SoFi’s big goals hit big obstacles
Just a few years after Mike Cagney co-founded Social Finance Inc., he was already talking about how his new venture was going to “kill banks.”
Having built a decent business refinancing student loans taken out by graduates from top universities, SoFi’s brash and quirky founder dreamed of creating a “Wells Fargo of the future.” It would market things from insurance and mortgages to wealth management to Millennials.
Now, with Cagney felled by a flurry of sexual harassment allegations, the question is whether SoFi has any chance of building the financial supermarket he envisioned. This was always going to be a tall order, with the intense
competition from big banks and startups alike, but now SoFi’s image has been tarnished as well.
“There are a lot of question marks,” says Alois Pirker, research director at advisory firm Aite Group. “The new CEO will need to find his or her bearings there and that will tell which direction they’ll be going.”
Some members of the board consider the moves into life insurance and wealth management to be Cagney’s “pet projects,” according to a person familiar with their thinking. Directors prefer to focus on more mature businesses such as personal loans and mortgages, said the person, who requested anonymity to discuss a private matter.
In an email, a SoFi representative said: “We aren’t seeing any changes in loan applications or any other measures of how our members engage with SoFi. We’re proud of our 350,000-plus members, and the role we’ve played helping them finance their education, buy houses and invest in the future.” The company declined to comment on the insurance and wealth management businesses.
Despite the internal turmoil, SoFi’s core business is doing pretty well. It lends money to people with stable jobs and relatively high wages. It then packages those loans and sells them to institutional investors. It’s a lucrative market and an attractive option for consumers, who often get a significantly lower rate by refinancing their student loans through SoFi; according to bankers, these packaged loans are the most desired in the space.
SoFi reported revenue of $134 million in the second quarter, according to an email from Cagney to investors in August. It had adjusted earnings of $61.6 million and extended over $3.1 billion in student loans, personal loans and mortgages during that time frame. Personal loans are the most profitable, the person said, followed by student loans and then mortgages.
But efforts to sell other products to its customers have slowed.
The wealth management unit had just $12 million in assets under management as of early September, according to a filing. This is far short of the more than $100 million goal, people familiar with the matter have said. SoFi started offering this service to current customers in 2016 and to the general public earlier this year. By contrast, Ellevest, a robo-adviser designed for women that started months ago, already has $50 million in assets under management.
SoFi’s life insurance business has trailed initial expectations, according to another person familiar with the matter. SoFi offers policies that are issued by Protective Life Insurance Co., promising applicants that they can qualify with a quick online application. But Protective has struggled because it lacks online experience, the person said.
SoFi also wants to offer traditional banking services like deposits and credit cards, further reducing the need for its customers to use brickand-mortar banks. In order to do that, SoFi applied for an industrial loan charter, which would give the company a banking license without being regulated as a bank holding company.
These charters are hard to get. Critics say they create a risk to the deposit insurance system and would give SoFi an unfair advantage because it wouldn’t have to abide by the kind of restrictions that a commercial bank does. And Cagney’s controversial departure makes SoFi’s already slim chances of getting a charter even slimmer, according to former Securities and Exchange Commission chairman Arthur Levitt, who has advised SoFi since 2015.
“Very often, the ... entrepreneurs think they march to their own rules,” Levitt said at a recent Finance Disrupted conference. “As a result, hardly a day goes by where there isn’t a report of one scandal or another. I think that makes the odds of winning much less.” In a subsequent interview, he said SoFi needs to hire a CEO with banking experience, and perhaps add a woman to the board, to help boost the odds of getting a bank charter.
SoFi also is battling lawsuits over claims of sexual harassment and fraudulent actions by managers. Cagney, a former Wells Fargo trader, is said to have engaged in at least one inappropriate relationship with a female employee, according to people familiar with the matter, behavior that was said to help fuel a toxic work environment. Other high ranking executives also have left, including the chief financial officer and chief revenue officer.
Since its founding in 2011, SoFi has focused on building a community, throwing cocktail parties and even dating events. As reports of sexual harassment have started to surface, some of the 33,000 members in SoFi’s private Facebook group have started to turn on the company, saying they will be looking to refinance loans elsewhere and even move money out of the wealth management unit.
“I closed my wealth account the day after the news came out and moved it over to Charles Schwab,” said Tyler, who requested that only his first name be used. Others have said that while they won’t be refinancing loans elsewhere, they also won’t be using SoFi again or suggesting it to friends and family.