Episode 9: Cross River | Rails, Routing, and Real-Time Payments
Our guest on this podcast is Keith Vander Leest. Keith is head of payments at Cross River Bank, one of the most innovative banks in the fintech space. Todd and Keith discuss rails, routing, and real-time payments.
Read the full transcript below.
Episode 9: Cross River | Rails, Routing, and Real-Time Payments
Todd Ablowitz (00:09):
Welcome to It Pays to Know, the Infinicept podcast where we dive deeply into unexplored areas of payments, embedded finance and more. My name is Todd Ablowitz. I’m co-founder and co-CEO of Infinicept. And today my guest is Keith Vander Leest. Keith is head of payments at Cross River Bank, one of the most innovative banks in the fintech space. Today, we discuss rails, routing and real-time payments. There’s so much innovation happening in this space in 2023 and beyond. It’s really a treat to speak with one of the true leaders in the space. Without further ado, I hope you enjoy our conversation as much as we did.
So Keith, let’s start out with how you got here and a little bit about what you do today.
Keith Vander Leest (00:52):
Yeah, Todd, thanks for having me. So I’m currently leading the payments team at Cross River, and I can talk more about what that means, what we classify as payments later. But I’ve been at Cross River about three years now. Prior to Cross River, I was working at American Express. I had a variety of roles at American Express. I was doing some business development, some strategy work, both on the acquiring side and on the issuing side. And then prior to American Express, I was at First Data for a number of years in different roles and if the people are familiar with First Data. So been in payments right from business school. I’ve always been fascinated by payments and I’m just excited about what is happening in payments today.
Todd Ablowitz (01:37):
Awesome. Well, I think we overlapped or we almost overlapped at First Data because I was there for about 10 years in the ’90s and 2000s. So let’s talk a little bit about your role and how CRB looks at the payments business. Your remittance payments. What does that encapsulate?
Keith Vander Leest (01:56):
Yeah, so payments at Cross River, we talk about payments in different buckets. We talk about our bank payment rails, and that’s ACH, RTP and wires. And then we talk about our card payment rails, and that’s a lot of push-to-card. So that’s Visa Direct and MasterCard Send. And then traditional merchant acquiring. And what that looks like at Cross River today is sponsorship in sponsorship. And we’re working on some other things there to expand our acquiring capabilities. But our clients are fintechs, exclusively fintechs. And by fintechs, I mean true fintechs. So fintech is a term that I think gets thrown out a lot, but to me a fintech is a company that has a large percentage of their staff that is engineers.
So we’ve created a bank core that is API-first. We built it for some of our clients and that’s essentially what we’re selling, at least when it comes to the bank payment rails. So the best clients are the ones who go right into our sandbox and start playing around and say, “Hey, this is what I want to do. How can you help me do this?” And they’ve already looked at the APIs. They have a certain knowledge of payments and then we help them navigate exactly how to set up their accounts, and exactly what their program should look like, and then they’re off and running.
Todd Ablowitz (03:15):
Awesome. Well, we’ve worked together obviously in the card business particularly. And on this pod, we talk a lot about the card business, but I think it’d be interesting to dive a little bit into the bank payments, as you call them, bank payments. And I’ve been fascinated with RTP and FedNow, and I’m very uneducated about it. I’m guessing there’s probably some of our listeners that haven’t had much experience with it. So let’s double-click on RTP and FedNow, how you look at it, what it is, how it came together, what’s special about it? And then I’ll have some follow-up questions, I’m sure, because I think there’s a lot of good education there.
Keith Vander Leest (03:52):
And taking a step back, with the payments programs typically mean our… operations group is called Instant Payment Rails. That’s the acronym they use. And it’s really important to us and for our clients to be able to move money really, really fast. So anytime there’s a faster payment rail that’s coming available, we’re going to make it available. So that includes Visa Direct and MasterCard Send, so the card rails, but obviously that’s RTP, real-time payments from the house and then FedNow. So we’ve got a number of clients live with RTP today. And then we will have clients live with FedNow sometime next year. We’re one of the pilot participants with the FedNow program.
And right now the use cases we’re seeing a lot with RTP is similar to what we see with our other payment rails. So Visa Direct, MasterCard Send, and then ACH credits. A lot of same-day ACH credits too. It’s much faster than next-day ACH. So those are gig economy payouts, online gaming payouts. The great thing about RTP versus, let’s say, ACH, is it’s 24-7, 365. And where that comes into play often is through the weekends. So people can make payouts outside of the traditional banking hours. You can do that with some of the card rails, but prior to RTP, you were tied to 9:00 to 5:00 Monday through Friday. RTP is the first bank payment rail that can be leveraged overnight and on the weekends. And so there’s some gaming paths, sports gaming specifically, there’s a lot of demand. When your team wins and you’ve got some money with the winning team, you want that money right away.
Todd Ablowitz (05:37):
That’s really cool. I didn’t realize that it was 24-7, 365. So RTP stands for real-time payments, right?
Keith Vander Leest (05:45):
Todd Ablowitz (05:45):
So it’s taking some time to roll out. We’ve been talking about it for a while. FedNow has been on the docket for what, five years? Something like that?
Keith Vander Leest (05:52):
Todd Ablowitz (05:53):
I assume two-sided market adoption is the reason for this. Is that a good assumption, that you’ve got to get the banks on board, they’ve got to be either in the Clearing House or signed up for FedNow, and that’s just a pilot? Where are we in the adoption? So let’s suppose I want to support… A lot of our customers want to get paid to merchants really quickly, whether it’s gig economy or just a merchant would rather get paid faster than slower, that seems pretty logical to me. So if you look at business bank accounts across the country, do we have a sense of what penetration of financial institutions could receive a real-time payment? And then I want to talk about what happens if they can’t? How does the unhappy path work? Or you try to do it, is there a fallback? How does fallback work? How do these things fit together for a functioning system?
Keith Vander Leest (06:43):
And when we talk about RTP, it’s important to note that right now it’s just the payouts. The pay-in’s not a real viable solution, and we can talk more about why that is later. But from a coverage perspective, I think the Clearing House, they publicized 70%. It is increasing. So maybe now it’s getting close to 80%, of all DDAs, demand deposit accounts, in the US. And so that’s the number that’s out there. It really depends on who the client is. On a retail banking perspective, most of those accounts are concentrated by the big banks. The Chases, the B of As, the Wells, that’s where a lot of those accounts are. And those banks have, for most of their routing numbers, enabled RTP.
But some of our fintech clients, who in turn have consumers or merchants who are their clients, who are working with different sponsor banks that have not enabled RTP, their overall penetration rate for RTP receive will be lower because some of those smaller sponsor banks have not necessarily enabled RTP. One earned wage access client, when they looked at RTP, they saw many of their customers’ employees were working with banking-as-a-service fintechs, whose underlying accounts were held with some smaller sponsor banks that had not enabled RTP, so RTP was not a great solution. I think they saw something like 30 to 40% penetration versus what the Clearing House states, 70 to 75%. So I think it’s generally where are the accounts and what types of banks, Now, the Clearing House is working and banks are working to increase that rate, but it’s very much based off of the use case and where the underlying accounts are held.
Todd Ablowitz (08:52):
Cool. That makes sense. And let me follow up with, so what happens when I’m wanting to push money to a customer? So I send you, I assume, an API call or a file. And when I send that to you and I am requesting RTP or I’m set to default to RTP, does it automatically fall back to ACH or like a same… Does it go RTP, and if that doesn’t work, same -day ACH? And if it’s too late for that, next-day ACH?
Keith Vander Leest (09:20):
Well, first of all, API calls only. We don’t like to do files. But we don’t have that smart routing into that waterfall logic built into our APIs, but most of our customers do. And I would say, again, all of the payment rails should be thought of, not just the bank payment rails, but the card payment rails for payouts. So what we like to talk about with our fintech partners is make all of the payment rails available and then you’ve got a waterfall. You can say, “What’s more important?” And push the decision down to the end user, to the consumer, to the end merchant to say, “Do you want the money now? It’s going to cost you a little bit more. Do you want to provide the card account number, the PAN? Or do you want to provide your DDA?” Some people are more comfortable with the card number being shared because that’s much more common, and there’s different protections around that, versus someone providing their DDA. Certain people get nervous about providing their account and routing number.
So what we like to say is push the decision down as close to the end user as you can, and let them make the choice. Lay out the differences between speed and cost and different payment modalities, and then let them decide. Other partners decide that they would write logic, smart routing logic themselves to say, okay, fall back to same-day ACH if RTP is not available because we don’t want to deal with the card networks and the different fees there. And then if, for whatever reason, they’re not as speed-conscious, they would fall back to a standard ACH.
Todd Ablowitz (10:55):
Yeah. So it sounds like you’re going to be thinking about the priorities between speed, cost and the credential needed.
Keith Vander Leest (11:05):
Correct. Yeah, and the other payment rail that we haven’t really talked about is wires. We do have wires via API. That is very costly, but in certain situations for large dollar amounts, that is a viable option as well.
Todd Ablowitz (11:20):
And a lot of our customers and people who are listening to this podcast are thinking about the whole indirect payments, meaning it’s a software company or a fintech serving their merchants, who in turn serve customers. And they may get a very large settlement overnight for all of their submerchants. And so a wire from a sponsor bank or processor into an FBO account would be very logical for them. But then the next hop from their FBO account, or “for benefit of,” meaning the settlement account for them. I know you know this, but for the listeners, I always like to think about the acronyms. We sure use a lot of them. As they send them forward, they might have a priority on cost or they might have a priority on speed. And that’s a great way to think about it with the five different rails that you speak of. So that’s very cool. I think it’s a really interesting area of payments and, I guess for banks, it’s moving quickly, right? It’s certainly getting adoption and I think we’re going to see a lot of interesting things there.
Keith Vander Leest (12:19):
Exactly. I think so many of our fintechs are looking at a payment. And you think about a payment as multiple hops or multiple transactions. And at each point in that transaction, there’s a point where liquidity is tied up. So, obviously, the faster you can move the money through that payment, which consists of multiple hops or multiple transactions, you can move it faster through it, the lower your cost of capital is. So while there’s a per-transaction cost, if you think about end-to-end, where you’re driving capital out of the overall payment, you’re, in the long run, especially as cost of capital is increasing, probably saving money.
Todd Ablowitz (13:04):
Yeah, that’s super interesting. So let’s take a turn a little bit. Right now the news on crypto is not exactly happy news. We are seeing mugshots every day, and there’s guilty pleas, and there’s extraditions and a lot of churn, a lot of change. But it might not be cool to talk about crypto right now, but there’s some really interesting areas that aren’t as sexy as what people got excited about with Ethereum and Web3 and all of that. Let’s talk about where you pay attention in crypto and where your bank plays in that space.
Keith Vander Leest (13:43):
Yeah. Personally, I’m still bullish on crypto, and I’ll nuance that by saying when I think of crypto, when I get excited about crypto, it’s not crypto as an asset, it’s crypto as a payment tool, as a medium of exchange. We talked about the speed of money movement. Well, if we can move money faster via crypto rails, similar to what we’re talking about with the RTP in that it’s 24-7, 365, and now crypto is also cross-border. RTP is domestic only, but crypto can be cross-border. That’s where I think… Now, you’re right, it’s not as sexy. People during the pandemic, they had extra cash on hand, they’re sitting at home, they were into crypto as an asset, as an investment, and see the value of that go up. That was exciting, and everyone was into crypto because you could make a lot of money.
And now, obviously we’ve seen that so much of that was around speculation. That, to me, that’s a bubble. I was never that excited around that component of crypto. I think crypto as a payment rail is really interesting. And that’s where it won’t be in the headlines, it’s very much behind the scenes, but the audience here, we know payments, and that’s where I think crypto can help a lot. Not the headlines, not the ticker on CNBC that has the price of BTC or ETH. That’s not where crypto can help for payments.
From a Cross River perspective, we’ve been supporting crypto customers for quite a while specific to payments. So we’re in the business of moving money, not storing money. We’re not one of those banks that is going after deposits. We’re not looking up to build up our balance sheet, so we didn’t really have much exposure from a balance sheet perspective to a lot of these crypto clients, but we were providing payments. We were moving the money, not storing the money for the [inaudible 00:15:42].
Todd Ablowitz (15:41):
Well, stepping back, payments that work rarely get replaced. It’s when there’s areas of payments that are highly inefficient or there’s a use case that’s not really supported very well – so, either way, too expensive or not supported – and the one that I think of is remittance. It seems like stablecoins have found a really good use case in moving money between countries that allow someone to get money to a relative, or to someone who needs it, in a more efficient, safe – or seems safe, as long as your on-ramps and off-ramps are safe, it seems like it would be a safe way to do it. And it replaces a highly inefficient agency system that takes a huge percentage. Am I on track there, Keith?
Keith Vander Leest (16:31):
100%. And it’s funny, you mentioned that you were at First Data. And when I started with First Data, I was in Denver with Western Union. And so my first experience in payments was with Western Union, with remittances. And yeah, remittances are very expensive. And another experience, Dan Schulman, he’s the CEO of PayPal, but when I was at Amex, he was there. And they were focusing on the underbanked and unbanked. And he had said this quote that I really like, “It’s expensive to be poor.” Some of that is just going to check cashing, paying your bills. But then oftentimes the unbanked, underbanked are immigrants who are needing to send money back home or want to send money back home. And then there’s very expensive remittance options out there now. That’s where I think stablecoin, and more broadly, maybe crypto can help.
There’s things that still need to be worked out when it comes to remittances or just, more broadly, cross-border payments, to include B2B payments in there as well because there’s a ton of cross-border B2B payments also. But one of the things when we think about consumers is Reg E disclosures around the FX rate. So there’s an FX rate in fiat to crypto. We need to factor that in, make sure that the consumers aren’t getting a free remittance, but they’re actually paying through the nose, through the FX rate. Whether that’s a fiat-to-fiat FX rate or a fiat-to-crypto FX rate, you still need to disclose what the FX rate is.
And then the other thing from a BSA/AML perspective is adhering to the travel rule. We need to ensure that any cross-border payments, we know who the sender is and who the beneficiary is. So those are some of the things that still need to be, I guess, fine-tuned when we think about crypto for cross-border payments. There’s a lot of our fintech clients trying to solve that problem. I haven’t seen a 100% complete solution there quite yet, but I think hopefully in the next year, if not two years, we will see that use case for crypto really take off.
Todd Ablowitz (18:39):
So if you need to know who the sender and the receiver is, but crypto is fungible, like USDC is fungible, is part of the solution finding a way to lock down that it can’t be transmitted elsewhere? Or how do you even solve that if it’s an anonymous, cash-like…
Keith Vander Leest (18:57):
Well, yeah, and so I’ve learned a lot about crypto, like probably we all have. You say it’s anonymous, it’s probably not entirely true because you can see the wallet addresses. And you can see all the prior wallet addresses that that token went through. So I think that the challenge is tying that wallet address to a person, to an entity, to whether that’s a consumer or business. And that’s where I think we haven’t come up with a comfortable solution. Maybe it’s from a regulator perspective, we haven’t gotten good direction or haven’t gotten comfortable with. There are tools out there that help with that. I’m not quite sure, again, like I said, we’ve come up with something that is a good solution yet.
Todd Ablowitz (19:47):
Very, very, very interesting. So Keith, let’s move to the future. What do you think 2023 holds for us in terms of what are your most interesting things that maybe… Especially if you can come up with a surprise for me on 2023.
Keith Vander Leest (20:03):
So obviously, things are slowing down both in the crypto space, but then more broadly in fintech. I think people are heads down on working on solving some of these, again, maybe not sexy problems, but problems that exist in payments today. Cost of funds are much higher than they were a year ago. And so, like I mentioned, moving money faster, there’s going to be an increased focus on how do we move money faster. I think there’s going to be, from a fintech perspective, an increased focus on the countercyclical verticals, payroll, earned wage access, some things that are recession-proof, insurance payouts, gig economy workers. I think there will continue to be innovations there. I think there’s a long-term secular growth in fintechs replacing traditional financial services, but I think it’s going to be actually probably more in the payment space versus other types of financial services, let’s say assets and investments.
I think that will maybe not be as strong of an area of growth as it has been in the past. So I don’t know if that is anything unique or unknown or a surprise to anybody who’s close to the business. But I think I’ve always been excited, like I mentioned at the start, about the trajectory of payments and specifically electronic forms of payments. And there’s always areas of innovation. Sometimes they’re in pretty niche verticals, oftentimes it’s B2B payments, that there’s different… Checks are still being written in a lot of these B2B use cases and we see fintechs coming to us trying to innovate in those areas.
Todd Ablowitz (21:54):
Part of what I’m hearing you say is a different way of saying unit economics matter. And I think that the conclusion I have from what you’re talking about and what I hear from others is there are going to be some really big, really interesting companies built during this down period. And I would not be surprised if payments is a big area. Every cycle we’ve had enormous payment companies come out of these periods, and it’s going to be a very exciting time. I think we have to encourage all of our friends in the broader tech and fintech space to preserve capital, make it through. We don’t know how long it’s going to be. Nobody knows, but the opportunity on the upswing is going to be phenomenal.
Keith Vander Leest (22:40):
Yeah. There will be a lot of failures. A lot of these fintech startups, for whatever reason, they’re not going to be able to weather the downturn. But to your point, the ones that will come out of it will be stronger. And I think the other term that gets thrown around a lot is embedded finance, and I think payments is one component of that. I think whether it’s a consumer-facing fintech or a B2B fintech, they’ll figure out ways to embed payments specifically into what their current offering is. I think the other term is monetization of payments. That’s going to take off a lot, I think.
Todd Ablowitz (23:27):
Certainly, they have to have that revenue source, and it’s difficult a lot of times to get consumer-driven revenue or business-driven revenue if it’s a business application. So often it comes out of interchange. It just does, right? And so that’s a big part, I think, where we see all these services hang off of it, but the ones that really power the economics, which, everyone needs unit economics now, it’s definitely payments. So I guess it’s pretty good to be talking about this with the head of payments at one of the prominent banks in this fintech space, so appreciate it.
Keith Vander Leest (24:01):
Yeah. No, it’s exciting. I think the other thing that we’ll probably see is there’s been a proliferation of neobanks. And my area of focus is not on banking-as-a-service. Banking-as-a-service is a separate group. But when we think about some of the neobanks that we’ve seen, I do think there will be a downturn there. From a total addressable market perspective, there’s only so much that you can do in a niche vertical around, let’s say, the bank for dog walkers, or the bank for, you know, name it, specific category, that those are going to be limited in their runway, I would think.
Todd Ablowitz (24:40):
Yeah, I think you’re going to see software companies that serve verticals, business verticals, will thrive. And I think the nichier and more consumer applications are harder.
Keith Vander Leest (24:53):
Todd Ablowitz (24:53):
Much, much harder.
Keith Vander Leest (24:54):
So many of our fintechs underestimate the challenge around customer acquisition and the cost of customer acquisition. That is not easy. I’ve seen that coming from First Data, which was very much a B2B company, to American Express. Most of my time at Amex was on B2B sides of the business, but definitely a consumer brand. The consumer brand is not something that should be taken lightly, and it’s hard to get consumer adoption.
Todd Ablowitz (25:25):
Consumer and small business. Small business looks and feels and acts a lot like consumers, so…
Keith Vander Leest (25:33):
100%. 100%. You market to SMBs like you market to consumers, right?
Todd Ablowitz (25:39):
Keith Vander Leest (25:39):
Maybe a few tweaks, but…
Todd Ablowitz (25:42):
Well, and that’s what we saw. We talked about some big companies that came out of the recessions. I mean, Square came out of the Great Recession and PayPal came out of the ’01 crash, so this is not theoretical. This is really happening. But it’s a cautionary tale, to your point, if you’re going to go after consumers or very small businesses, you better raise a lot of money, and that ain’t easy to do these days. So I think one last thing I take out of this, and as we wrap up, is the opportunities to go after real businesses, real use cases that have high value and can be supported with the kind of revenue you might get from interchange or from merchant-acquiring revenue, from logical, straightforward business models. I think that’s what we’re going to see. Do you agree?
Keith Vander Leest (26:31):
Yeah, and I don’t think it’s necessary… You used Square as an example. And when Square came out, there was a lot of focus on the dongle. And yeah, the dongle was cool, but I think what they really did well was make it very clear to merchants what the value was from a cost perspective. Anybody who’s looked at interchange, it’s a nightmare. They said, “Forget about interchange. We’ll just charge you this flat rate.” And then they figured out how to acquire customers at a very low cost rate, entirely digital customer experience, because that was what consumers were doing. It just hadn’t been brought into the SMB space. So that’s what Square did. And I think it wasn’t necessarily… I don’t want to say it’s not that innovative, but it was something that you look in a different area of the economy and it’s already happening. You’re just bringing it into SMB payments. And that’s where I think coming out of this downturn, we’ll see someone like that. We’ll look back and like, “Oh, we could have done that.” So I’m excited to see who that’s going to be.
Todd Ablowitz (27:36):
It’s going to be very, very interesting. I think we’re going to see our share of headlines, and I think we’re going to see the exciting stuff underneath the surface, and I can’t wait to see it.
Keith Vander Leest (27:46):
Todd Ablowitz (27:47):
Thank you so much to Keith Vander Leest for joining us today for a fascinating chat about the banking rails. It was a great extension to our regular discussions about card payments. I learned something as always, and I hope you did too. Many thanks to our awesome listeners for tuning in to It Pays to Know podcast once again. We hope you enjoyed it as much as we did. To hear more from us, go to infinicept.com, where you’ll also be able to learn more about our PayOps platform and how we get payments going your way. For Infinicept, this is Todd Ablowitz. Thanks again for tuning in, and we’ll pay you another visit next time.