Sponsor Bank: Cross River Bank's CEO Gilles Gade
In an interview with JoAnn Barefood at Barefoot Innovation, Cross River Bank’s CEO Gilles Gade tells the story of founding and building one of the leading sponsor banks at Lendit Fintech 2018.
My guest today is pioneering a crucial innovation within the innovation landscape in finance -- by providing banking services to fintechs through a platform-based financial services model known as the sponsor bank, or partner bank. In today’s episode, Gilles Gade tells the story of founding and building one of the leading sponsor banks, Cross River.
Most fintech companies are licensed by their states but are not banks. That means that every one of them has to find a bank through which to clear payments and connect to the payments system (which only banks can do). That’s not easy -- many fintechs struggle with this because banks are required by their regulators to set up complex systems for due diligence and risk management in dealing with any kind of third party that could affect the bank’s soundness or its customers’ wellbeing. Over the last decade or so, this challenge, combined with the enormous potential of the fintech market, prompted a number of banks to focus on meeting this need -- Gilles points to Webbank as leading the way. These banks have to meet a range of specialized needs including, crucially, taking responsibility for the partner fintechs’ compliance with regulatory requirements.
Gilles describes founding Cross River in 2008, when the financial crisis had curtailed many kinds of consumer and small business credit, and talks about how new companies emerged to fill the gap, with either new kinds of products, or new ways of creating access to old products. He points to fintech lenders -- like Affirm, Lending Club, and Sofi -- and also to payments-focused companies like Coinbase, Transferwise and ActiveHours as innovators that are opening up more inclusive finance.
Gilles is especially thoughtful on regulatory issues, which he calls “by far” the biggest challenge for the fintech world. He emphasizes that the single biggest difficulty is sheer uncertainty, as technology change outstrips traditional regulatory change mechanisms. Gilles cites the Madden v. Midland litigation, with its controversy over national versus state interest rates, and the “valid when made” doctrine, as issues that need clarity so that lenders can build stable business models.