Subledger management

Fintech has transformed how we interact with money. Services like digital payments, online lending, credit, wealth management, and blockchain/distributed ledger technology now figure prominently in the financial landscape. These products operate through a delicate dance between fintech companies, banks, and the middleware that allows them to communicate. At the heart of this intricate ecosystem lies subledger management, a crucial financial control process that ensures accurate tracking and reconciliation of financial transactions across diverse platforms.

Subledgers, sometimes called “accounts” or “wallets,” are essential for accurately tracking and securely managing transactions between parties. Typically, middleware companies provide the infrastructure to help manage subledgers and facilitate communication between systems, but Cross River takes a differentiated approach, serving as both the technology platform and the bank, without a need for third-party software. With Cross River, companies can generate subledgers to track transactions and balances in real time. This capability allows for automated balance synchronization and efficient fraud detection, protecting the consumers and businesses that interact with Cross River APIs.

In this piece we explore how we think about the power of subledger management and the cutting-edge tech solutions that we offer as an industry leader. For the last 16 years, Cross River has been focused on building smart financial products that boost financial health for consumers and businesses. By working together with our partners, we’ve been able to expand access to financial services for millions. Our extensive experience has equipped us to address significant issues and adapt to the ever-changing needs of the industry.

In this article:

• Why subledgers matter
• Real-time transactions and streamlined operations
• No middleware dependency
• Enhanced fraud detection and compliance
• Improved customer trust
• Proactive compliance
• Innovation at the core

Why subledgers matter

Subledgers contain detailed financial information for individual transactions, customer accounts, or departmental expenses. You can think of subledgers as individual accounts for each customer

or entity. This granular information is then rolled up into a general ledger, which offers a comprehensive overview of a fintech's overall customer base.

Subledgers track financial transactions rather than hold value themselves – they contribute to a broader financial picture. Balance synchronization is what ensures alignment between subledgers and the general ledger, eliminating discrepancies. If ledgers don’t sync properly, there can be reporting and reconciliation errors but most importantly, discrepancies can lead to recordkeeping challenges. Automated balance synchronization, which Cross River makes possible, ensures that subledger and general ledger balances update in real-time as transactions occur, a solution to the ongoing concerns raised by the FDIC.

This tech enabled feature is accessible to all partners integrated with Cross River's proprietary Operating System (COS) where creating subledgers is quick and seamless. They can be generated in real-time and on-demand, easily linked to existing deposit or master accounts. Each master account even comes with an automatically generated ledger account, an “implicit” subledger, ensuring everything is efficiently managed.

The subledger system is fully routable, supporting a variety of payment methods, including:

• ACH
• FedNow®
• TCH's Real-time Payments®
• Wires

Cross River’s advanced subledger configuration offers significantly enhanced transaction monitoring and customer record reconciliation – key elements for regulatory compliance.

Cross River's subledger technology enhances transaction monitoring through specific fields for both consumers and businesses, effectively supporting Know Your Customer (KYC) and Know Your

Business (KYB) processes. Metadata from a customer record and a subledger can be used to enhance transaction level data to provide greater insight and efficiency in transaction monitoring. The flexibility provided in the system also allows for detailed reconciliation and regulatory oversight of consumer, business, and merchant records, enabling precise tracking at the customer level.

The comprehensive system underscores our dedication to delivering cutting-edge financial technology solutions while maintaining strong compliance and consumer protection.

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Real-time transactions and streamlined operations

The ability to create primary accounts and subledgers that reflect accurate balances in real-time has multiple benefits – including faster, more streamlined operations. A customer does not have to wait for things to settle, or for feedback from the bank. There’s generally no internal delay in settlement or delay in accessing your funds.

This is because the real-time element ensures every transaction is not only accurately recorded, but immediately reflected in the appropriate financial accounts. In a real-time environment, subledgers update continuously. Users don’t have to wait for the bank to process things or wait for the OK to send money because funds won't be stuck in a waiting period.

This real-time feedback also gives customers confidence that their funds are safe and accounted for. Our customers know what's in their accounts and subledgers because we give them real-time access to that information. Whatever funds we say are in the account are in the account.

Another benefit of Cross River’s subledgers is that it creates more transparency and is easier to control than legacy bank systems, where multiple transactions are grouped and processed at scheduled times. These batch processes are typically file-based and require manual intervention and settlement windows, which can be slow. By using an API (application programming interface) that acts as a communication bridge between software applications, Cross River’s subledger management system allows for real-time, immediate updates on individual transactions. “That’s a key unique differentiator,” Keith Vander Leest, Head of Payments at Cross River, says. “We're reporting via automated webhooks that can provide updates on specific transaction activity.”

No middleware dependency

Many financial institutions rely on the subledgers of third-party middleware because these systems can manage complex financial data without extensive in-house development, maintenance, and cost. However, banks that use middleware might not have complete visibility or control over the ledgers.

In response to this increasing need industry-wide, Cross River developed our proprietary API-based banking infrastructure, COS. “Our legacy bank core couldn’t do some specific things that particular partners were asking us to do,” Vander Leest says. “So, we built our own proprietary API-based bank core. That was not a small undertaking.” COS went live in 2019.

One of COS’s key differentiators is subledgers. “The subledgers provide our fintech clients the granularity to reconcile and manage their customers’ balances with more precision, ensuring real-time updates and simplified,” Vander Leest says.” Bringing these functions in-house gives Cross River’s fintech partners like Plaid, Upgrade, Best Egg, and Coinbase more direct control and better data insights, which is especially important for such massive and complex partners.

“We own our technology, and can thus adapt to our customers’ needs,” Hillel Olivestone, Head of Corporate Development and Strategy says. “Most of what we’ve built from a technology perspective has been in response to our customers. That’s led us down a path of building a full-stack solution that differentiates us in the market.”

As both a bank and technology platform, Cross River has paved the way for unprecedented flexibility through the development of its modern-day bank core – partners have the ability to create unique configurations and solutions for a variable customer base.

Enhanced fraud detection

As Cross River continues its dedication to enhanced technological and infrastructure capabilities, regulatory adherence in all operations remains a priority.

It has also been Cross River’s aim to develop industry standards that safeguard consumers while fostering innovation and maintaining a rigorous emphasis on consumer protection, particularly for those with limited financial access. Cross River actively engages with policymakers, regulators, legislators, and industry leaders to foster a practical and cooperative approach.

Product led decisions such as real-time subledger creation and automated balance synchronization can make it easier to provide regulators with data and monitoring for money laundering and fraud, according to Colleen Paschal, Director, BSA AML at Cross River, especially since Cross River’s broader anti-money laundering (AML) system includes both tools like rule-based systems and manual reviews.

Cross River’s technology can also create specific scenarios to flag suspicious activity based on customer profiles and behaviors. These scenarios, such as spikes in wire transfers or activity that doesn’t match the customer’s expected net worth or transaction history, can automatically be

flagged for further scrutiny. All subledger profiles include customer risk ratings, which allows us and our partners to be more proactive.

Cross River’s subledger management features are “no longer simply a best practice; they’re now necessary for a rapidly changing regulatory environment,” Vander Leest says. Because of the rapid growth of fintech and BaaS ecosystem, regulators are scrutinizing the industry more than ever before. So Cross River’s subledger features are now “more of a requirement to future-proof our business and our customers’ business from proposed FDIC regulation around how these programs are run and how fintech programs operate overall,” he added. That means our subledger management system not only helps us comply with existing AML regulations, but also positions the company to adapt to future regulatory shifts.

Improved customer trust

Cross River’s customers and end users can feel confident that their funds are protected even if there are issues that arise with the middleware provider. In light of recent industry news, Vander Leest explains “Some of these banks didn’t have visibility into what was happening in the FBO account. When a middleware provider disappears, and customers need to access their balances and get their money out, those banks didn’t know what the balances were at the customer level. That would likely never happen with us.”

Cross River’s subledger technology provides complete visibility and control over balances, ensuring that you can always access funds. Think of Cross River’s subledger technology as insurance. “You’ll always be able to come directly to us as the bank and say, ‘Hey, I want my money,’ and we would have a record of all of that activity through your sub-ledger,” Vander Leest says. “We would be able to pay you out correctly.”

Proactive compliance

Recent events around BaaS safety and soundness have rightfully prompted the FDIC to propose new rules regarding custodial account recordkeeping – Cross River welcomes responsible regulation, and we have equipped ourselves with a solution that ensures compliance while supporting growth.

We have been proactively working since our inception to protect our ecosystem through innovative technology and believe Cross River’s Operating System (COS) and its subledgering capabilities are viable answers to rising concerns.

Our fintech clients can attest to the stability, safety, and growth potential our technology offers all parties involved.

This critical feature helps responsible fintechs future-proof their programs against potential regulatory changes, ensuring seamless management of reconciliation and compliance.

Innovation at our core

Over the last 16 years, Cross River has empowered partners to focus on what they do best – innovate. By providing a one-of-a-kind technology and banking and payments platform alongside our regulatory expertise, we take care of the heavy lifting and enable businesses to tackle the ever-changing demands of both companies and consumers head-on.

We’re constantly pouring resources into our growth, whether that's beefing up our tech stack, expanding our product lineup, bringing in top-notch development talent, or strengthening our compliance framework to support that ongoing innovation for our partners. The development of COS and critical solutions like subledger management are a testament to our approach and business philosophy.

Cross River is not just keeping up with the industry – it’s setting the pace and making sure our partners have the tools they need to stay ahead of the curve.

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