Venture Capitalists Get Radical and Invest in a…Bank
By Telis Demos for WSJ
Startups aiming to disrupt banks have been a decent bet for venture capitalists. But what do some think might be an even better bet? Banks.
For the first time in over a decade, a group of Silicon Valley’s top venture firms are making a sizable bet on a deposit-taking U.S. bank. Battery Ventures LP, Andreessen Horowitz, and Ribbit Capital are investing $28 million in a fundraising round for CRB Group Inc., the holding company for eight-year-old Cross River Bank, according to the firms.
In many respects, Cross River looks like many other small lenders: It is a New Jersey-chartered community bank with one branch, in Teaneck. It makes commercial loans to businesses like specialty grocery stores in and around New York City, and offers personal savings and checking accounts.
But the little-known bank, with $543 million in assets, has quietly risen to national prominence in tech circles. Since its founding in 2008, it has partnered with some of the highest-profile financial technology, or fintech, startups offering online loans and payments, such as Affirm Inc., Stripe Inc., and TransferWise Inc. It is also linked up with tech giants MasterCard Inc. and Google parent Alphabet Inc.
Cross River uses its position as a chartered and Federal Deposit Insurance Corp.-member bank to do things that are tougher for nonbank firms under U.S. rules. That includes originating loans in any state and moving funds over the banking system’s rails on behalf of its partners or customers.
Such arrangements have attracted scrutiny from the FDIC and the Federal Reserve, who have concerns that partnering with lightly regulated tech firms may introduce new risks into banks protected by U.S. taxpayers.
For now, however, these pairings are thriving due to a surge in interest by tech firms that want to participate in the large and growing ecosystem of mobile wallets, peer-to-peer money transfers and online shopping checkouts.
The Silicon Valley firms’ pivot to investing in a bank is a surprising twist in the evolution of fintech. Many investors believed that banks were ripe for disruption by tech-first upstarts, in the same way that taxi cabs and hotels were upended by Uber Technologies Inc. and Airbnb Inc.
But startups such as LendingClub Corp., which makes online loans, and Simple, which offers smartphone banking services, have ended up partnering with banks to varying degrees to grow their businesses.
Cross River’s new backers said they viewed it as the “pick-and-shovel” equivalent for fintech, an analogy for quietly providing services to people hoping to strike gold.
“It’s rare that people think, ‘We’ll build another Bank of America,’” said Scott Tobin, a general partner at Battery Ventures who will join the board of Cross River’s holding company with the new investment. “But my hope is that Cross River will be a giant bank.”
Bank ownership is highly regulated and even investing in one can prove difficult, which potentially limits competition. Cross River’s new investors had been in negotiations with the bank for over a year, and notified the Federal Reserve, which oversees the safety and soundness of the banking system.
The venture funds also had to limit their investments in Cross River, to avoid turning themselves into so-called bank holding companies. The threshold is typically 10% ownership for an individual fund. That would have subjected the venture firms and their portfolio companies to Fed oversight as well. Mr. Tobin’s role on the board will also have some limits, such as what committees he can serve on.
Cross River was started in 2008 by Gilles Gade, a former Bear Stearns and Barclays PLC banker and chief financial officer of a mortgage lender. He raised about $10 million from friends and family to start the bank, aiming to step in when other banks were pulling back following the financial crisis.
About three years ago, Cross River started partnering with online lenders. Cross River’s nine-month revenue more than doubled this year, to $55 million from $26 million last year, according to the bank’s public financial filings.
The bank’s newest business is facilitating digital payments. It has built new internal software to enable it to settle bank transfers on the same day, and to use MasterCard’s instant debit card transfer network, of which it is now the largest user.
First appeared at WSJ