Behind the fintech boom
If you want a glimpse of the future of banking, don't look to Silicon Valley or Manhattan's financial district. Instead, drive across the George Washington Bridge to Fort Lee, New Jersey. If you glance left as you come over the traffic-clogged expanse and make your way onto Interstate 95, you'll see a red granite office building. On its 14th floor, overlooking America's busiest toll plaza, is the headquarters of a tiny FDIC-insured bank named Cross River.
Cross River is not a typical community bank. There are no tellers here, or ATMs or safe deposit boxes. Instead there are 175 bank staffers and traders stuffed elbow to jowl into about 23,000 square feet, peering into hundreds of computer monitors-often stacked three per desk. There are startup touches-a kitchenette stocked with LaCroix sparkling water, gourmet coffee and a game room.
Cross River is on a lending tear. It is underwriting loans at the rate of more than $1 billion a month-some $30 billion worth in just nine years. But unlike in banks of yesteryear, virtually all Cross River's lending officers aren't human beings. They are apps. Cross River's loans originate mostly from 15 or so buzzy venture-capital-backed financial technology startups, so-called fintechs, that go by names like Affirm, Best Egg, Upgrade, Upstart and LendingUSA. The fintechs provide the customers; Cross River provides the licenses and infrastructure. It holds 10% to 20% of each loan it issues, and the massive volume of fintech loans has propelled Cross River to $2 billion in assets, up from $100 million a decade ago.
"We're in the moving business, not the storage business," booms chief executive Gilles Gade, 53, an immigrant from France, balding and wearing clear-framed glasses and a navy Hugo Boss sweater. "We move assets. We originate [them], we package them, and we sell them."
Gade is being modest about Cross River's role in the fintech revolution. State-chartered banks like his have the regulatory and compliance framework in place and the lending licenses necessary to originate loans. Most fintechs do not and thus rely on banks for funding. It's the industry's dirty little secret. Once you get beyond the slick iPhone apps and inflated tales of big-data mining and AI-generated lending decisions, you realize that many fintechs are nothing more than aggressive lending outfits for little-known FDIC-insured banks.
Since 2010, Silicon Valley venture firms and others have invested some $175 billion to disrupt the financial system, according to Accenture. This has inevitably resulted in astronomical valuations for many privately held fintechs. But just as WeWork's prospectus laid bare the fact that the company was little more than an overpriced lessor of real estate, a glance under the hood of many fintechs reveals similar sleights of hand.
Take out a $2,000 zero-interest, 39-month installment loan from Affirm to buy a Peloton bike this Christmas and it is likely that Cross River is actually making the loan. Cross River holds onto such loans for a few days, then typically transfers them to the fintech, which will sell the debt to hedge funds and bond buyers, or securitize it into bundles of thousands of such loans.
On the stock market, banks tend to trade for a fraction of the multiple technology stocks do. That's why fintechs are eager to position themselves as tech firms, not financial firms. The VCs are eager to sell that story, but the market hasn't been that stupid. Many fintech unicorns that have managed to stage public offerings have been severely punished in the aftermarket.