Talking Banking Matters

At the intersection of banking and technology: A conversation with Cross River Bank

In a wide-ranging interview with McKinsey’s Vijay D’Silva, Cross River’s Gilles Gade (CEO) and Adam Goller (head of fintech banking) talk tech, talent, cryptocurrency, and their role as one of the biggest US originators of Paycheck Protection Program (PPP) loans.

Matt Cooke, McKinsey: From McKinsey’s Banking & Securities Practice, I’m Matt Cooke, and this is Talking Banking Matters—new, short audio content for leaders in banking, securities, and beyond. For this first episode—taken from a new occasional series from our Payments Practice on payments and fintech—our New York-based senior partner Vijay D’Silva spoke to Cross River. Here’s Vijay to tell you more.

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Vijay D’Silva, McKinsey: Back in May [2021], I interviewed Gilles Gade, CEO and founder of Cross River Bank, and Adam Goller, its head of fintech banking. For those of you not familiar with Cross River, it is the tech-driven banking institution that was founded by Gilles in 2008 and which now helps power several well-known fintechs, such as Stripe, Coinbase, Affirm, Dwolla. Along with a few other tech-native banks, Cross River has pioneered what is now known as banking as a service.

The banking-as-a-service model is becoming increasingly prevalent, so that even some banks that might otherwise have competed with Cross River are finding it easier to work with them instead. This is part of a broader trend within banks to change their core technology platforms, which could in turn transform 50 to 60 percent of a bank’s cost base. At the same time, banking as a service is being pressured, and a number of large fintechs are now in turn applying for their own licenses.

During the height of the COVID-19 pandemic in the US, Cross River became a leading PPP [Paycheck Protection Program] lender, with over $11 billon in originations to over 200,000 small businesses. It managed to implement a solution in under two weeks—something covered widely in the media at the time and something we discussed in the interview you’ll hear today.

As we record this, the top four PPP lenders are now JPMorgan Chase, Bank of America, Wells Fargo, and Cross River. But while most banks originated PPP loans to their own customers, Cross River leads in originations to new customers. I started by asking Gilles and Adam to talk about their bank’s agility, how was that developed, and how do they maintain it.

Gilles Gade, Cross River: We view ourselves as a fast mover, a nimble organization who can adapt to the realities on the ground, both on the technology side and the compliance side. And I think those go really hand in hand. You can’t be in the financial space, even if it’s called fintech, at the end of the day if you cannot be nimble on technology development to answer the demands of our fintech partners who want to be very fast-paced, fast moving, because they do themselves have to answer to consumers and small-business aspirations.

It’s much easier to grow when you’re starting from zero than when you’re a Wells Fargo, a Chase, or Bank of America and you have to shift gears or you have to steer the mother ship in a different direction. It takes a very long time to steer the boat in the other direction.

With us, we just benefited from an environment that was very friendly to the fintech universe, and there was a very high demand, very low supply because most of the banks were derisking. They were not interested in venturing into those domains. And we just took the risk.

At this stage, we broke into the market in a big way that enabled us to test the waters with technology, with compliance, regulatory components, et cetera. And then from that point on, you just continue to build on the foundations.

Adam Goller, Cross River: I think what’s made us successful is two things at our core. One, we listen to the client. Everything that Gilles said—how we went from just lending to ACH to push-to-card to payment options to banking as a service—was all because of the client demand and the client need. So listening to our clients is definitely one.

But the second thing is that when we talk to our clients, they love the technology. The fact that we’re building technology alongside them, based on their demand, is music to their ears, because usually they’re talking to big banks that have legacy technologies. It’s not configurable. It’s not malleable. It can’t be adjusted to their needs.

Gilles Gade: When we have a big client that comes to us with a pain point, we scratch our heads and we think about it, we brainstorm, and we come up with a solution.

How long is it going to take to develop that solution? Not that long, because that’s what we’re going to do for the next three months. And we know that if we don’t cater to that client, that client is going to go somewhere else because they have absolutely no reason to stay with us.

Adam Goller: I think the most important thing that we provide is flexibility. So it’s not just the products that we offer and the way we offer them the API technology, but it’s the flexibility of knowing that if you have a specific need that is not accommodated by the current technology, we can build it.

That ability to adapt and to adjust the technology based on the client demand I think is what separates us, aside from the fact that, again, when you’re talking to a fintech company and you speak their language, which is technology, then it goes a long way.

Vijay D’Silva: As I mentioned in the introduction of this recording, Cross River gained recognition during the coronavirus epidemic as one of the biggest program lenders in the United States for PPP loans. I asked Gilles what it meant to the staff of Cross River to be part of something that was having such an impact on the lives of people on Main Street and small and medium-size businesses across the country.

Gilles Gade: If you sell to your staff something that is much greater than them, even for them to comprehend the magnitude of the potential impact that we can have in somebody’s life and for so many lives that we can actually touch, then you could accomplish miracles.

The bottom line is that we really managed to rejig the entire organization toward one purpose. It’s to get our technology to work with the SBA [Small Business Administration]. We were fortunate to be SBA lenders to begin with, so we did have access to E-Tran. But what we did is that we built an API that could adapt to the E-Tran model or the SBA’s changes on the fly and—because everybody was working toward one purpose all the time—at the same time.

Now, the core technology was there, so obviously, you need a backbone. And we were very fortunate to be able to develop that backbone over the past few years on behalf of our client.

Adam Goller: One of the challenges that all of these companies had when the program first was launched was that they had all these customers who were clamoring for loans but needed a bank to work with. So to Gilles’s point, we already had the infrastructure in place to accommodate that.

We could go through numbers, but the reality is that the demand we had from fintech companies looking to work with us on PPP was in the hundreds. We wound up with over 70 partners for each round. And so I think that the fact that we were already in a business that accommodated fintech companies, enabling them to lend, made it a natural fit for them to come to us for that program.

We had pivoted the entire company to focus on this opportunity. But equally importantly, it was already germane to what we already do. It was nothing new for us—the fact that we were enabling fintech companies who were sourcing the clients to make loans was what we’ve been doing for years.

Vijay D’Silva: One of the areas that newly formed fintechs often underestimate is the level of rigor necessary in being a regulated banking entity. Most banks spend a significant share of their energies ensuring that they meet the list of banking regulations intended to maintain the safety and soundness of the industry and also to protect consumers. Here’s Gilles again:

Gilles Gade: At the end of the day, the buck stops right here. We are 100 percent responsible for every loan that we make and for every payment that we disperse and for every account that we open. That’s the bottom line.

And if you believe in that, then the regulators understand that you’re putting everything on the line. You’re the last line of defense for the Treasury Department. If you understand that and you manage to convey it to the regulators in a way that tells them, “These guys understand controls, they understand regulatory compliance, even if they don’t get it 100 percent. We know they’re good guys and they’re on the right side of the regulatory compliance; they’ll get it at some point with our advice. And as long as we understand what they’re doing and they’re being transparent with us, we’re going to work along with that.”

And that’s really a big lesson in banking. At the end of the day, they’re not the enemy. They just want to do well by the consumers.

Adam Goller: One of the things that maybe also helps us be as nimble as he described would be the fact that we hire compliance folks who believe in the same story as our engineers do.

Gilles Gade: And once you sell that story to engineers, they really love that, because we live and breathe it. Then, ultimately, you get the right people at the right place. So it’s a combination of pushing from behind but also the folks leading the engineering and on the front lines. They do feel that they’re being pushed from behind and being supported in their endeavors.

Adam Goller, Cross River: So when you’re interviewing someone for a compliance role, it’s very easy to figure out whether they’re capable of—whether it be AML [anti-money laundering] or consumer compliance—they know TILA [Truth in Lending Act]. Whatever the rules are, I need to know they know those. That’s very easy.

As an example, yesterday we interviewed someone for a risk position, and the first question that I asked them was “How do you balance the regulatory requirements with the growth of the bank?” So for us, it’s about hiring the right people.

I think we can’t stress that enough. It’s not just about the systems and the process and the technology. And that’s certainly what we lead with. But equally important is the people we put around that technology, around that process. I think—across the board, I think what you’d find if you walked into Cross River would be folks who believe in the story and support the story. So no matter where your seat is—if you’re sitting in sales, in a business role, or in compliance—your entire goal is to grow the bank in a way that’s safe.

Vijay D’Silva: A common challenge that many existing banks face, even when they know exactly what they need to do to compete, is that they operate on core technology platforms that may be decades old or that they have old-school IT departments that move too slowly. I asked Gilles what it is that makes players like Cross River different.

Gilles Gade: I don’t want you guys to believe that we had this grandiose plan, ten years ago, to get into fintech and become the bank that we are today. You just need to be a listening ear to your clients. And like I said, it’s a case-by-case basis. So when we get a use case and we don’t have the product, we develop it. Originally, it was an ACH. Then it turned into a push to card. And then it turned into an automated wire. And then it turned into a bank account, then subledgers, and then virtual accounts. So one thing led to another, to another, to another, and then, suddenly, “Oh, my gosh, we have got a core.”

So then how do we make sense of that core? How do we connect all these products together to make sense with each other, so that we could actually bundle them up and sell them as one core? That’s how we ended up building our own core processor, which is in real time, all in the cloud. It was in the dot-net environment originally. We are very proud of it. This is really our crown jewel. This is what enables us to move very rapidly. Think of it a little bit like a tool kit.

So now, we have a native gateway that connects to every single one of the PIN debit networks that is built on top of our core. It’s a lot easier for us to roll out a client, I would say, within two weeks on the technology side. Not talking about compliance but purely on the technology side, we could roll out a client on RTP [real-time payments], for example, in less than two weeks.

This is really the objective here, to build the foundations of a tool kit, of a toolbox, whatever the case may be, whatever the consumer use case is. That’s what we’re going to build for that customer. And then we’re going to try to build it at scale. That means that it’s replicable and not customizable but configurable to other clients as well.

Vijay D’Silva: In the last several months, there has been a flood of fintechs either obtaining or filing for banking charters. This is being done presumably to obtain low-cost deposit funding to facilitate national lending or to get direct access to the payments system. I asked Gilles whether he sees this as a threat to the banking-as-a-service model.

Gilles Gade: Now, just a quick word to wrap up on the recent phenomenon of filing for banking charters. I mean, we’ll see. The jury is still out. It’s a very difficult thing to own a bank and to manage a bank, particularly in the high-risk environment and in the fintech environment. Very few can actually develop their own core. They’re going to have to adopt an existing core. You’re going to be tributary to that core, which is not in real time, not scalable, and is not adapted to the fintech universe. That’s one of the big challenges.

The other challenge? For seven years, you can’t really change your business plan. The fintech companies—they need to stay nimble. The way that we’ve been able to maneuver that is because that was our business model to begin with. And we started at a time when the de novo process was switched from three years to seven years. So for four years, we benefited from the scrutiny of the regulators on a new era, on a new venture called fintech banking or marketplace lending; they looked at us with eyes popping out, and they said, “We’re going to manage your growth.” But once we got out of that seven years, then we busted out of the gate.

If you look at our growth, it was fairly moderate for seven years. And then for the past five years particularly, or six years now, it’s been really exponential because the FDIC [Federal Deposit Insurance Corporation] prepared us for that exposure. But the banks starting today, the new charters starting today, they have seven years to go before they can actually burst out.

Now, a lot of those are public. They already publish their expected earnings. They’re in for a big surprise when they’re going to have propose with the FDIC to approve their change in business plans. So they’re going to be limited in growth.

Vijay D’Silva: In recent months, we have seen a lot of momentum in cryptocurrencies, whether it’s the regulators’ acceptance of crypto assets, or central banks looking to introduce digital currencies, or increasing volumes of stablecoin transactions. Or maybe it’s simply the growth in the value of digital assets like bitcoin in the last few years. I asked Adam what that means for players like Cross River and the services provided to clients.

Adam Goller: The expansion of the fintech to include other products I think definitely is something in the cards for the future. But internationally, it’s sort of a TBD. And then cryptocurrency—not necessarily myself but Gilles could probably spend a few hours on cryptocurrency. But probably [there’s] not enough time today to cover that.

Gilles Gade: There’s no question in my mind: it’s no longer the future of banking, it’s the present of banking. And anybody who has not embraced that yet is going to be left in the dust.

The future in banking really resides in the fact of opening your eyes to new horizons and daring to venture the limits, the frontiers, of regulatory compliance and technology. I said that at the beginning, and I’m going to keep repeating it. That’s where the future of banking holds.

What we’re starting to see, which is very interesting, is more and more of our colleagues or pseudo-competition—let’s say the community banks in general—they are getting a second breath of fresh air. With the advent of the first wave of fintechs, everybody thought, “That’s it. It’s the end of community banks as we know it.” Today, they’re getting a second wind because they’re getting a crack at those loans. They could originate that themselves by partnering with fintechs on the payment side.

It’s all available to everyone now. It’s a level playing field. So I believe in the future of community banking. I believe that it’s actually pretty bright and that there’s a lot of business to be had.

Vijay D’Silva: I want to thank Gilles and Adam again for the time they spent with us. There is no doubt that we are at a unique moment in global banking, which is simultaneously dealing with a global pandemic, the emergence of new technology firms that are quicker and cheaper than the traditional banks, consumers that have now come to demand the same level of digital service from their banks that they get from Amazon or Google or Apple, and governments and regulators that are looking ahead at the future and shaping regulation to meet this new demand.

As we tend to say, things will never be this slow again.

I was fascinated listening to how Cross River has managed to redefine how this new generation of banks develop product, how they have responded to a rapidly changing environment, and at the same time inspire their people with the sense of mission. With fintechs continuing to grow quickly and redefine payments and banking, I have a feeling that a lot more people will be hearing about these companies in the future.

Matt Cooke: It’s Matt Cooke here again. On behalf of McKinsey’s Banking & Securities Practice, thanks for listening in today to Talking Banking Matters. We’ve got a series of conversations planned, so we look forward to you retaking your front-row seat to listen in on more industry leaders from the world of fintech, banking, and digital talk about their work shaping the future of this industry. But for now, wherever you are today, thanks again for listening.

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