On Tuesday morning, Social Finance's New York office fairly glowed with positivity.
With the announcement that Twitter executive Anthony Noto will be the educational lender’s new CEO in March, SoFi executives were eager to paint a picture of a company that is growing and solid.
They stressed the internal efforts to keep business going while fixing its very public problems — former CEO Mike Cagney was embroiled in scandal and ousted, the company culture was described as a frat house, the quality of its underwriting was questioned, its focus on young, high earners criticized in 2017.
"It's been a hard year, we had these claims against Mike, but we also achieved a lot in the year," said Ashish Jain, senior vice president of capital markets, who has been with the company since May 2016 (before that he was at Deutsche Bank).
He points to the $12.9 billion in loan originations SoFi did last year. The company sold more than $2 billion of those loans.
“To be profitable, to grow our company, add new employees, to handle adversity ... I still remember when Mike told me that he and the board agreed that he was gone,” Jain said. “I think very few companies would have handled this with the poise we did. We did a deal that week.”
Company executives held nonstop meetings with lenders, rating agencies and investors, he recalled.
“We were willing to do calls at any hour, to assure them the quality of product was high, and that there weren't any issues on these loans they were buying,” Jain said. Synovus and Citizens were among the banks that bought SoFi loans last year.
“All our investors are still buying, and we've added many new investors post Mike leaving,” Jain said. “All our lenders continue to lend to us and they've shown interest in lending us more. In the face of adversity, we did all we could."
Craig Focardi, senior analyst at Celent, agrees that these are positive signs.
“SoFi’s ability to continue to obtain funding and issue securities on their student and personal loan debt in the fourth quarter is a major positive for the business model,” he said.
“Their securitizations are the envy of the industry and investor demand is as strong as ever,” said Peter Renton, founder of Lend Academy.
Focardi wonders, however, what employee turnover was in the second half of 2017 and if that is stabilizing under new management. Cagney and his wife, June Ou, the former CFO, have started a new company and are campaigning SoFi investors and employees to join them.
SoFi has been improving human resources policies following complaints of improper behavior among male employees toward female staff.
SoFi also has been rolling out career coaching help and this week launched a partnership with Korn Ferry Advance to offer more. It also introduced a loan feature through which it will pause repayments for three months when members lose their jobs, and help them find new ones.
It has been building community among its members with fintech-style meetups. It held 323 such events in 68 cities in 2017. In social media, SoFi’s Facebook group has 40,000 members, and 10,000 are active every day.
“We've undergone culture sessions,” Jain said. “It's an iterative process. We've done a lot of heavy lifting over the last few months, but the work is ongoing.”
Over the past year SoFi has been working to become what it calls a holistic financial services provider.
On the loan side, SoFi added a medical residency product to its line of student and personal loans. It takes into account the fact that medical residents make much less money during their residency than they do later. The terms allow them to make smaller payments during this period.
“SoFi has introduced a full lineup of retail lending products that replicate the typical retail bank,” Focardi noted. “What they lack internally is ongoing funding for those loans, but they have successfully used securitization and other financing for that. Last year they began an initiative to acquire an industrial loan charter for financing. One question is, how will they continue to finance ever-larger amounts of lending and maintain liquidity?”
The company applied for an industrial loan charter last year and withdrew its application after Cagney left. According to Jain, the company has not decided whether to reapply.
“We pulled the banking license because we didn't have a CEO,” Jain said. “When the new CEO comes on board, we’ll see what that person's vision is for the company.”
SoFi also developed traditional banking and wealth management products last year.
“Our ambition is much broader than just providing student loans,” said Meron Colbeci, senior vice president of product at SoFi. “We want to become the personal finance operating system of the future for our members, where everything you do works better, not only because we're creating a better experience, but because we're aligned with your incentives.”
In March, the company launched its first app for iOS and Android. It lets members track their loans and invest through SoFi Wealth, SoFi’s robo-advisor. Like other robos, SoFi’s asks people basic investing questions and then recommends a basket of exchange-traded funds in which to invest. It also provides free human advice for SoFi borrowers from fiduciaries on staff.
This week, SoFi opened a waiting list for SoFi Money, its version of a bank account. It will accept deposits, on which it will pay 75 to 85 basis points, and charge no fees, Colbeci said. It will offer person-to-person payments, mobile check deposit, ATM access, and a debit card. The product will be in beta until summer. Anyone who sets up direct deposit with the product will receive $100 in their bank account and $100 in their SoFi Wealth account.
Over time, the plan is to integrate SoFi Money with other products, so for example, if a customer has spare cash in an account, it could be automatically swept into the wealth management account.
When these pieces are completed, SoFi will have traditional banking, wealth management, robo-advisory and online lending, looking pretty much like a full-fledged bank.
“This has always been our ambition,” Colbeci said. “Student loan was the biggest unmet need in the market. We've always wanted to expand and create a holistic financial company.”
Focardi pointed out that with the introduction of new products, credit, operational and compliance risk management will be critical in 2018 for SoFi. “We’ve seen some lending fintechs in North America, China and elsewhere have challenges with their operations and risk management. With SoFi’s rapid growth, that’s important for investors to look at.”
SoFi has been criticized for the way it unapologetically goes after HENRYs — high earners, not rich yet. It ran an ill-received Super Bowl ad in 2016 that labeled some people jogging by or getting coffee as “great” and others “not great.”
Jain argued that the elitist label is off-base.
“We are helping so many different people,” he said. “It's not just Harvard graduates. We abide by all the regulations — disparate treatment, disparate impact.” Consultants have been brought into check compliance with these.
“Are we targeting a higher quality borrower in terms of FICO and income? Yes,” Jain said. “But to a degree, all institutions do. We're targeting a specific cohort, this HENRY, and we want to grow with them throughout their career and life cycle and then deliver other products to them.”
In its underwriting, SoFi considers FICO scores, cash flow, career path and school, among other factors.
“We know if someone is an engineer, a lawyer, in finance, in medical, we know what college they went to,” Jain said. “In our deals, I can show you what percent of borrowers are NYU graduates, what percent are from any given school.”
But far from being elitist, Jain makes the case that SoFi is helping those who can’t afford to go to college, by giving them the loan to go.
“They want to pay down their debt and they want to grow their career,” Jain said. “If we can help reduce that rate, as we've done, we’re giving them that opportunity.”
Acknowledging these efforts, Renton thinks SoFi still has a ways to go to restore its brand within the fintech community.
“Clearly, I think the first major job for Anthony Noto is to establish trust with employees and the broader community,” Renton said. “SoFi has weathered the storm well, but they need to show they are a different company to the one led by Mike Cagney. The good news is SoFi is well positioned to re-establish themselves as the fintech leader in the U.S.”
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