Overview of Can Community Banks Survive the Next SVB? | ModernFi CEO Paolo Bertolotti and Former Comptroller Gene Ludwig
This A16Z episode (host David Haber) discusses why the U.S. banking system—highly fragmented with ~10,000 banks and credit unions—is both a strength and a fragility, using the Silicon Valley Bank (SVB) run as a case study. Guests Gene Ludwig (former U.S. Comptroller of the Currency, originator of the reciprocal deposit idea) and Paolo Bertolotti (founder/CEO of ModernFi) explain deposit networks/reciprocal deposits, how ModernFi and the bank-owned consortium EnBid aim to solve the “cold start” problem, and why a member-owned utility model could be the key infrastructure to preserve community/regional banking’s role in the economy.
Key topics covered
- Recap of the SVB collapse: causes and systemic implications
- Why America’s many community and regional banks matter to local economies and startups
- What a deposit network / reciprocal deposit is and how it prevents runs by expanding insured capacity
- ModernFi’s business model and product stack (deposit network, analytics, reciprocal network for credit unions)
- EnBid: a bank-owned consortium / governance model for deposit infrastructure
- Adoption barriers: technology integration, economics/pricing, and alignment/ownership
- The “cold start” problem for networked financial utilities and how to overcome it
Main takeaways
- SVB’s failure was not primarily bad loans or fraud but an acute asset-liability mismatch amplified by instant internet-driven fund transfers and insufficient regulator readiness. (Transcript note: SVB held ~94% uninsured deposits.)
- Deposit networks (reciprocal deposits) can materially reduce run risk by distributing large deposits across member institutions so depositors receive extended FDIC-equivalent protection.
- Reciprocal deposits are not new—Gene Ludwig developed the idea in 2003—but market and technology constraints limited broad adoption until recently.
- ModernFi builds the software infrastructure (deposit marketplace, analytics, UX integration) to make reciprocal deposits digital, simple, and institution-owned.
- A member-owned, governed utility model (like Visa, DTCC, SWIFT, Zelle) aligns incentives, improves economics, and increases adoption because banks both supply and own the service.
- Adoption barriers are threefold: legacy tech and lack of integrated product UX; suboptimal pricing/economics in incumbent offerings; and lack of institutional alignment/ownership—addressing all three unlocks the network flywheel.
- ModernFi has focused on bringing reciprocal networks to credit unions (a previously underserved segment) and established EnBid as a bank consortium for banks; reciprocal networks now represent substantial scale (transcript references ~$450B in reciprocal deposits).
Why community / regional banks matter (summary)
- They provide specialized, local credit and relationship banking that large GSIBs can’t replicate (e.g., small-business loans, localized decision-making).
- The U.S. multi-bank system supports economic dynamism and innovation (VCs, startups, industry niches).
- Consolidation risks “banking deserts” and reduced access for communities and verticals—maintaining diverse institutions is economically important.
How deposit networks / reciprocal deposits work (concise explainer)
- Each bank has deposit insurance capacity; many have unused capacity.
- A reciprocal deposit network allows banks to place portions of a depositor’s funds at many member banks so the depositor’s total balance is effectively covered (beyond the standard $250k limit).
- Mechanically, deposits are routed/cleared across members via the network, preserving liquidity and spreading risk.
- Benefits: increases insured coverage for depositors, creates stable funding for banks, and reduces concentrated run risk.
The ModernFi + EnBid approach
- ModernFi: builds the core tech (digital onboarding, integrated UX, analytics, market clearing) and launched the first reciprocal network tailored to credit unions.
- EnBid: a bank-led consortium that runs a deposit network for banks. It is structured as a member-owned utility so banks have governance, alignment, and revenue share.
- Together they address tech, economics, and alignment: digital products integrated into banks’ flows; better pricing and competition; and a coalition ownership model to drive usage.
Notable quotes / insights
- Gene Ludwig: “It was the first time...the internet and the ability to transfer funds more rapidly conspired to put that kind of instantaneous pressure on a bank.”
- Paolo Bertolotti: “If you think about deposits, once you make the products digital and integrated—checking, savings, insurance sweep—it becomes the default.”
- On coalition utilities: “If you're really going to have a winning technology enterprise...you’ve got to have good technology, good governance, and customer-centric value.”
Figures mentioned (from the discussion)
- ~10,000 banks and credit unions in the U.S. (order of magnitude more than many countries)
- ~$20 trillion in U.S. deposits (total market context)
- ~$4.5 trillion cited as “wholesale funding” (deposits bought/sold)
- Reciprocal deposits market referenced at roughly $450 billion (scale achieved in networks)
- SVB reportedly had ~94% uninsured deposits at collapse
Technical and go-to-market challenges highlighted
- Cold start problem: building network effects in a market of cautious, regulated incumbents is slow and costly—first participants are critical.
- Tech integration: reciprocal services must be embedded into banks’ regular digital banking UX (not via separate portals) to become default.
- Regulatory & operational rigor: utility must be run to the highest operational/regulatory standards to earn bank/regulator trust.
- Pricing & market design: better economics and transparent revenue sharing increase adoption; incumbents’ pricing structures historically limited reach.
Actionable recommendations (for each stakeholder)
- For community/regional banks and credit unions:
- Evaluate reciprocal deposit products to expand insured capacity for large-deposit clients (public funds, nonprofits, business customers).
- Consider participation in member-owned consortiums to gain governance and share upside.
- Prioritize integration of reciprocal products into customer UX to increase adoption.
- For regulators:
- Continue to treat deposit networks as critical market infrastructure and ensure operational resilience and oversight standards.
- Encourage utility-style governance models that align participant incentives and ensure system-wide safety.
- For fintechs / builders:
- Focus on integrations and UX that make systemic-risk-reducing products easy for customers and banks to use.
- Design pricing and revenue-share models that attract member adoption and scale network effects.
- For business and high-net-worth depositors:
- Ask banks about reciprocal deposit/insurance sweep options before moving large balances to “too-big-to-fail” banks.
- Understand that extended insurance options are available via networks, not just via consolidation into GSIBs.
Why this matters going forward
- The SVB episode showed internet-era fund mobility can instantly convert a localized problem into systemic stress. Making deposit insurance and liquidity distribution more distributed, digital, and owned by banks themselves reduces that systemic tail risk while preserving the unique U.S. banking ecosystem that supports local economies and innovation.
- Building deposit-market infrastructure as a member-owned, highly regulated utility—backed by good technology and customer-centric products—can materially strengthen community/regional banks and reduce incentives for deposit flight to megabanks.
Bottom line
Reciprocal deposit networks, when implemented as digital, competitively priced, bank-governed utilities, are a practical, scalable solution to reduce run risk and expand services for community banks and credit unions. ModernFi and the EnBid consortium aim to solve the tech, economics, and alignment problems that have historically blocked broader adoption—addressing a less glamorous but potentially systemically important opportunity in fintech.