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Today’s show is our special 500th episode of the Fintech One-on-One podcast. Rather than do a retrospective or a look back at some highlights from the last 11 years of interviews what I decided was to do my regular interview but with a fintech pioneer. I wanted a big name so I was delighted when the CEO and Founder of Cross River Bank, Gilles Gade, decided to join me.
I first interviewed Gilles (along with Adam Goller) on the show way back in Episode 32 in March 2015. A lot has changed since then as Cross River Bank has become a market leader in Banking-as-a-Service (BaaS) and they have expanded way beyond their initial focus on marketplace lending.
A lot has happened in the BaaS space over the last year and we discuss this in depth as Gilles shares his thoughts on the past, present and future of bank-fintech partnerships. And much more.
Enjoy episode 500 and thank you for listening!
In this podcast you will learn:
- The origin story of Cross River Bank.
- How Cross River has been able to stay as a leader in the fintech lending space for over a decade.
- The staggering numbers of loans that have flowed through Cross River.
- How they expanded beyond the lending space.
- How they developed their payments capabilities.
- Why they moved away from the core providers to develop their own banking core.
- The points he was making in his recent American Banker op-ed.
- The lessons learned from the recent challenges in the BaaS space.
- Gilles’ thoughts on the higher bar now required to work with a BaaS bank.
- What was behind their decision to start an investment bank earlier this year.
- The scale that Cross River Bank is at today.
Read a transcription of our conversation below.
FINTECH ONE-ON-ONE PODCAST NO. 500 – GILLES GADE
Episode 500 – Gilles Gade_Transcript.docx
Peter Renton 00:00
Welcome to the Fintech One-on-One podcast. This is Peter Renton, Co-Founder of Fintech Nexus, and now the CEO of the fintech consulting company, Renton & Co. I’ve been doing this show since 2013, which makes this the longest running one-on-one interview show in all of fintech. Thank you so much for joining me on this journey. Now let’s get on with the show. This is a special episode of the Fintech One-on-One podcast. It is episode number 500. I had no idea I was going to get to that number when I first started doing this show, in 2013. But here we are, and instead of doing a retrospective or looking back at some of the favorite highlights, I wanted to get someone on the show who has been around as long as I have, and has really been a trailblazer and leader in the fintech space. So I invited my old friend Gilles Gade, the CEO and Co-Founder of Cross River Bank, onto this special show. He graciously agreed to the interview. We cover a lot of territory. Obviously about what Cross River is doing today and how they’ve been able to maintain their leadership role in the fintech space, in the BaaS space, and we talk about the BaaS crisis at length. Gilles provides his perspective about lessons learned and what’s needed and what is not needed as we come out of this crisis. It was a fascinating discussion. Hope you enjoy the show. Welcome back to the podcast, Gilles.
Gilles Gade 01:40 Hi, Peter.
Peter Renton 01:41
Great to have you back on. It’s been almost nine and a half years. You’re on episode 32, and as I said in the introduction, this is episode 500. You’ve come a long way in the last nine and a half years. So what I’d like to start with is actually going back to 2008 when you decided to jump into the banking space. Why did you decide to start Cross River back then?
Gilles Gade 02:10
Just seizing the opportunity. Banking debacle, there was definitely a need for a change in the status quo. Consumers were left behind. A lot of people could not put food on the table, and there was just a
clear need to not reinvent banking, but to come up with a new way to bank a big swath of the economy, or the population that was not served anymore by the banking system.
Peter Renton 02:40
So I know you just recently celebrated 16 years. Congratulations.
Gilles Gade 02:46
Thank you. In fintech years, that’s actually a lot.
Peter Renton 02:50
It’s like a century, I think.
Gilles Gade 02:52 Exactly.
Peter Renton 02:55
You’ve been really successful. You’re one of the largest and most respected banks in the fintech space. Where you are today, was that really your vision back in 2008? What was the vision back then?
Gilles Gade 03:09
No, not at all. The vision was just to try to change the status quo a little bit, one bit at a time. Just to address some of the concerns of the consumers by helping folks that were innovative, that used technology, and that just wanted to help the consumers as a whole. We paired with a couple of those [companies], just to try, you know, to test the waters. Green Sky comes to mind. That was really the first one, that first foray in the industry, and we just learned a ton from them, like particularly third party origination of loans and consumer finance and consumer compliance.
Peter Renton 03:12 Right.
Gilles Gade 03:13
And we just broke our teeth on that relationship. And ultimately we became good enough to be able to convince some of the new entrants, like the Affirms of the world, the Upstarts, the Marlettes to trust us with their products and their consumers and their services. And then one by one we developed a reputation of being fintech friendly,
Peter Renton 04:14
Right. And I know we talked about that in the last episode and I will link to it in the show notes, for people who want to go back in history. The fintech lending space, when you first got into it…
Gilles Gade
I remember the first LendIt.
Peter Renton
Yes, I know.
Gilles Gade
That was number one; that was where the pioneers met.
Peter Renton
Yeah, we grew up together in that time period, and it’s really been fascinating to watch how things have grown. But I’m curious, some of the numbers that you shared in your press release for your 16 years, it’s just truly staggering, as far as how much lending volume has flowed through Cross River. Maybe you could share a little bit about how you think you’ve been able to maintain because, you know it’s a competitive environment these days. And it even was back then to a lesser extent, but you stuck your flag in the ground. You’ve maintained some of these clients for a long, long time with you guys in the lending space. How have you been able to maintain that leadership, do you think?
Gilles Gade 05:12
I think that if you demonstrate an unwavering commitment to your customer base and an unwavering commitment to consumer protection, those two go hand in hand, by the way; I think you you would manage to convince most of your clients to stay with you. And that’s not only paying lip service to our clients or trying to convince them that we’re good guys. It goes much, much deeper than that. In times of cycles, when there’s a downturn, when there are troughs in the economy, then are you going to step up and actually be beholden to that commitment, or are you going to leave them in the dust and say, “ciao, see you later. We’ll come back when things are a little better,”
Peter Renton
Right.
Gilles Gade
And we prefer the former, not the latter.
Peter Renton Yeah.
Gilles Gade
We’ve demonstrated that through a number of crises already, in 2015 and then Covid hit, and some of our partners were in great difficulty, and the times were uncertain, and we stepped up. We said, “we’re going to continue buying your loans. We’re going to put them on the balance sheet and we’re committed to making sure that you’re going to survive this crisis and the next”. Through that, we’ve just built a ton of loyalty, and now they’re thinking to us about going somewhere else. Now that said, you know, the environment is such that we totally understand them having backups and belt suspenders and a bunch of other risk management practices that they need to have in place, because the market demands that.
Peter Renton
Yeah, yeah.
Gilles Gade
And the regulators demand that. But, you know, we totally understand that, and we want to be part of that solution. But that said, we’re still seeing a ton of loyalty, and most of the volume we used to have is still sticking with us.
Peter Renton 06:58
Right. And that volume, I’m just going to read some numbers here, which I think are really something: $137 billion in total originations, 94 million loans originated. I mean, those are staggering numbers across some of the leading players, obviously.
Gilles Gade 07:17
Listen, it is really a pride and joy to be honest with you, just to know that we managed to help 94 million consumers. I mean, naturally, some are repeat, but to help 94 million unique users in this economy put food on the table, afford life, buy, or invest in their passions, whatever the case may be, is the greatest accomplishment of our careers, collectively, here at Cross River.
Peter Renton 07:43
I’m actually included in that 94 million I still have a loan outstanding with Cross River.
Gilles Gade 07:49
You’re included even as a consumer, but in my mind, you’re included as a partner, as a stakeholder, enabling our industry to be very fertile and to continue to thrive, and particularly to be relevant in the eyes of many stakeholders out there.
Peter Renton 08:04
Well, thank you. Thank you. Anyway, tell us a little bit about how you have expanded beyond the lending space. You became a leader in the lending space fairly quickly, but tell us how you expanded that leadership role into other areas.
Gilles Gade 08:16
So, it became necessary to continue serving our lending clients. We started with a basic ACH product, which we call ACH Manager. We needed to disperse loans in record time. Naturally, you know that time is of the essence, all the time, particularly for borrowers in need of funds.
Peter Renton
Right.
Gilles Gade
And just going through a series of funding cycles, for example, we had a truncated file for lending approval of, let’s say, 2000 loans, and then we sent one ACH to one bank another ACH to another, and then they dispersed the funds. Usually, the settlement was taking anywhere between three to six days. That is not going to fly in the fintech ecosystem. So we thought about developing our own ACH capabilities, and then we developed it, and it was pretty neat and very API driven, very easy to onboard, very easy to use, dashboarded, good records, and we were off to the races. We had an ACH product we thought we could sell to payment clients. So we went on a mini roadshow to some of our partners, and particularly some of the big venture capital firms out there, Andreessen Horowitz and really Capital and Battery Ventures and a bunch. And they said, “Well, we have clients that actually could use that product.” That’s how we were introduced by Andreessen Horowitz to Coinbase in 2014.
Peter Renton
Wow.
Gilles Gade
And then the rest is history. And we’ve followed that mantra, which is, take a cue from your clients, because your clients are taking their cues from their consumers. So the consumers want something, and the client is saying, “We will service that something to you because we’re listening to learners of this industry.” And in turn, they’re turning to us saying, “Now you, the bank, have to be also listening learners of this industry. So please come along to the right, and hopefully, you can actually provide us with the services and the technology that our consumers aspire to be serviced with.” And that’s how, basically, we took our cue, from our customers and we developed from that point on, ACH capabilities, Push-To-Cards, Pull-From-Cards, automated wires, and then ultimately, RTP, FedNow, and then fast forward, now we have interoperability of all these systems and services, and particularly RTP and FedNow. And that constituted basically the engine underneath every transaction that we operate, which is what we call, in our jargon, a core engine, a core processor. So we veered away from our core, which was a traditional core, and into this new core that was native, that was developed by us. And now we have about 350 tech [staff] to support it and to continue to develop it into the 21st century.
Peter Renton 11:19
And that’s how you’re able to move pretty quickly into the FedNow, and RTP and interoperability, because that’s the big piece. I mean, the instant payments piece sort of demands interoperability, I would think. It seems like I don’t know many people that are offering that right now.
Gilles Gade 11:37
Right. That’s another thing. We have a little bit of a leg up. We can’t stand on our laurels, and we see the competition is creeping up, but we need to be convincing enough to all our clients that we are the right partner for them today, and hopefully we continue to build that loyalty and if we deserve to keep those clients, then we’ll keep them, and we’ll continue to serve the consumers.
Peter Renton 12:02
Right. Okay, so I want to talk about the BaaS, Banking as a Service, crisis, shall we say, that has happened this year, and it’s been fairly slow moving, but I was really interested to read your op-ed recently in American Banker, where you laid out the idea that we don’t want to overreact to this. We want to encourage innovation despite the setbacks that’s happened here. Maybe you should summarize the points you were trying to make in that op-ed.
Gilles Gade 12:39
Listen the regulatory environment is such that it has a tendency to overreact in terms of crisis. So we did have a liquidity crisis a year ago where people got caught off guard for a very rapid rise in interest rates, their balance sheets turned out to be on the wrong side of that risk management. And then ultimately that created the liquidity crisis, whereby a lot of the folks out there just exited those bank relationships, right, and they could not meet up with a demand of cash outflows. So then suddenly the regulators are reaching out to all the banks, and particularly the ones that are perceived to have riskier deposits. And the first that come to mind are the BaaS banks. So the increase in scrutiny is not necessarily justified, because I could say exactly the opposite. Actually, as a matter of fact, you know, brokered deposits or Baas deposits are extremely steady, right? And these relationships that you’re developing are not the same as the definition of broker deposits from 1970s when the rule was actually enacted, right? So these are the type of things that we’re just asking to open your eyes. Just sit at the table, formulate an agenda and let’s talk about it, and they might be a better solution for the consumers out there, because we have demonstrated that BaaS and fintech in general have a ton of validity, and particularly it’s here at the state, not going anywhere right now. It became the fabric of this economy. So we can’t just do away with it by eliminating some of the actors, which are called fintech banks or BaaS banks. They’re in the middle. Where are those consumers going to go? And that is really a key question that all of us, all stakeholders, need to ask ourselves. They’re not going back to Wells Fargo or to B of A or any others, right? Because they wanted to taste the flavor of something different, something fresh, something that answers to their aspirations, that they don’t feel they’re entrenched in the banking relationship, almost prisoners to that banking relationship, and they want to be free-willing. They want to be able to jump from one transaction to the next and have the fluidity of money so that they could actually continue to afford life. And because they experienced the times when that liquidity actually disappeared, or that lending outfit disappeared. So they don’t want to go back to those times.
Peter Renton 15:01
Right. There are consumers, even as we’re recording this, who are still frozen out from their money. That’s not something that regulators are not going to not take any action on, right? They’ve already taken some action, but how do you ensure that something like that doesn’t happen again? The regulators obviously didn’t prevent this. How could it be prevented again?
Gilles Gade 15:25
Listen, I always look to get answers. There are two types of answers to every problem. There is the cause and the excuse, right? And a lot of people like to find themselves or hide themselves behind an excuse, because, first of all, it’s very convenient. Second, you don’t have to address the cause, which might be costlier. And then you have others who actually are addressing the cause straight on. because if you eliminate the cause, then you eliminate the effects forever. So in the case of the liquidity crisis from a year ago, people like to assign that liquidity crisis to some of the fintech players, or the ones that are going to be the most impacted by a change in regulation, or enhanced scrutiny, are going to be the BaaS players, ultimately. And this is where we need to differentiate between an excuse and a cause. What caused the crisis? Is it fintech? Is it the democratization of banking services? I don’t think so. It was a liquidity crisis due to a very fast increase in interest rates and very poor risk management. So let’s address the problem where it lies, which is risk management.
Peter Renton
Right.
Gilles Gade
You want to increase risk management practices? Go for it. But do not destroy innovation or stifle innovation, because that’s actually the low hanging fruit excuse to attack, and the easiest way to attack, because those banks are weak, those banks are young, and they only hanging their hat on one type of business, which is the technology business, the BaaS business. That’s the danger that is looming here, and that may stifle innovation. We may fall on the other side of the competition, because the competition from overseas is looming, and there are many banks who have the wherewithal to come into the US and then steal the show. So we have to be very careful where the regulation ends up. This is something that I was trying to bring to the forefront in my op-ed. And I’m not the only one saying this, obviously, there are a lot of folks rallying behind that that echo.
Peter Renton 17:25
Right. The crisis that’s happening this year, that’s still unfolding, it’s not directly related to the SVB liquidity crisis. You’ve got an interesting perch here, as someone who is running a bank that has more clients than most in the space, and you’ve been doing this a long, long time. What are the lessons from this particular crisis of the last three months? What are the lessons that we can learn from that?
Gilles Gade 17:53
That’s a great question, and it’s something that we owe to ask ourselves constantly.
Peter Renton Right.
Gilles Gade
In general, it’s good practice to reinvent yourself and not to take anything for granted, and particularly you have to constantly demonstrate humility in approaching this market and the regulatory environment, because our consumers and customers deserve that. In this case, lessons learned, the first and foremost is that consumer protection is what matters the most, and because they expect that, they deserve better, and they’re the weakest link in this entire economy. They’re the ones who know the least about our products and services. So they’re the first ones to fall prey to bad agents who will abuse the consumers and we’re the last line of defense to prevent that from happening. So it is our responsibility. Every loan is our loan. Every payment is our payment. Every bad actor is our bad actor, and we need to squash them before they spread their tentacles throughout the market. So this is really a lesson that continuously needs to be learned. The second one is, again, be beholden to your clients. If your clients are experiencing difficulty, help them out, because the consumers expect for you to step up in bad times, as well as in good times. We were very happy to make money during the Covid period because there was a bonanza in online transactions, because nobody was going to the source to shop. So suddenly the folks, like all the BNPL players, as well as some of the traditional, I mean, I call them traditional, but they’re the 2008 to 2012 traditional players, such as Marlette, Affirm, Upstart, Upgrade, Lending USA and many others. Lending Club, Prosper. So all these folks, they saw resurgence in volume and particularly good business, because people had the cash. They had the government handouts. Now that’s the third lesson that we need to learn, is that consumer behaviors are not dictated
by one particular event, because that event could turn out to be a disaster for them, and that’s why affordability of credit is so important, and that’s where technology actually comes into play. The use of AI and the use of predictability of consumer behaviors is extremely important in providing the right loan to the right person at the right time. We saw during that time that there was definitely an outlier in the economy. So are you going to rush to lending an individual an excessive loan because at that time he could demonstrate that he has the wherewithal to repay that loan, but ultimately that outlier is one little uptick in the lifetime of that individual, and that needs to be taken into consideration. And the traditional methodologies of providing credit to consumers do not work in those kind of cases. Like the FICO scores, like the traditional underwriting standards, like the DTI, you know, the debt-to-income ratio. All these need to be revisited, and that’s where technology comes into play. It’s actually to help the consumers, not to the detriment of the consumers. And this is something that the regulatory environment needs to start embracing.
Peter Renton 21:18
Right. You know, there’s a lot of great ideas still. I mean, obviously, fintech is rife with innovation, and new companies are starting all the time. But what I’m concerned about is, you might have had a new company starting up, you know, maybe raised a half million dollars or a million dollars from friends and family, and, you know, enough to get them on their way, and they’re looking for a partner bank. And you must get many of these types of people over the years. I’m worried that they’re not going to be able to be served anymore, right? You really need ten million dollars to come talk to us, and they can’t really get a viable product out the door. Are you concerned about that, where suddenly some of the great ideas have to be better funded to work with a BaaS bank than they would have been five years ago.
Gilles Gade 22:03
So that’s an interesting point. And I think that the market has evolved. You see some of the folks that used to provide an interface or a set of APIs, or what we call the middleware, so those folks now are changing the model, their business model, into a SaaS model. They have become a software company. So now suddenly they’re a vendor like any others. You have, BSA, AML compliance vendors. You have traditional compliance vendors, and you have technology vendors, you have co-processing engine vendors. And then, in the middle, you’re going to have a vendor that enables you to do fintech, to do BaaS, to open accounts in a rapid fashion, and all this with your compliance regimen that you have at your disposal. So the market has evolved. I think the same million bucks could actually help innovation, but in totally different way. And this is the beauty about technology, is that those banks that used to…20 years ago, 90% of the banks did not have an internet application, a phone app. Forget about that, for sure. But even an internet website, you know, to open accounts online, to check your balances or to do transactions. And then that evolved in a way that was open only to a very select few banks in the country. And then that became an off the shelf technology, because some folks actually developed that technology to enable you to have access to those services. Those companies did not disappear. Those companies continuously reinvent themselves. And then some new players came into the fray. So that is demonstrative that the banking industry as a whole, with the 5000 banks, 4000 credit unions in the United States, there’s a lot of resilience in that, because the consumer still wants to be able to walk into a branch and talk to somebody or at the same time conduct an online transaction, or a transaction on the iPhone. So the combination with all these things actually helps innovation. It helps the banks embrace innovation.
Transcribed by https://otter.ai
8
Peter Renton 25:09
Yep, indeed. So I want to switch gears a little bit and talk about your new, or relatively new, investment bank. You started an investment bank, I think it was just earlier this year, right? And what were you thinking there? What was behind that decision?
Gilles Gade 25:22
It’s along the same lines as building loyalty and helping our customers get to where they need to be, so that they could focus on innovation, they could focus on serving their consumers, and we’ll take care of the rest. So we do have a capital markets activity which is extremely robust and very active, so we like to provide capital markets as a service. And then an extension of that is we’d like to raise capital, we’d like to raise debt, equity, structured finance. So we’d like to do an M & A transaction, whatever the case may be. And we were short on providing the services. So Ben Samuels and Harry Pinnell founded this investment bank about six months ago, and they are off to the races. It’s incredible the reception that we got. I mean, obviously I don’t want to say we benefited, because that’s an unfortunate term, but at the same time that it didn’t turn out well for SVB, that’s when we benefited, because there was a void in the market. There was an entire swath of the market that needed to be served. Now, some of our clients, existing clients, they all have needs in capital, whether it be equity, debt or structured finance, securitization and others. That’s where we come in, because we know the company very well, because we are a stakeholder, we have a vested interest in their success. So there’s no conflict there. On the contrary, our interests are aligned. So we hand the business over to the investment bank, and they do their thing and help them raise capital. But they could actually look at a series of investors and think convincingly, “we know those guys. We originate their loans. We effectuate their payments. We know how they behave, and particularly, we know how compliant they are and how serious they are about their consumer base.” So this is a dialog that you could not hold if you are just an investment bank, doing your transaction, a one-off transaction, and not being entrenched with that client. Of providing a wholesome service to the client in the full cycle of the product that they cater, whether it be a loan or a payment or an account, like in the case of a BaaS, or transactions such as debit, credit to others.
Peter Renton 27:39
Can you give us some stats before we close here? I’d like to know how big you guys are today. How many employees do you have? What are the bank’s assets?
Gilles Gade 27:48
So the assets of the bank is something that we’re managing very carefully. We would like to remain under the ten billion dollar threshold.
Peter Renton
Right.
Gilles Gade
And we don’t want to be at $9.5 billion. We want to be comfortably below the ten billion threshold, because there’s always growth demands.
Peter Renton
Transcribed by https://otter.ai
9
Thank you, Dodd-Frank.
Gilles Gade
Yes, so we’re anywhere between $6.5 and $8 billion in assets, we’re pretty comfortable with that. And that depends on the volume of cash coming in at the end of the quarter or exiting the balance sheet. And that’s what fluctuates the most. The amount of employees that we have today is, and I’m very proud of that, it’s about 1,000 in-house employees and about 300 consultants. We have about 200 people in Israel, which are all tech, and about 800 here in the country, most of which are on the East Coast. In our office, we have, I believe, something like 500 to 550 people in Fort Lee, and then the rest are scattered across the country. And then we have the investment bank, and we operate out of our own office space, our own building in Fort Lee, New Jersey, and I invite anybody to come and visit. It’s really a fintech environment, and we offer a lot of amenities and benefits to our employees that we’re very proud to provide. So all in all, top line growth has been very robust at about anywhere between 15% to 35% over the past five years. There is a little bit of pressure on the expense side, which I think everybody is experiencing, particularly as we continue to invest in our regulatory compliance framework. This is something that we will not hesitate one second in spending whatever we need in order for us to attain the gold standard of regulatory compliance. It’s a huge investment, and particularly we just take our cue from the various consent orders that have been enacted, the scrutiny that we are aware of, the hot buttons that we know of that the regulators are particularly pressing. We’re trying to double down in those areas. We want to be extremely robust, so that we could withstand any scrutiny, because we do want and aspire to be the gold standard in this industry.
Peter Renton
Right. Okay, that’s a good place to leave it. Gilles, I really appreciate you coming on the show. Thank you for joining me for episode 500, and best of luck to you.
Gilles Gade
Thank you.
Peter Renton
Well, I hope you enjoyed the show. Thank you so much for listening. Please go ahead and give the show a review on the podcast platform of your choice, and go tell your friends and colleagues about it. Anyway, on that note, I will sign off. I very much appreciate you listening, and I’ll catch you next time. Bye.