While the vast and various online lenders all offer unique variations on value propositions – if one were to try to unite them all under a single heading – “Not Banks” might be a good place to start.
Or at least might have been a good place to have started about 8 weeks ago – in recent memory, “Not LendingClub” would probably be a more likely contender for the mantle of segment slogan.
But the recent pyrotechnics at the U.S.’s largest marketplace lender aside – the wave of tech-backed lenders that have been storming the consumer (and SMB) credit beaches over the last few year have all, to some extent, advertised the degree to which they were very much not like the banks they were trying to disrupt. Specific pitches varied to the specific elevator one found themselves in – online lenders were faster, more technologically adept, less beholden to leaden regulation, better wired into their consumers’ fundamental needs – and were thus better suited to lending that the big bank-backed methods of the past.
A plausible and beloved narrative that ran into two big problems in 2016. The first was Lending Club – which over the course of a few headline bursts reminded everyone why regulation in lending is not the worst idea in the world. But more fundamental – if less dramatically satisfying- was an emerging underlying reality that many, many online lenders are having some trouble demonstrating that their risk assessment methods are actually creating better classes of lenders.
The uptick in charge-offs and defaults across quite a few high profile platforms has left some investors wondering if all those super smart algorithms actually do any better at finding reliable borrowers than those slower, but more time tested, methods their counterparts in traditional banking use.
This leaves many lenders at an interesting crossroads – and San Francisco-based SoFi (short for Social Finance) is one such firm. Created in 2011 to help Stanford students refinance their student loans, the platform has since grown to include personal loans and (in some markets) mortgage loans as well. Those non-student loan products represent more than half of SoFi’s business these days.
The firm is much beloved of investors, having snapped up a cool $1 billion in Series E Funding in a round lead by SoftBank. The firm is currently valued at $4 billion and has loaned out over $10 billion for student loans. According to its CEO Mike Cagney, he would like to see the company grow to a value of $100 billion someday.
But SoFi, despite its slightly different business model than its marketplace lending fellows (SoFi does not sell off loans in their entirety, and holds on to a percentage of all of them) and fairly rarified customer-base (SoFi’s initial and current focus is on millennial borrowers with debt from elite universities) is still feeling the tidal pressures that are pulling the rest of its segment around.
And, it seems in SoFi’s case, it is being pulled in two nearly opposite directions.
Being Even More Alternative
Whatever else can be said of SoFi – if recent reports in CNN Money about the lengths they go to help their users meet and mingle are accurate – they definitely take the “social” part of Social Finance seriously.
Over 8,000 borrowers have met up at the 300 or so (mostly fully booked) SoFi events held nationwide over the last year. Events include social mixers full of free food and alcohol, yoga classes and the chance to meet other young, upwardly mobile professionals.
“You meet a lot of interesting, like-minded people,” New York-based SoFi Customer Elsa Yan noted of the four different SoFi events she has attended.
You meet interesting people – and apparently date them, according to Dan Macklin, the VP of Community and Member Success.
“We know people have been on dates after meeting at SoFi events, and we’re embracing that,” Macklin noted. He went on to say that SoFi will be holding more singles events – and that a “connections app” should be expected soon for those who are looking to make friends or more than friends through the service.
So come for the three percent reduction on the interest rate on your student loan – stay for the romance. It is an interesting sales pitch for an online lender.
And if it is a little too non-traditional for the average borrower, SoFi also offers the perhaps more expected service of sessions with a career coach once every couple of weeks to help borrowers map out their plans.
“It’s like a mix of a therapy session, a career coach, and somebody that just helps expand your perspective on yourself. So it’s been pretty helpful,” noted borrower Andy Beltran of the service.
And according to Macklin, helping their borrowers attain success is more than just protecting their investment – since the gainfully employed generally pay back loans better than the unemployed – it is also about living up to customer needs.
“We don’t believe that you should just receive a statement from us once a month and that should be it. We believe people are looking for more than that,” he said.
And so on the one hand, SoFi needs to be different – because different and more are what customer are looking for.
On the other hand …
Getting Into Traditional Banking
While SoFi may seem to be doubling down on the alternative path by developing their answer to Tinder for the financially responsible – recent reports indicate that SoFi is also moving toward being much more like one of those traditional banks whose methods it has historically eschewed.
Apart from the sector-wide pressures SoFi is now feeling in the wake of the Lending Club never-ending avalanche of shoes dropping – the lender itself has had some trouble harnessing and controlling its growth this year.
And the Super Bowl ad worked a little too well and flooded its website with far more traffic than it was ready to handle. Days passed – customers waited, got mad, and turned to Twitter and online review sites to blast SoFi for being inept.
Then it came out that the firm just plainly didn’t have the capital reserves necessary to meet the surge in loan demand – which didn’t help the PR situation – and had their growth happy CEO singing a slightly different tune.
“It’s important to grow, but you need to grow in a way that you can manage,” Mr. Cagney, said “If we lose sight of that, then we very quickly become just like the whole [banking] infrastructure we’re trying to drag kicking and screaming into modern time.”
And speaking of becoming like the banking infrastructure – well, according to the Journal, that is very much looking like SoFi’s future as it readies itself for the next phase of its corporate evolution.
On the table: SoFi could seek regulatory approval for a state banking charter in Utah. This has the upside of adding the sort of stability lenders would like to see – but comes with the miles of red tape SoFi has built a reputation for speedily avoiding. Also possible options are credit cards and deposit accounts. Finally, partnerships with big financial institutions seem very much in play. That last option has seemed increasingly likely since the former co-chief executive officer of Deutsche Bank AG, Anshu Jain, announced his intention to join SoFi’s board of directors. Cagney also met extensively with JPMC’s Jamie Dimon earlier this year.
But if such partnership is viewed as the most likely outcome, it is also held to be the one Cagney feels most ambivalently about.
“Some of my peers are perfectly content being the origination arms for banks,” he says. If SoFi follows that approach, he says, “what have I really disrupted?”
So far, SoFi is doing somewhat better than its peers. In May, SoFi received a triple-A rating from Moody’s on a $380 million deal that repackaged loans into bonds. It was the first securitization by an online lending startup to get the top rating from Moody’s.
But SoFi can see the world around it is changing – and that it will likely have to change to become something more like a bank – and some time soon in order to keep up with a market that is looking for more stability from marketplace lenders.
They might just be the only one that also has a dating app.