Inside The Secret Bank Behind The Fintech Boom

[vnatale]

The Forbes Investigation: Inside The Secret Bank Behind The Fintech Boom

https://www.forbes.com/sites/antoinegar ... 1cfd603c10




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.




Today Cross River continues to expand, seemingly oblivious to the looming risks. Just as banks competed in a frenzy to issue “low doc” and low-rate mortgages while the housing bubble inflated, some fintechs have begun making riskier loans.

Last year, one of Cross River’s biggest fintech partners, Freedom Financial, agreed to a $20 million settlement with the FDIC after the regulator determined Cross River used “unfair and deceptive” practices by failing to effectively oversee its partner during the origination of over 24,000 loans. Cross River was forced to pay a $641,750 fine.

An even bigger threat to fintechs is an economic downturn.

In the third quarter of 2019, Cross River reported that its problem loans doubled to nearly 2% of total, led by a $17 million problem in commercial real estate, where 10% of its assets were past due. (Cross River says most of the loans are now current.) But since the fall of 2016, Cross River’s provision for loan losses has nearly doubled as a percentage of average loans. Even more recently its reserve coverage ratio of “past due or nonaccrual” loans has declined from 489% to 114%. This at a time when the overall environment for credit—thanks to record-low unemployment and low interest rates—is ideal.


“Our revenues have had a compounded annual growth rate of 45%,” says Gade, who has adopted Silicon Valley speak to describe his operation as an “everything as a service” company. “The talk about a recession or a credit cycle that’s going to start going the other way is much ado about nothing.”

[Libertarian666]

Nothing could go wrong with such a brilliant plan.
It's technology, and that's infallible!