E.in small fintech from small, technology-savvy Estonia makes you sit up and take notice: The modular bank, founded in 2019, has just received equity financing (“late seed”) of 4 million euros. It is not the sum that is surprising, but the investors: In addition to the venture capital companies Karma and Blackfin, Plug and Play Ventures has also acquired a stake in Modularbank. The investor and accelerator from Silicon Valley has held shares in companies such as Paypal, Dropbox and Lendico since the start-up phase. Ott Kaukver, the former Chief Technology Officer (CTO) of the cloud provider Twilio and the Internet communication service Skype, is also an investor (“Angel”).
All of the investors were obviously won over by the modular bank’s business idea: The 30-strong team led by CEO and co-founder Vilve Vene has developed an open IT system consisting of many individual modules for core banking services that work in the cloud. Modular bank seems to be in trend, as Deutsche Bank has just announced a partnership with the American technology group Google. One goal: relocate IT systems to the Google cloud.
Why in the cloud?
One advantage of cloud technology: users have internet-based access to storage space and computing power, so they can access the data in the cloud from anywhere. At the same time, they only pay for the computing power they need. However, the monolithic core banking system that is still common in many German banks is a hindrance to outsourcing to the cloud. “The banks cannot stay as they are,” said Vene in an interview with F.A.Z. Banks would have to work less product-oriented and offer IT applications for real-time payment transactions, for example.
But creating many small, modern platforms is difficult with outdated IT, says Vene, who last worked from 1992 to 2002 as IT manager at Hansabank, which is now owned by Swedbank. Before Vene founded Modularbank, she did the same with Icefire – a kind of fintech consultancy that is responsible for the digital infrastructure of the Estonian tax system. So Modularbank is her second start-up.
Away from the “Big Bang”
The modular bank helps to modernize a financial IT in steps, slice by slice. Deutsche Bank IT board member Bernd Leukert calls this salami tactics. Many credit institutions with a monolithic core banking system, on the other hand, like the pharmacists ‘and doctors’ banks most recently, have to completely replace their IT at once after a changeover phase of several years (“big bang”). In this case, as is well known, it went completely wrong. Vene also points out that no more innovations will flow into the IT systems during a changeover phase.
Similar to Solarisbank and the service provider Mambu, which provides the digital infrastructure for N26, Modularbank offers a range of IT services that banks can access. But the banking IT core offering is also aimed at retailers, energy suppliers and providers of telemedicine. Such companies can integrate the various modules such as a credit tool into their own IT and then need banks less often. However, they themselves need licenses from the financial supervisory authority for this, because Modularbank does not have these. The strict regulation of the financial sector is seen as a major hurdle. Even big techs like Google will not apply for banking licenses, at least according to Deutsche Bank.
Even after the financing round, the three founders of Modularbank hold the majority in the company. With the fresh money, they want to expand to Great Britain and use the Berlin office that opened in January to promote customer acquisition primarily in Germany, Spain and France. Modularbank has six customers to date, including the latest Danish payment and card processor, Nets, in which Concardis has merged. According to Vene, Modularbank is about to sign a contract with three other customers.