Can Deutsche profit from other banks' payment IT projects?
Deutsche Bank realized it wasn't alone in its search for a vendor to expand payments to non-bank platforms, turning a fintech vendor hunt into a search for an investment opportunity.
Deutsche Bank recently made an undisclosed private investment in Modo Payments, putting Deutsche in a position to cash in on other banks building bridges to popular platforms such as PayPal, Venmo and Alipay
“They would rather see a return on the money they spend. Recognizing the benefits of Modo and the fact I can’t profitably build it myself, then perhaps I realize nobody else can either,” noted Tim Sloane, vice president of payments innovation of Mercator Advisory Group.
The growing popularity of non-bank payment platforms is creating a challenge for traditional banks that desire to make payments into those systems. Since many major banks provide treasury services to major companies, having the ability to make B2B and B2C payments (on their behalf) into these platforms is critical, especially given the growth of these non-bank platforms. For example, when Bank of America decided it needed help to serve the growing “Gig” economy in 2016 it reached out to Modo Payments for assistance.
Deutsche Bank has scaled its payments infrastructure, but it isn’t designed to talk to non-bank payment systems, according to Bruce Parker, founder and CEO of Modo Payments. "The institution is used to paying people by using institution and account identifiers, or as we know them, bank routing and account numbers. If the destination is PayPal and the identifier is an email address or a phone number, their system can’t handle the payments without a lot of extra work," Parker said.
Modo’s technology will allow Deutsche to provide new transaction services and payment alternatives for the rapidly growing digital economy such as vendors who sell entertainment content or application development and want to be paid in their mobile wallets, an important area of growth, according to Deutsche.
Modo provided an example of how Deutsche’s scenario could work using Google as an illustrative client. The challenge arises when Google wants to pay each YouTube channel owner for their earnings, but the owners wanting to be paid into their PayPal wallets and not a traditional bank account. This is where a bank would use Modo’s infrastructure.
“This is our jam. We make payment systems look like other payment systems. In speaking of payouts and interoperability. In this case [Deutsche Bank] we make digital wallets look like bank infrastructure so the bank can move money to the digital world,” Parker said.
While there are many vendors available who can transfer funds from a bank account into non-bank platforms and digital wallets, not all of them are equally attractive to banks since some will also seek to earn fees on foreign exchange when it comes to cross-border payments.
“Modo is the utility for the bank. We don’t compete for the banks’ FX earnings as some competitors do” noted Brian Billingsley, chief revenue officer of Modo Payments. Billingsley had joined Modo Payments less than a year ago, having been the former CEO of Klarna.
While working as a bank utility may not be particularly attractive, there are clear upsides to providing needed infrastructure and not competing with your clients. “Now consider this as Modo connects to more and more networks. The complexity for a new entrant grows and so the Modo solution looks better and better” added Sloane.
While Modo executives would not elaborate on the Deutsche Bank investment they did provide additional details regarding potential future investors. “We are closing our Series A funding round. We potentially could have additional investors to be announced in the next 90 days,” Parker said. The company also stated it plans to file the required SEC documents, e.g., Form D, for the Deutsche Bank investment within the required regulatory timetable.
Prior to the Deutsche Bank investment, Modo Payments had raised $11.25 million in four rounds of funding according to Crunchbase.
The ability for banks to be able to serve major corporations’ cash management needs is becoming more critical as marketplaces grow in size and as the “Gig” economy takes off. “The speed of payment for a gig economy or marketplace is critical to its success. Once price is competitive with other marketplaces, the next question participants ask is how fast they can be paid,” added Parker.