Inside Cross River’s ecosystem of some of the best fintech brands

Behind many of today’s top fintech firms sit important partners. A lot of them are pure technology firms. Other partners hold charters. But Cross River combines both tech and banking to power brands like Affirm, Coinbase, Upstart, Upgrade, and Stripe. The firm’s chief strategy officer, Karan Mehta, joined us at The Big Bank Theory Conference this November to discuss how Cross River’s technology is enabling the delivery of innovative financial solutions to millions of consumers and businesses. 

We discuss Cross River’s growth, the building of an ecosystem around its proprietary, real-time core, and how fintech partners are plugging into this one-stop-shop to enable payments, banking, and merchant acquiring at scale.

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The following excerpts were edited for clarity.

The Cross River Story

I think we have a unique story and a super interesting one. So at a fundamental level, Cross River is a bank. 

We were formed in 2008 as a community bank. What's interesting about that is that we were the last de novo charter for many years. We were formed in the depths of the financial crisis, so it's one of those stories where, you know, it's a baptism by fire. 

You really learn how to do things in a much more differentiated way when you're doing them in a period of disruption. 

Rewinding back to where the world was in 2008, Cross River’s management team realized that banking and financial services absolutely could not be approached in the same way that it had in the past. The regulations were changing; consumer perceptions were changing; tolerance of risk was changing; the delivery of financial services was changing -- who could hold them and who could deliver them was changing, as well. 

Take mortgages, for example. That used to be a cornerstone of business for banks. And today, you've got non-bank lenders and fintechs, such as Rocket, who are powering that innovation. So we were born during the fundamental moments when fintech, in some sense, was coming to life. And we always knew that we would be approaching the delivery of services in a differentiated way. 

So interestingly, we've always been committed to tech. And we've always been committed to providing the best in class solution. We actually changed our core banking platform, even before we opened our doors for the first time. We were accelerating our technical capabilities, even before we started business, and that was back in 2008-2009. We were profitable in five quarters, which is unheard of for most companies, especially for a bank. 

Getting traction

During the financial crisis, we first saw the evolution of fintech with GreenSky, one of our early clients. We helped, in some sense, shape, that initial business model for GreenSky. GreenSky today works with a number of different banks. But if you rewind back to where they were before, they worked with us. Back then we were a small capital provider to them. And there was only so much that they could scale with us. But we saw the potential in what could happen with fintech in the delivery of consumer and business solutions that would be differentiated in the future. And that's what really led the spot for us back in about 2010. 

Since then, we've continued this trajectory of orienting the firm towards growing the fintech ecosystem. And eventually, when fintech becomes normalized, just becoming everyday financial services, and delivering embedded finance at a fundamental level across the economy. 

So that's really what we're aiming for -- we want to be that infrastructure provider. And we continue to demonstrate that we are that infrastructure provider by  providing those financial solutions across the economy.

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Creating the ecosystem

If you walk into Cross River today, you'll see we're a medium sized organization --around 600 or so people. So, we're not small, but we're not huge. We have two big locations: New York and Jerusalem. We've got over 100 developers in Jerusalem. 

And being 14 years in the business or thereabouts, we are relatively mature. 

We’re really growing with the fintech ecosystem and powering some of the biggest names in the industry. We have a fairly large suite of products and services -- we're not just a single point solution. 

We want to be the Home Depot of fintech -- that's really our core mission. 

If you're starting a fintech tomorrow, and you want to lend or you want to be in payments, give us a call. Because we have the pipes, we have the plumbing, and we have that infrastructure that can make that a reality. 

An interesting proof point for us over the last 12 months has been with the Paycheck Protection Program (PPP) that the government rolled out in 2020 and the early part of this year. 

Cross River was a top five lender by loan count across the country. In the first round, I believe we were number three or four -- even more than a bank like Wells Fargo. 

So when you think about it: here's a small institution that doesn't have any direct consumer or small business contact, but has assembled the infrastructure to power some of the biggest names in the business. And when we used that horsepower to power our PPP program along with other partners like BlueVine, Kabbage, and Intuit, we managed to get right at the top and challenge some of the biggest names in financial services globally, by delivering a solution that helped the economy and help save millions and millions of of businesses. 

We power some of the biggest logos in the business. And we do that by scale and by having an extremely robust offering. Affirm, Coinbase, Upstart, Upgrade, Plaid, Stripe -- they're all clients and customers of Cross River.

Lending and payments 

Lending and payments are the lifeblood of fintech. It's really where fintech is at the moment, to a large extent. 

I think fintech will continue to evolve over time, and it's possible it will be less lending and payments focused in the future. But today, that's where the action is. 

I would say today, we're probably more focused, generally, as an industry, on payments than we are on lending. Lending was, in my view, the first wave of fintech. We had these pioneers like GreenSky, LendingClub and Prosper take the delivery of consumer lending solutions to a different level. And it’s caused a dramatic shift in consumer behavior as a result of that evolution. 

So if you look at what's happened in lending, there’s this interesting question of which came first. Is it that consumers were not satisfied with the existing solution -- their credit card -- and they were looking for something different, or was it that fintech engendered the change in behavior with Buy Now, Pay Later and what Affirm has done? 

Whatever it is, we want to be at the forefront of either recognizing that change in behavior or helping shape that change in behavior.

I think Affirm, to a large extent, helped shape that change in behavior. It made people think about spot purchases and about what you should and shouldn’t carry credit for. How do you reorganize the way you approach your financial decisions? How do you compartmentalize your money decisions, your path, and your buying decisions? 

So that's changing with each generation coming into the economy and buying, saving, and interacting with their service providers in a different way. That's going to continue to evolve. 

We've seen that starting to take place in lending with the advent of buy now, pay later. I think that we're still in early innings -- I think that there's a lot more to come. 

Smoothing of your payments based on your income is a trend that at the moment is only now emerging. You see providers offering your paycheck three days early. Why three days? Why not 14 if you get paid twice a month, right? We still have another 11 days to go to fix that problem. So that's something we think is coming. 

Five years from now my financial partners will understand my financial situation, and are going to deliver me a solution that takes care of that for me, as opposed to us having to think about it and arrange that in our heads.

 So I think that's another revolution to come with payments. Payments is so interesting, because it's so vast from both a consumer standpoint, as well as from a business standpoint. Vertical integration of payments is something that we're seeing happen across the board. Seamless cross-border movement should be taken for granted. Why do we pay some of the biggest banks a huge bid-ask spread when we're moving two thinly traded currencies, for example? So payments is going to continue to see multiple dimensions of development. 

We are an infrastructure provider. And we're fortunate in that we've developed our own core banking software that's entirely real time. It's homegrown and has no dependencies. We can make real time payments decisions by being in the flow of information and knowing whether or not the money exists. 

We developed a solution of this nature for Coinbase a few years ago. We know it's really helped them and others. How you control your data is, of course, already being tended to, thanks to the regulators. But what happens with that data -- what your providers are predicting will happen with your money -- is the next frontier.

Partnering and competing with fintech

Are you friends? Are you enemies? Everyone loves compartmentalized representations. 

Leaving Cross River aside, it depends on the core motivations of the business. What is the institution? What are their goals? If you're some of the larger financial institutions that are traditional banks, fintechs present a loss of the consumer relationship, a loss of a cross selling opportunity, and an erosion of the consumer base. 

Thanks to the Fed and helicoptering of money across the economy, we now have an expectation that if you've got any kind of liquidity crunch or any kind of macroeconomic shock or tightening, the Fed is going to come in with significant amount of easing.

Too many people in the fintech space think quantitative easing and loose monetary policies are a fact of life. They've been that way since 2008. So the amount of money that's in the financial system and the amount of liquidity that's been created is enormous. It's trillions and trillions of dollars. Those trillions and trillions of dollars are chasing the same assets. Where do those assets come from? You lend more, you take out more debt, and asset values go up. 

That chasing of assets has resulted in returns coming down. So that means that banks now face the loss of a client or cross selling to someone else -- it’s more painful today to a traditional financial institution than it was in the past. And that's just exacerbating. 

On the lending side, at least, fintech is taking some share away from banks. But it's also underwriting in other segments of the population more effectively than banks could, because the banks were hamstrung by what the regulators would allow them to do, or what their models told them. 

Models are now more sophisticated. In the US, some of the biggest fintechs have more consumers than some of the biggest banks. 

Can you imagine the amount of data that companies like Affirm have, for example? Or the fact that Coinbase has made millions and millions of loans -- they’ve made more loans in three years than some regional banks have made in a decade. That tells you a lot about the customer. You can underwrite better, you can provide a better solution, and then you could probably sell that asset back to the bank. 

So going back to the frenemies --  it's an interesting problem. I think it really just depends on the orientation of the business. It's the same story in small business lending and middle market lending -- I think that's where the disruption still has some room to run. There is certainly going to be a colliding of worlds with collaboration and cooperation. Marcus, I think, is at an interesting standpoint, where it’s a traditional financial institution that's semi-perceived as a fintech, and is very much competing and partnering with some of the best names in technology -- like Apple. 

It's certainly going to be fun.

The emerging small, niche bank

Embedded finance is talked about all the time. The barriers to entry to creating your own little neobank stack have come down dramatically. Cross River can build your new bank in three months, soup to nuts, and that can include plastic, lending, whatever you want. It can also be a full stack offering. 

So then the question becomes how captive is your consumer? And are they going to transact with you across the spectrum, such that you're going to recover your investment and your need to generate shareholder value? Or is somebody going to see that as being a valuable interaction and then purchase you and that's how you generate your shareholder value? 

I think it ties back to that behavior question: are your consumers going to change their behavior in such a meaningful way that they're going to deviate from what they've been doing in the past and fit the model of behavior that you are trying to create? 

The jury is out on that one. I think that, to a large extent, many of these small niche banks will fail because being a bank is extremely hard. That's where part of what we do is -- we take some of the pain away from banking. Disruption of banking is not about mobile banking -- disruption of banking is about taking all the services that you could have in a traditional bank and cutting them up into small little pieces and then offering each piece individually. And what we do is we give you the regulatory wrapper and the rails to deliver each individual piece. 

Why deliver the whole section of a pipe when you only need a one foot section? 

So the question for some of the smaller niche players is, what's your niche? What's your target market? What's your revenue model? What's your oversight mechanism? Are you going to build that oversight mechanism and deal with the FDIC yourself, which is going to cost you millions of dollars a year? Or are you going to work with us so that we can use our scale? We have more than 75 clients. We can use our scale to deal with the FDIC. 

I think we're at the forefront of answering that question, but I don't know if I have that answer yet.

Crypto and banking

It's a question that all the banks, large and small, are asking. There are certainly some areas in which crypto is a natural fit. Why do I have to wait three days for settlement? If crypto lets me do it in three seconds, isn't that a better outcome? So better, faster, cheaper is a mantra that we live by. And in many ways, crypto is better, faster, cheaper. In other ways. It's not. Mining is inefficient. But there are other ways of ledgering. And there are other ways of settlement mechanisms. 

I think crypto has a role to play. I think it can upend some of the traditional settlement mechanisms. It naturally has a cross-border element that I think is very, very powerful. Going back to what I mentioned earlier about paying the big banks: what if I need to move my dollars to Bangladeshi taka, how many legs does that transaction take? Does it go via London? Why? 

So crypto is a natural solution to some of those things. You have providers that are already doing that for cross-border movements in Africa. 

So I think that for certain spot cases, it's very powerful. The power of blockchain is also powerful, but needs to be done in the right way. Otherwise, you know, it could be a boiling the ocean type problem. I think that there's a lot of future there.

I think we're two or three years away with DeFi, at least. The interesting thing about DeFi is that a lot of the attraction is coming because of the high yields. But we're an economy that's awash in liquidity. When this becomes more and more mainstream, the volatility goes down and the liquidity premiums go down. And then DeFi starts to become less interesting. 

It’s the rails that it creates. If I create new rails in which every single transaction can get pieced out into millions and millions of little bits -- to me, it is extremely interesting.