The American Dream in Peril

This year we celebrate Cross River’s 16th anniversary and the 248th birthday of the United States. For me, they go hand in hand.

The profound democratic ideals that form the bedrock of this nation compelled me to move from my native France to the United States over three decades ago. Arriving with 90 days of cash in hand in search of adventure on Wall Street, I learned that financial services were out of reach for a new immigrant: opening a bank account, renting an apartment, or getting a credit card were almost impossible. It was even worse for low- or moderate- income Americans, and worse yet for people of color. Today, through innovation, those same Americans have far greater access to financial services and products, most delivered by providers who did not exist when I arrived in the U.S. But the journey of financial inclusion for all is nowhere near complete.

Cross River opened its doors during the 2008 global financial crisis when other banks were tightening or shutting down access to credit. At a roundtable on derisking hosted by a former U.S. Treasury Secretary, I was asked what Cross River did and planned to do. I simply said: “What could be a better time to enter the market and bring much-needed solutions when it appears everyone else is deserting consumers? We’ll embrace and deal with the idiosyncrasies of the regulatory environment because our consumers deserve it and demand it. And we hope to make the world a better place.”

Despite some chuckles, Cross River forged ahead. And we continue to do that today.

We believe that the emergence of fintech has been massively positive for the US. Fintechs have been the sources of innovation the banking industry sorely needed. They have enhanced competition, and awoken incumbent banks from decades of complacency, returning some, but not all, to being customer centric. They have found ways of bringing products to people traditionally excluded from the marketplace, and doing so with care, fairness and integrity. Many have succeeded handsomely, and, as with all innovation, some have failed. A few compliance issues have been raised over the years, yet they have been small, with limited customer impact, and have been rapidly remediated. More importantly, the issues have frequently arisen where the innovativeness of the fintech’s approach has challenged a lack of regulatory clarity, or worse, regulations that have not advanced at the pace of technological development.

Almost all Fintech require a Bank as a partner. And Cross River is proud to be one of the pioneers, and possibly one of the largest, Bank-Fintech Partnerships the US.

Alas, we believe the future of fintech and the banks that serve fintech communities is today at peril.

Of the roughly 4,800 banks in the U.S., fewer than 100 provide BaaS to fintech partners. Of those, about 20 are very active, a dozen or so of which are key players in the BaaS ecosystem. Of the 12 such banks, 11 (including Cross River) are subject to consent orders and enforcement actions by their regulators since September 2022. Those numbers are concerning on both policy and practical levels. Does this mean that the bank-fintech partnership model is broken and non-viable? We firmly believe the opposite, that the bank-fintech model is absolutely viable, but it is wrestling with a broken regulatory model.

From a supervisory perspective, there is little banks can disclose publicly about the underlying facts of a consent order. A high-level survey of recent consent orders shows some commonality: (a) an alleged compliance issue with a fintech that may be neither widespread nor systemic rises to regulator’s attention; (b) whether or not alleged consumer harm actually exists, the regulator inevitably “wins” the argument against the bank based on inherent power; (c) the ensuing consent order imposes limits on banks’ future business and affects every fintech in these banks’ respective portfolio, potentially requiring banks to offload fintech partners who subsequently struggle to find other bank partners, affecting millions of consumers. The chilling effect reverberates through the entire banking industry and the message other banks receive is “don’t innovate”.

Why does it matter? Because innovation is what distinguishes the U.S. from myriad other developed nations. Innovation has fueled the American economy and has allowed millions of Americans to access financial products and services. Banks like Cross River are the living proof of that.

We have made a meaningful difference in the lives of many Americans who might not otherwise have access to credit or banking services. We have done so with an absolute commitment to compliance and safety and soundness, relentless striving to uphold the highest standard, with in house expertise to address the ever-growing complexity and breadth of our business model.

We are close to processing our one billionth payment transaction and originating our one hundred millionth consumer loan through our partners. During the pandemic, we became a leading provider of Paycheck Protection Program loans, servicing close to 500,000 small businesses and saving over 1.4 million jobs. Our amazing staff have championed doing what is right by our clients and consumers. In both good and bad times, as our Foundation@ 2023 Impact Report demonstrates, we imbue humility, integrity, creativity, compassion, and responsibility in everything we do. All these efforts will be threatened if BaaS as a business model is unable to survive.

Innovation thrives in a society that values dialogue, education, and openness. Consumers benefit from an array of choices in financial products and offerings, and with market forces at work to drive competition. America must never cease to be the global leader in innovation and entrepreneurship. However, politics and misguided regulatory forces threaten the very foundation of that innovative spirit and limit consumer choice.

Cross River’s name comes from the voyage our forefather Abraham took when he crossed a literal and spiritual river, attempting to cure the worlds ills. Similarly, Cross River believed in changing the banking industry’s status quo through innovative ideas, processes, and business models. Just as Abraham was grateful for crossing the river, so are we. We hope that the many benefits of BaaS and the fintech communities it serves will enable regulators and BaaS banks to cross the river together.