“Then I took your ancestor Abraham from the other side of the Euphrates River and led him through the entire land of Canaan. I multiplied his descendants, and gave him his son Isaac.” That’s a passage from Joshua 24:3 in describing how Abraham “crossed over” the demarcation line into a spiritual awakening. It’s also the inspiration for the name of Cross River Bank (CR), led by its charismatic founder Gilles Gade.
The Hudson River may not have the holy resonance of the Euphrates; however, there’s no denying the special character of this Fort Lee, New Jersey-based bank that supports fintech companies including Affirm, Circle, Best Egg, Coinbase, Rocket Loans, Stripe, Upstart and Transferwise.
From its modest beginnings as a one-branch bank in nearby Teaneck, to its leading position within the marketplace lending industry, to its current aspiration to be a standard-bearer of bank-fintech cooperation, CR has been a model of adaptability. A constant, says Gade, is a belief that it’s possible to simultaneously protect customers and deliver more and better services to them. In CR’s latest iteration, those services involve a variety of technology-infused offerings which have defied skeptics, regulatory uncertainty created by court decisions such as Madden vs. Midland Funding and increased competition. To preserve its momentum, the bank recently closed on an eye-popping $100-million growth equity round led by a KKR division and purchased a sizable office building near the George Washington Bridge. That latter move may be unconventional for a fintech high-flier, but as anyone familiar with CR knows, the bank plays by the rules — but it doesn’t play by conventional wisdom. And so far, that’s working out divinely.
GS: Gilles, it’s good to see you. Let’s start with a quick overview on CR, which may not be familiar to everyone.
GG: Thanks, Gregg. We are deeply rooted as a community bank from our founding 11 years ago and we’re one of the last banks chartered by the FDIC before it shut down the program due to the banking debacle. As you know, now the program has reopened.
GS: CR’s foray into fintech is, of course, your claim to fame. That journey started with GreenSky. How did that come about?
GG: GreenSky was on the verge of signing a sizable contract with Home Depot. But it needed a home for the prime and super prime loans that it was going to generate across 1,600 stores. We signed an agreement with GreenSky so that it could use us as the balance sheet.
GS: Fast forward to today, and you’ve grown from that initial use-case into a key banking partner for a who’s-Who of fintech. But you still have a branch that does actual, honest-to-goodness banking, right?
GG: Absolutely. We would not be able to do all the things that we do on behalf of our clients without eating our home cooking.
GS: I know you’ve expanded your offerings quite a bit, but is the marketplace lending business still your biggest segment?
GG: Yes, but it’s rapidly changing because lines are getting blurred. For example, if a payments company wants to become a lender or a lending company wants to do payments, then they have the ability to do that on our rails.
GS: Yes, I get that fintech lines are blurring. Here’s the thing, though. You’re an FDIC-regulated New Jersey bank.
GG: Yes.
GS: Is it fair to say, then, that you’re wearing the reputation of your clients?
GG: Absolutely.
GS: So if Affirm’s Max Levchin were to break character and do something harebrained, the regulators would come knocking on your door—
GG: —And come after us, yes.
GS: As CR moves towards a broader model that embraces payments, you’re entering a vastly complicated world, with all sorts of different actors. I would imagine you’re turning down as many prospective clients as you are taking in new ones, right?
GG: Much more, actually. About two years ago, we saw a slew of new entrants into our marketplace, and we signed north of 250 non-disclosure agreements. But we only signed up 19 platforms, or less than ten percent.
GS: I’ve dug into your financials, Gilles, which shows the benefit of your selective strategy. Given your success thus far, and the zaniness in the crypto world, why get involved in crypto? Do you need it?
GG: That’s a great question. I would say we’re not going say no if we think we can do something right. When we do anything, we start with a white paper, a full-blown risk assessment of the enterprise and how the regulatory environment is evolving. If the policy and procedures pass muster with the third-party folks that we hire to provide an opinion on them, then and only then would we consider launching a program.
GS: So you then turn to the prospect and say….?
GG: We say, ‘This is the way that we’d entertain the program. If you embrace it, we’ll be your bank.’ I’d add that we’ve passed four government examinations with Coinbase. And I must say, it’s been a real epiphany for us to basically dare to challenge our regulators and to push them to the limit.
GS: Let’s turn back to the meat of your business. Last year, you did $35.5 million in non-lending or fintech revenues. But your lending revenues have almost tripled since 2016 to about $84 million. Could you talk about why you’re retaining more loans on your balance sheet?
GG: Very good point. We made some conscious decisions when we decided to get into fintech. We recognized the benefit of our charter and believed it could provide us with a unique proposition if we played it right.
GS: What does playing it right mean in this context?
GG: That we can really help our partners focus on their growth, which is our mission statement. We let them focus on their growth and we handle the rest.
GS: By rest, you mean extending your balance sheet?
GG: In this case, our partners truly needed us for balance sheet purposes. The reason being is that you have loans originated in states such as Colorado, West Virginia, and those states affected by the Madden decision, which have to be excluded from any securitization. So what does that mean? Do you stop lending in those states?
GS: I suppose you’d have the cover to do so.
GG: Sure, but then you can’t pretend to be for financial inclusion if you’re going to say, “We’re only going to lend in 42, 43, 44 states.” Instead, we decided to say, “Okay, that’s not a problem.” The only issue that you have originating in those states is that we can’t turn around and sell those loans to non-banks. So we keep those on our books until it’s actually resolved, which, by the way, we are working towards.
GS: But it sounds like after Madden hit, your retention of the economic interest in loans accelerated.
GG: Actually, the growth of our platform accelerated.
GS: So you’re still holding between five to ten percent of your platform’s origination on your books.
GG: That’s still the range.
GS: Still randomly selected whole loans?
GG: That’s right. Purely random. But because our platform is growing very fast, the balance sheet will grow accordingly. For example, we did about $2 billion of origination about three years ago, then $5.3 billion, and close to $9 billion last year. In 2019, we’re probably going to do somewhere between $13 and $14 billion.
GS: As someone who has watched the marketplace lending industry for a while, what’s interesting to me is that you were originally a balance sheet-light model. Now, you’re heavier.
GG: Right.
GS: But the originators are the ones who are incurring the costs of getting the loans. So from your perspective, you’re getting quality assets at a zero CAC, right?
GG: I’m not paying for it. It’s exactly the same thing on the payments side too, by the way.
GS: It wasn’t that long ago when people would look at smaller banks and feel sorry for them in comparison to start-ups that got all the glory. You flipped things; however, it does lead to the question of whether or not the good times will keep rolling now that Varo has been granted preliminary approval for a de novo national bank charter and others are waiting in the wings.
GG: We think we’re well positioned for two reasons. First, it really validates our business model and existence if everyone tries to become like us. Second, you’re still going to have some components of the banking universe that are not going be served by these entities. Let’s take Varo for example. It doesn’t specialize in lending, and it doesn’t have the API for that. We are light-years ahead of them. Of course, if Varo put an army of developers on it, it would eventually get there, but we have first-mover advantage. Also, keep in mind that we developed our own core that we’re slowly but surely launching.
GS: You don’t want to compete against the big core providers.
GG: I just want to compete vis-à-vis us. I don’t care about the rest of the banks or who they utilize. I’m sure that Fiserv, FIS and Jack Henry have many years to come of profitability. The problem is that they didn’t serve my purpose.
GS: Support for your specific needs?
GG: That’s right. We needed to come up with something different.
GS: Why?
GG: As an example, I don’t believe others can handle three million ACHs a week the way that we are doing it today. I also don’t think they can handle push-to-card, because they don’t have that channel open with all 12 PIN debit networks.
GS: You’re saying that you had to develop those capabilities internally?
GG: Yes. Then, about a year ago, we concluded that we might as well have our own core, because all the components existed. It was just a matter of creating a middleware layer that connected these entry points to the payment rails.
GS: And you’re not worried about some of your best clients today choosing to secure bank charters?
GG: Look, if they could beat us on price and on functionality, then we’d have something to worry about. But in the meantime, what they are now realizing is that the limited charter in particular is not going to allow them to collect deposits.
GS: Just to clarify, who are ‘they’?
GG: Square, Varo, Stripe, etc. Let me just add that a key objective for us now is to become what I’d call the marketplace of banking services.
GS: I like the defensibility aspect of your story. But let’s reconcile that with your recent capital raise. When the announcement hit, not too many outlets focused on the entity within KKR that gave you $75 million. But when I think of the KKR private credit opportunity funds, I think of savvy mezzanine and distressed investors, not tech folks. So what’s the deal here?
GG: The partners who handled this transaction on behalf of KKR are actually in the space. They are dealing with companies like National Debt Relief and are buyers of marketplace loans in a very heavy manner.
GS: Has this fund been a client of yours?
GG: No, they haven’t.
GS: Did some sort of flow arrangement come in exchange for the $75 million investment?
GG: Not at all. But it’s very synergistic in the sense that they have three or four platforms that they immediately introduced to us that we got on board, which will propel our growth to new heights. They also wanted to see what we have under the hood, to see if we are originating loans that they could buy. So it’s a mutually beneficial relationship.
GS: Does the deal suggest that CR is going to focus on the small business side of the lending world?
GG: Well, they do a lot of consumer, but the answer is yes. We want to start focusing more on the small business side, but in a very deliberate way. Also, we’re not going to do merchant cash advance.
GS: That’s good to hear.
GG: We believe that there is a strong play to help the folks that are being embroiled in an MCA program that they can’t get out of. So there’s a theme here of trying to help the ecosystem, much in the same way that we have helped folks get out of a payday situation.
GS: Returning to the KKR folks, can you talk more about the rationale?
GG: They have opened a lot of doors for us. They sit on our board. They’re very mindful and extremely deliberate. They bring clout, and for me, the deal was a good pre-IPO round as we venture into that territory. We’re not sure yet when that’s going to happen, but we have to start thinking about it.
GS: That makes sense to me.
GG: I view it as a progression in the right direction in terms of the type of investors that are coming down the road. KKR requires probably a lesser return than an Andreessen or a Battery because you’re not looking at venture risk anymore. It’s growth equity, and it’s a natural progression towards an eventual public offering.
GS: I want to end by covering the culture of this bank, because in reviewing some of the other interviews you’ve given, it’s apparent to me that you didn’t have a master plan guiding CR’s development. But here you are, right? One of perhaps two unicorns that can lay claim to New Jersey.
GG: Unicorn means you’re not making money.
GS: Well, CR makes money. How does its unique culture connect with the growth story?
GG: Practically, what we do here is to stay nimble, to always find a way to say yes. The attitude around here isn’t, “We can’t do it,” it’s, “Just tell me what I need to do in order to get it done.” And that starts particularly with compliance and regulatory. And while there are certain things that we are going to say no to—
GS: —Like what?
GG: Cannabis banking. This is not something that we’re prepared to do at this point. But on anything that is within the realm of being possible, we’re going to beat it like a dead horse until we find a way to actually do it. But to be clear, we really love engaging our regulators.
GS: Is it a contradiction to possess both attitudes?
GG: No. It’s not contradictory to better serve and protect the consumer at the same time. And this is where the regulators have diverged from the banks in the past, We’re trying to bring those two back together.
GS: By implication, what you’re saying is a lot of banks haven’t taken that approach with respect to the regulators and consumers.
GG: That’s right. Obviously there’s a big bullseye on our back. At first, the regulators looked at us and scratched their heads saying, “These guys are mavericks. They’re crazy.” But ultimately, we looked to bring them to the table by saying, “Just take a look. Maybe we’re doing something right. Maybe you can help us improve.”
GS: Let’s talk about the spiritual edge.
GG: Number one is humility. In other words, success doesn’t come from us. We can only try, but the result is not up to us. When you bring that humility into the equation, then it suddenly brings the level of egotistical individuals two or three notches down. Number two is giving back. We are trying our darnedest to give back to the community in every way, shape and form we can.
GS: As you have grown, have you faced challenges over Shabbat and/or lesser known Jewish holidays when some of the staff won’t work?
GG: It’s not even negotiable. So when something is not even negotiable, you don’t even argue on it. But It hasn’t presented a challenge to us.
GS: So there are ways?
GG: Yes, we extend ourselves to our clients, and we make sure that they’re served the way they’re supposed to be served. But I’ll tell you: If the regulators can wait until the end of Shabbat to talk to the CEO, I think our clients can wait to talk to the CEO as well.
GS: Ha, yes, of course. Good luck to you, Gilles.
GG: Thank you so much, Gregg.
This interview has been edited for content, length and clarity.