The mysterious bank behind the fintech boom


Cross River is located in New Jersey.

The company’s chief executive, Giles Gadder, said his bank’s contribution to the future of the financial industry is like providing operational software.


If you want a glimpse of the future of banking, don’t go to Silicon Valley or Manhattan’s financial district.

You can cross the George Washington Bridge to Fort Lee, New Jersey. Exit the heavily trafficked road and come to the entrance to Interstate 95, where you can see a red granite office building to your left. The building houses a small bank insured by the Federal Deposit Insurance Corporation called Cross River. The bank is located on the 14th floor of an office building overlooking the busiest highway toll booth in the United States.

Cross River is no ordinary community bank. There are no tellers, no ATMs, and no savings boxes. Instead, the 23,000-square-foot space has


Bank employees and traders are staring at hundreds of computer monitors – often three monitors stacked on top of each other on a desk. There’s also a bit of a start-up vibe — LaCroix sparkling water and great coffee in the kitchenette, and a playroom in the office.

Cross River is borrowing aggressively, more than $1 billion a month, and about $30 billion in nine years. Of course, unlike traditional banks, Cross River doesn’t have a loan specialist, instead using apps to take on the job. Most of Cross River’s loans originated from about 15 fintech startups including Affirm, Best Egg, Upgrade, Upstart, and LendingUSA. These businesses have received venture capital to provide customers to Cross River, which provides licensing and infrastructure. For every loan it makes to the outside world, the bank holds 10% to 20%. Because of the size of fintech lending, Cross River’s assets have reached $2 billion, up from $100 million a decade ago.

Gilles Gade, the bank’s chief executive, said: “Our business is less like a warehouse and more like a porter. We move assets, generate, package, sell. “Gade is France


。 He is 53 years old, has thinning hair, wears glasses with a clear rim and wears a Hugo



As for Cross River’s role in the fintech revolution, Gad described it modestly. State chartered banks such as Cross River have regulatory and compliance frameworks and the necessary lending licenses to originate loans. Most fintech institutions do not have these qualifications and therefore need banks to provide funding. That’s the little secret of the industry. Fintech does have beautifully crafted iPhone apps, as well as magical stories such as big data mining and artificial intelligence loan decision-making. But if you look at what’s behind it all, most fintechs are nothing more than stores that actively promote lending, serving little-known banks that are insured by the Federal Deposit Insurance Corporation.

Accenture said that since 2010, Silicon Valley venture capital firms and others have invested about $175 billion in hopes of transforming the financial system. As a result, valuations of many unlisted fintech institutions have skyrocketed. But as the prospectus makes clear that WeWork is no different from real estate renters and is overpriced, a closer look inside many fintech firms reveals much the same approach.

Let’s say you borrow a $2,000, 39-month zero-interest installment loan from Affirm to buy a Peloton exercise bike as a Christmas present. The actual loan may have been CrossRiver. The latter hold such loans for a few days and then typically hand them over to fintechs, which sell them to hedge funds and bond buyers, or may package and securitize thousands of similar loans.

In the stock market, bank stocks typically have much lower multipliers than technology stocks. Therefore, fintech institutions themselves are also willing to maintain their position as technology companies, and are not willing to be regarded as financial institutions. Venture capital firms are willing to tell such stories, but the market is not stupid. After many fintech unicorns went public, they were severely punished by the market.

LendingClub went public in 2014 with a market capitalization of $5.6 billion. Today, the company has a market cap of just $1.2 billion. On Deck Capital, a New York-based fintech firm that provides small business loans at breakneck speed. When the agency went public in 2014, it had a market capitalization of $1.9 billion, and today it has a market capitalization of just $290 million. Listed fintech institutions such as Funding Circle and GreenSky have a similar story.



Andrew Marquardt of leman Partners said: “[These companies] are positioning themselves as tech companies, [but] are really just using technology to do traditional things like consumer credit.” Some investors look at these businesses and say, ‘It’s a bank, not a tech company.’ ’”

Forbes estimates that the unsatisfactory stock price performance of fintech companies after going public has led to an appointment


The market value of billions of dollars has come to naught. Large lenders such as Prosper Marketplace and LoanDepot have either filed to go public but have not acted as scheduled or remain unlisted. Unlisted institutions with high valuations have increased.

There’s a good chance all this will end up causing Cross River a lot of trouble. Investor investments in some fintech institutions such as GreenSky and LendingClub, both of which have done business with Cross River, have failed. In the future, there may be more similar failures. Cross River’s top five fintech clients by market capitalization have raised $2.25 billion, totaling $50 billion. While the stock market is at a high level and consumer defaults are near historic lows, none of these institutions seem ready to go public and be under intense scrutiny.

At the moment, the Fort Lee region is experiencing an economic boom. However, the good times may end soon. According to Federal Deposit Insurance Corporation filings, personal loans come almost entirely from fintech lending partners, which already account for 60 percent of the total loans on the agency’s books. Many of Cross River’s loans have extremely high interest rates, which are prohibited in states with strict loan shark laws, such as New York and Connecticut. Cross River itself is also funded by venture capitalists such as Anderson Horowitz and Battery Ventures, which raised about $28 million in funding at the end of 2016. A year ago, KKR & Co led a $100 million investment round that valued Cross River at nearly $1 billion, about three times the typical valuation of similarly sized regional banks.

“Our strategy is to be the only financial services provider in the global fintech ecosystem,” Gade said excitedly. Our primary purpose in doing this is to make a difference in people’s lives. ”

Before joining Cross River, Gad had a modest career — he worked at Bear Stearns and Barclays before becoming CFO of First Meridian, a New York mortgage lender company. The latter is known for issuing loans under the authorized name of Trump Financial. Born in Paris, Gade devoted two years to the Talmud early in his career. In 2008, he decided to start a business. He took $700,000 and $9 million from friends and invested in Cross River. The latter is a community bank with a bank charter but no assets.

In Cross River’s first year in operation, Gad and his small team made major deals


Secured securities and auction rate securities. Less than two years after the bank opened, Gerd was approached by an entrepreneur named David Zalik. Zalik’s fintech agency, GreenSky, has seen rapid growth in attracting contractors to provide interest-free loans to homeowners on housing improvement projects.

Gad began lending for GreenSky and recognized that nascent fintech could be Cross River’s growth engine.

Gad quickly adjusted Cross River and began serving fintech’s pain points. The timing he chose was perfect. It was 2010, when the financial crisis had led to widespread distrust of traditional banks, consumers had little housing capital to support consumption, and banks largely stopped lending to the outside world. Specialized banks like Cross River and Utah’s Celtic Bank and WebBank are eager to fill the gap by using growing financial institutions as a façade.

The rise of fintech has also brought benefits. Many emerging fintechs, such as Acorns and Betterment, have used data and behavioral economics techniques to drive higher savings rates and enhance the efficiency of personal finance. To date, fintech institutions have refinanced and lent about $170 billion.

Everything went well in the industry until 2015. Before 2015, large institutions such as LendingClub went public. Investors outside Silicon Valley suddenly began to examine the books of these institutions and found holes in their foundations.

Today, Cross River continues to expand and seems unaware of the immediate risks. The real estate bubble is growing, banks are competing wildly, and they are competing to issue “low-document loans” and low-interest mortgage loans; Some fintechs have also started issuing riskier loans.

Freedom Financial is one of Cross River’s largest fintech partners. The Federal Deposit Insurance Corporation determined Cross River had engaged in “unfair and deceptive practices” by failing to effectively supervise its partners in the origination of more than 24,000 loans. Last year, Freedom Financial agreed to settle with the Federal Deposit Insurance Corporation for $20 million. Cross River was forced to pay


$1,750 fine.

Fintech institutions also face an even bigger threat – an economic downturn.

In Q3 2019, Cross River reported that its troubled loans doubled to nearly 2% of the total. Chief among them is $17 million in commercial real estate, where 10 percent of its assets in this area are overdue. (Cross River says most of its loans are not overdue) Cross River’s loan loss provision as a percentage of average loans has doubled since the fall of 2016. Recently, the company’s “overdue and stopped interest-bearing loans” allowance coverage ratio has been reduced from 489% to 114%. You know, because the unemployment rate is already record low and interest rates are low, the overall credit environment is still ideal at this moment.

Gade described his organization in a Silicon Valley way, calling it a company that “treats everything as a service.” “Our revenue is growing at a compound annual rate of 45 percent,” he said. There is talk of a recession, others of the credit cycle starting to turn, but these are just ‘nothing more than nothing’. ”

Translated by Joe

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