The Secret Bank Behind the Fintech Boom

This is a sloppy article.

It cites irrelevant details. For example, when it talks about "little-known FDIC-insured banks", the 'FDIC-insured' part is entirely irrelevant. FDIC insurance is for deposits, and has nothing to do with consumer lending.

On to the main point, though: the reason all these Fintech companies have Cross River make the initial loans has nothing sinister about it. And, contrary to what the article implies, this commercial arrangement says nothing about the innovation (or lack thereof) involved.

For many types of business, getting started in the USA is amazing because you have this single market with a single language and (mostly) a single set of consumer regulations. So it's much easier to grow a business in the USA than in the EU.

But for consumer lending, you need to apply for authorization in every state where you want to lend. A new FinTech will aim to distinguish itself through some combination of:

1. User experience (convenience, speed, gamification)

2. Customer acquisition

3. Underwriting performance and efficiency (using AI, alternative data or whatever)

When you have so much to set up at the start, why would you want to tie up a whole bunch of your colleagues applying for licenses, and then making sure you comply with all regulations (e.g. making sure your loan contract template for each state complies with the laws, even as they change), etc.?

Just like you don't rack your own servers but pay AWS, Heroku or Fly.io. You want to stick to your areas of comparative advantage.

So Cross River is effectively providing a backend-as-a-service. I don't know the details of the relationships, e.g. whether Cross River does the underwriting and takes the lion's share of credit risk. It probably varies depending on each Fintech co's area of expertise.