Garnet Capital Advisors Blog

Financial technology (fintech) firms are sometimes seen as competitors to banks, providing tech platforms that offer services similar to those of traditional lenders with processes that can be considerably less cumbersome. Fintech firms have been growing at a pace that has caused the Office of the Comptroller of the Currency to consider a fintech charter, although one has not been formally proposed.

Does the future hold partnership?

Partnership, Not Competition

However, key Silicon Valley venture capitalists think the better bet is to invest in banks that will partner with fintechs. So does upper management of some banks.

One banking chief executive officer who thinks so is Gilles Gade, head of Teaneck, NJ-based Cross River. The bank, with $467 million in assets has carefully positioned itself in the market to help fintechs prosper.

"I don't care to own the consumer, it's not my endgame," Gade told American Banker recently. "We just want to be the infrastructure bank, the plumbing."

It's quite different than some of his competitors, who worry that fintech companies will take over customer-facing roles and they will be confined to the back end.

But venture capitalists agree that partnership can be a lucrative market. The Massachusetts-based firm Battery, for example, focuses on what American Banker calls "the guts of the system," giving its stake in the London International Financial Futures and Options Exchange, made 16 years ago, as proof.

Evolution Rather than Disruption

Battery recently was the lead on an investment in Cross River that totaled $28 million. Other investors in the round included legendary Silicon Valley venture capitalists Andreesen Horowitz.

One of the attractions of partnerships is that the expertise that banks have gained on the regulatory picture can be utilized to the benefit of fintechs.

Venture capitalists are funding partnership banks.

For all tech's focus on disrupting industries, partnership points the way to evolution, not revolution.

"The best way for regulation to evolve is for traditional institutions to evolve over time. It shouldn't be revolutionary," Battery head Scott Tobin observed to American Banker. "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."

Cross River now partners with over 15 online lending companies. Its loan origins totaled over $2.4 billion in 2015.

CEO Gade liked the partnership to "banking as a service," analogous to the tech world's "software 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 noted. "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."

Benefits of a Seasoned Loan Sale Advisor

Loan originators of all kinds - both banks and other marketplace lenders - need to comply with existing rules and regulations. When seeking a loan sale advisor to benefit liquidity, lenders are advised to work with seasoned loan advisors, such as Garnet, who are well-versed in the lending industry's best practices. Sign up for our newsletter to stay informed about issues of interest to all marketplace lenders.