needs to be real differentiation. And in this case, it was born from just having, I think, hopefully a deep understanding of what these institutions were actually looking for,

what they were actually worried about, what they actually wanted, what they would get excited about. and for the folks that modify, but very much so for the banks and the partners that we're fortunate to work with, what's been such a joy is how excited and enthused and motivated they are to make end up to make end up to success.

And I think that's how you drive the success that we've been having is when you have, of course, you know, our firm excited, but the actual participants, the actual members just amped up to make the success and something that, you know, the bank board talks about something that we talk about something in our members talk about a lot is the U.S. has seven what are controlled systemically important financial market utilities. These are some of the firms we talked about, DTCC, ICE Clear Credit. They are a lot of the organizations that provide the deepest, most

critical infrastructure behind our financial markets. And what we're doing with Enbit in a lot of different ways is building what could be and what will be the eighth. Absolutely. Absolutely. Absolutely. And for, yeah, and for every, everyone involved, that mission, that vision is just beyond exciting. And the banks want to be part of that. They want to own it. They want to be on that journey. They want to see the upside.

They want their customers to see the benefit. And so that has been a huge motivator for everyone involved. And the thing that I think that's been done here with that and basically the company itself is it's actually an interesting lesson that even goes beyond finance, goes beyond the company. So if you're really going to have a really winning technology enterprise, you've got to do three things. You've got to have good technology, right? And people who can create and adopt good technology. This company's done that and has that team. It's got to be well managed, which is often a challenge for young companies.

This company has got that. But then the other part of this, which is often, you know, in the ether, but it's not as precisely focused on as this company, is Modern FI has figured out this is about the customer. This is about adding critical value for the customer. And if you have an idea that is as big as you both have articulated, and as Modern FI is, and as NBIT is, you've really got to make it a customer-centric operation.

And I think if you look at the biggest, most successful tech companies in the United States, you will find that the way they operate is in essence with that focus in mind. So, now it's exciting. I think Palo is doing is exciting. It's great to be part of it. And there's a lot of moving parts and work on everything. No, I think what gets me so excited to your point on, like, you know, I mean, you prove that, you know, deposit networks can be an unbelievable wedge and an incredible business. I mean, you know,

you created billions of dollars that, you know, value at your last company. But, you know, if I think back to your PhD and bank balance sheet optimization, right now we're only focused on the liability side. I think once you get the network built, there's a whole other side of the balance sheet to even think about and lots of other products and analytics that we can kind of route, not just in the network, but serving an individual institution. But again, the hard part is solving the cold start problem, and I think that's been what's been so exciting for me even to just watch the last few months in it together. I remember reading the cold star problem when we were getting this going together and thinking,

you know, trying to solve the cold start problem in a network affects business with financial institutions has to be the worst idea of all the time. But now that we're on the other side, it's worth it. Once you get the flywheel going, it's hard to get it going. zero to the first 20. That's the painful part. Awesome. Thank you guys.

Thank you, Dave. Really fun conversation. Thanks for listening to this episode of the A16Z podcast. If you like this episode, be sure to like, comment, subscribe, leave us a rating or review and share it with your friends and family. For more episodes, go to YouTube, Apple Podcast, and Spotify. Follow us on X at A16Z and subscribe to our substack at A16c.com. Thanks again for listening.

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