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Cross River Bank is a new breed of financial institution — a state-chartered bank with the mindset of a fintech startup. Born during the financial crisis, it is innovating through its banking-as-a-platform service that lets other companies offer banking products to their customers. In a wide-ranging interview, Gilles Gade, founder, president and CEO of Cross River Bank, discussed the opportunities he saw in banking during the meltdown, how his bank has kept growing and what’s ahead for fintech. He was interviewed by Knowledge@Wharton and fintech entrepreneur and former Wharton professor Vinay Nair, founder and chairman of investment firm 55ip.
An edited transcript of the conversation follows.
Vinay Nair: Could we start with a little bit about your background?
Gilles Gade: Sure. I was born and raised in Paris, France. I went to business school there, and then joined Citicorp Venture Capital as an intern. I got my internship extended by about a year, which gave me an appetite to get into the financial arena, particularly in the U.S. on Wall Street and I crossed the Atlantic in October 1991. I got my first job in the U.S. at Bear Stearns in investment banking, working primarily on banks and insurance companies, a number of cross-border transactions, international IPOs, privatization of banks and insurance companies abroad, on the European continent. Then I took a hiatus for a couple of years to learn the Talmud (a Jewish religious text).
Then I came back to Wall Street to work at … what is now Barclays Capital, worked in technology and investment banking, primarily cross-border M&As. … I left with my boss and created a boutique investment bank focused on technology from 2000 to 2005. This opportunity [for Cross River Bank] fell in my lap in late 2007 and for the past 10 years I’ve been working furiously to keep abreast of the fast pace of the fintech world.
Nair: The 2007-2008 period was a tough time for the banking industry. What inspired you to start the bank at that time?
Gade: In every downturn, some people perceive certain things as being challenges and others see an opportunity. In this case, the opportunity was opening a bank that had a clean balance sheet, adequate equity, and a tremendous opportunity to buy quality assets that were being dumped by numerous financial institutions, hedge fund investors and others. This was happening for various reasons like margin calls or because they had bridge triggers.
“We are positioning ourselves as a new bank play, somewhere between what a bank should be and what fintech aspires to be.”
The opportunity was to utilize either government leverage or depositors to deploy quality assets — very safe — at terms that were stringent, and so, basically, safe and sound as far as regulators were concerned. We managed to execute that vision fairly rapidly to a point where we managed to generate profits. Typically, it takes anywhere from three to four years [to be profitable] because you are investing a ton of money in things like compliance, infrastructure and technology. But in this case, we managed to turn a profit after the fifth quarter. It was the right time to enter the market with that kind of philosophy.
Nair: Typically, when we think of banks, especially in the start-up world, we don’t think of them as fintech firms. But you have investors from Silicon Valley noted for tech investments. What makes Cross River a fintech firm, as opposed to a traditional bank with a charter?
Gade: We are not trying to tell the world that we are not a bank. We are a bank. However, the way we view banking in the 21st century and beyond is radically different from how people typically perceive banks. So, instead of positioning ourselves as a fintech play, we are positioning ourselves as a new bank play, somewhere between what a bank should be and what fintech aspires to be.
This entails a host of compliance modules, a host of technologies, a host of not only fintech but regtech [regulatory technology] as well — but not necessarily providing services such as a message platform or access to certain payment models. It’s a very comprehensive suite of products into what we call banking-as-a-platform. It enables anybody to plug and play into the payment realms, into the payment systems, and develop not only a payment strategy but also a banking strategy.
Nair: What do you think has prevented or slowed some of this within existing large banks? Why does the opportunity that you are tapping into exist at all?
Gade: Staying small and nimble has helped us stay under the radar and adapt rapidly to the regulatory requirements and technology advancements the market requires and demands. In the case of large banks, whether they are money centers, international banks or correspondent banks … if they venture into a new arena, it may cannibalize their own business. For instance, marketplace lending would be a threat to the credit card business of most of the large credit card issuers.
“Every single bank has been hit. That’s just a fact.”
This is a typical example of why they shied away from marketplace funding. Now, you actually see an alliance or realignment. In other words, we went from a phase of disintermediation of banking services to a remediation of banking services. Banks are realizing … that there could be a different way of servicing and serving the consumers and that we ought to look at new offerings like marketplace lending, fintech and regtech and embrace them, like Goldman Sachs and Marcus [an online platform from Goldman Sachs offering no-fee personal loans], as a new form of doing business.
Nair: Marketplace lending is obviously an area you have the strongest momentum in — since you started your assets have grown beyond half a billion. With the larger banks thinking about these alliances that you mentioned, how are you working with them to make the alliances smoother or easier for them?
Gade: We specialize in originating loans on behalf of marketplace lenders. I would put them in two different categories. One, the pure fintechs, such as Silicon Valley companies … that spread out probably in the last three to five years. These include Lending Club, Upstart and others. We have another category, which is the legacy of finance companies that have been doing a phenomenal job at serving consumers at various facets of the financial product offering. For example, large mortgage originators like Quicken Loans, Loan Depot and many others. So, we have two kinds of marketplace lender originators. The model is the same. You utilize a bank to originate your loans, handle the compliance and the payment delivery to the consumers in quasi-real time.
Quicken Loans, for example, is capitalizing on the million leads a month that they are getting on the mortgage origination side. The name of the game is how low you can go in terms of customer acquisition…. That is the big battle between all these originators.
We, as a bank, are here to provide a service, provide access to payment routes and compliance modules, to anybody who wants to venture into that business. We believe that legacy players such as Multifunding, as well as Quicken Loans and Loan Depot, have a compliance infrastructure and understand compliance requirements much better than anybody else. They have a little bit of a leg up there.
That’s why the banks that are in the credit card space could have a lot to gain by venturing into this business by providing a different type of loan to the consumers. At present, if you walk into a bank branch and fill out an application, or even go online and fill out an application for a credit card, it may take anywhere between three to five weeks for you to get an answer.
The consumer deserves a lot better. The fintech companies on the marketplace lending side offer a service delivery that consumers deserve, and now expect today. The loan application there is seamless and elegant. You should have an answer within 20 minutes, because the technology enables that. And within 24 to 48 hours, you should have the funds in your account.
“There is now a critical mass of marketplace lending loans outstanding.”
Nair: This idea of banking as a service is very interesting. Are there competitors that you have, or peers that you would classify as trying to do something similar?
Gade: In Europe, yes. But I’m not sure I would qualify them as competitors because they evolve on a totally different regulatory framework…. The idea is not to compete with our platforms, not to compete with our customers. If we wanted to compete with our customers, it would turn us into one of the larger banks and those are shying away from cannibalizing their own business whether it’s on the lending side, like the credit card example that I mentioned before, or on the payment side.
That’s why most banks have been shying away from services like Zelle or WireXchange or ACHWorks. They wanted to develop their own ACH [automated clearing house] platforms. The problem is legacy systems prevent them from having a good interface and a user experience that consumers expect today. In the U.S., we are seeing competition, but it is very fragmented. Various people have certain components of what we do but I haven’t yet encountered a company or a bank that does a full sweep of services that is working on a core processing platform the way that we’ve been developing for the past three to five years.
Nair: Do you think of what you are doing as disrupting, or incrementally changing the banking industry?
Gade: The interesting thing about the banking industry is that like in the telecom industry there hasn’t been any innovation except on the acceleration of the transmission of data. … The only true innovation on the payment rail, I would say, is messaging in the cloud. The other one is blockchain. … Beyond that, we basically use traditional rails and try to accelerate the movement of money between them, make those payment rails talk to each other through an intelligent router, through a payment gateway, or whatever the case may be. It’s the same phenomenon that occurred in the telco space over the last 10 to 15 years. You have a fiscal router that accelerates the movement of data, but using traditional channels such as coaxial cable or fiber.
Nair: What do you think are the primary risks for your very impressive growth over the past decade?
Gade: The primary risk is the compliance risk. The reason is very simple. This is a new arena with new players. This is probably the highest risk business in the sense that the bank is using third parties to originate, whether it’s loans or payments. It’s about dealing with money service businesses or third-party payment processors. These are considered very high risk by the regulators. And they’re still writing the book. They’re still writing some of the compliance modules. They’re still writing some of the guidance.
The goalpost keeps moving, and we have to adapt rapidly to make sure we are on top of, and to some extent even predict, regulatory requirements. That requires a ton of work, a ton of know-how, knowledge base and compliance folks on our staff, just to make sure that we stay ahead of what the regulators expect us to deliver in terms of consumer protection. I would say this is our primary concern, probably our primary risk.
“Fintech occurred because banks left a huge void. … Banks just exited entire markets.”
The second one, particularly after the Equifax debacle [in which sensitive data of over 143 million people was breached], is cyber-security. We can’t ignore the fact that there are only two types of banks: Banks that know they’ve been hit and banks that don’t know that they have been hit. Every single bank has been hit. That’s just a fact. Banks are a very easy target. So, it’s a matter of how fast can we respond, how fast can we identify a cyber-breach.
The third risk is employee retention and talent acquisition. If you want to stay abreast of all the technology improvements and innovation that is occurring, you need to get the staff that truly can understand and stay on top of all these innovations and technologies. That’s a challenge because, as a bank, how do you convince somebody to stay on, as opposed to going to a Square or a PayPal? It’s a lot more appealing. It’s on the West Coast…. It’s a totally different proposition. From a branding standpoint, and we’re going back to your first question, which is how do we identify ourselves? Do we identify ourselves as a bank or as a fintech company? In this case, I would say we are selling the fintech play. That’s what we have to do.
Nair: How much of this regulatory risk that concerns you is a wider phenomenon in the fintech industry? Do you reckon that this is something beyond fintech as applied in banking or is it restricted to the banking segment?
Gade: I think the regulators are still trying to figure out how to regulate the fintech world. If they lose control of the financial transaction through disintermediation, consumers will be exposed. Not only regulators, but policymakers have typically been reactive. They wait for a major crisis to occur and suddenly pass laws that ultimately they’ll regret. For example, many components of the Dodd-Frank [Act] were probably an overreach and have hindered innovation and prevented consumers from being truly protected. That’s a classic example.
The element that is the most puzzling is the turf war between the regulatory bodies and how policy makers will react in case there is another credit crisis whereby the marketplace lenders get hit badly. There is now a critical mass of marketplace lending loans outstanding and people are starting to think if there is a systemic risk in marketplace lending. These questions did not occur two years ago. Or even last year. So there is definitely a lot of discussion around who will regulate this industry.
“We are providing access to credit to more than 2.2 million people on an annual basis.”
We are a proponent of the fact that … regulators should be regulating this industry through the banks. The reason is simple: We have more than 200 years of legacy regulatory compliance expertise. We are just piggybacking on what many banks and regulators have been doing for the past 200 years in the banking world.
Nair: From the viewpoint of a policy maker or a regulator, you hear about the social role of banks. You also hear, especially post-crisis, that banks need to play a more important societal role. How can technology move the needle on banks and their social impact?
Gade: Fintech occurred because banks left a huge void — on the credit side with marketplace lenders [following] the credit crisis. On the payment side, fintech happened after the big de-risking exercise that all major banks engaged in because they got a tremendous amount of money laundering violations over the past two decades. Banks just exited entire markets. For example, foreign transactions between Mexico and the U.S., and not dealing with countries like Sudan, Afghanistan and Syria that have a propensity to host terrorists.
So, in came the innovators, thinking, we have a way to identify whether these people are legitimate or not. We have a way to cross-reference or recalibrate the various lists — whether they are illicit, terrorism or of other criminal activities. [These are] international lists that you can extrapolate with machine learning and artificial intelligence and easily stay out of trouble if you are conducting financial transactions from one country to the other.
That’s why the payment space has been evolving tremendously with companies like TransferWise, Earthport, Currencycloud, Payoneer and many others. They facilitate exchanges between countries. There are entire markets that the big banks have exited. I am a very strong believer in financial inclusion and the use of technology to enable these transactions in a safe manner within the confines of international, know-your-customer, and anti-money laundering laws. This has been the big revolution in the past three to five years.
… I believe that financial inclusion [offers] tremendous reward, not only spiritually, but also a philosophical reward that technology players have brought to this fray.
Knowledge@Wharton: What are your thoughts about taking a step further and looking at a combination of financial inclusion and financial education? Do you think there is some scope for activities there?
Gade: I believe so. [But] we are still somewhat far from that. It’s one thing to enable people to have access to payment mechanisms, but it’s another one to be fully educated so that they don’t fall prey to illicit agents. Unfortunately, we are going to see a lot of that occurring now that the market, the exchange, is wide open. We need to do a tremendous amount of work in order to embed the financial education component inside the financial inclusion / cross-border payment mechanisms. I also think it is our duty to educate our kids about spending responsibly and managing their finances…. There is a huge opportunity for people to have much better lives, at least from a financial standpoint, in the next 20 to 40 years if we do a good job educating our kids.
“We’re taking the lead in trying to educate our kids, to bring financial inclusion to kids as early as possible.”
Nair: It’s also interesting that the regulatory risk you spoke about earlier is directly related to how educated the end consumers are. Any action out of ignorance is more likely to put them in danger, which in turn is likely to enhance regulatory oversight, which gets in the way of innovation. So, I think innovation needs to go hand in hand with some of that education.
Gade: I agree.
Nair: You’ve been in this space for some time. What do you think are the most exciting trends in fintech?
Gade: Financial inclusion is probably the most exciting trend for me. … We are providing access to credit to more than 2.2 million people on an annual basis. This is a source of satisfaction that is very unique. … We are the settlement bank for a number of fintech players, and we execute anywhere between 3 million to 5 million transactions a week. That’s also a very big source of satisfaction. These numbers are important not because they’re associated with dollars and earnings, but more because we are providing people the ability to transfer money to their families, to their friends, on an international basis or even domestically.
Going back to access to credit, this is something that people have been suffering from for the past 10 years. That’s why this is exciting. We ought to do a very good job on the compliance front to make sure that the regulatory pendulum doesn’t go all the way to the other side and prevent and hinder innovation. We were talking about education earlier, about educating the users, but we need to educate our regulators, as well as our policy makers, to ensure that they make the right decisions and not politicize them.
The second most exciting thing is that we’re taking the lead in trying to educate our kids, to bring financial inclusion to kids as early as possible so that they can realize their potential and invest in their passions early on.
Nair: Which areas or segments in the fintech industry do you believe have exciting growth potential?
Gade: I would say regulatory technology, even though it’s been a bit of a buzzword lately. Regulatory technology is what will enable the various financial companies to continue to innovate within the confines of regulation because at the end of the day the biggest hindrance to innovation has been the manual verification of transactions.