In venture capitalist Scott Tobin's chats with fintech startups, one name kept coming up: Cross River Bank in Teaneck, N.J.
The $467 million-asset Cross River has positioned itself as one of the go-to banks to help fintechs make their business go.
Many bank chief executives worry nowadays about being relegated to the back end of the customer experience, but Cross River thrives in that position.
"I don't care to own the consumer, it's not my endgame," said Gilles Gade, Cross River's CEO. "We just want to be the infrastructure bank, the plumbing."
That's a sweet spot for Tobin and his Boston-based firm Battery. While the firm has placed many bets on individual companies trying to change the world, some of its marquee deals involve going after the guts of the system, such as its 2000 investment in the London International Financial Futures and Options Exchange.
On Tuesday, Battery led a $28 million investment round in Cross River, betting that the company's acumen in working with fintech companies, specifically its regulatory know-how, can be leveraged. The round also included Silicon Valley luminaries Andreesen Horowitz and Ribbit Capital.
"Financial services is not going away. It is the underpinning of the global economy and regulation is part of the defensive moat," Tobin said in an interview. While fintech companies are looking to disrupt the industry, "all roads lead back to a regulated bank and there is an emerging group [of banks] that is a little bit more innovative and a little bit more forward-thinking."
In some ways, the deal is also a read on how Silicon Valley views the value of traditional banking, the regulatory environment and the possibility of a fintech charter and what it might look like. Tobin declined to comment specifically on a special-purpose charter for fintechs.
But he said there is exceptional value in the expertise existing banks have in navigating a highly regulated industry.
"The best way for regulation to evolve is for traditional institutions to evolve over time. It shouldn't be revolutionary," Tobin said. "From our point of view, the way to invest is to pursue revolutionary young companies that take off when they partner with more traditional entities."
Observers, however, see the investment in an existing bank working with fintechs as a safer bet than waiting to see what a fintech charter, such as the one being mulled by the Office of the Comptroller of the Currency, would look like.
"The special fintech charter right now is like [Hillary Clinton's] 33,000 missing emails. What's in there? We don't know," joked Lawrence Kaplan, a partner at Paul Hastings. "Maybe it's wonderful. Maybe it's terrible."
Cross River currently has partnerships with more than 15 online lending companies and originated more than $2.4 billion in aggregate loans last year. It has also partnered with companies like Coinbase and TransferWise on the payments side.
Gade said that Cross River is not a conduit for fintechs. Instead, Gade referred to the model as "banking as a service."
"We have so much control and oversight of those businesses that we adopt them as ours. Underwriting guidelines, compliance management, AML oversight – we redo every single step of the compliance component at a low level," he said. "We put our balance sheet to work. If we were just a charter rental place most of our partners would just have the loans with us for two or three days and then we would move on."
The additional capital will help Cross River "perfect" how to operate in the marketplace lending and payments space, Gade said.
"We need to continue working on our compliance management system ... our goal is to be a leader on how to operate this industry, how to regulate it, how to build oversight," he said.
That means much of the money will likely be used to invest in compliance technology.
"Compliance is one thing, but the technology wrapped around compliance is what will help us scale it," Gade said. "The only way for this model to be scalable is to develop a compliance management system that makes sense and then create technology to automate some of those processes."
When that is in place, Gade said the bank's regulatory framework could help pursue businesses that have been pushed out of banking because of compliance.
"Instead of de-risking, something large banks have been conducting for eight years, we want re-risk," Gade said. "We want to cater to money service businesses, money transfer processors, remittance companies. The big term four or five years ago was 'disintermediation.' We want to re-mediate. These services belong in the banking system – that's what we're defending. We want to bring them back to probably the most scrutinized industry on earth: the banking environment."
In a broader scope, others say that the investment is a clear indication that investors see the future as one of convergence – where banks provide the regulatory wrapper and fintech provides the user interface.
"This is a really big development for the fintech ecosystem because regardless of what you're doing, whether you're Stripe or Wealthfront or Betterment, you need to partner with the existing financial system, with a bank," said David Sica, principal at the venture capital firm Nyca Partners. "You're not going to do a seed deal right now and give a startup team capital to go build a new bank."
The investment points to the increasing "crossover" between banks and fintech, said Brennan Ryan, a partner at Nelson, Mullins.
"This [deal] could be highlighting the recognition on the part of VC investors that in the long run, the banking and fintech industry will become closer together and incorporate the best of both worlds," he said.
Bryan Yurcan contributed to this article.
