SoFi's Plan to Become the Bank of the Future Isn't Going So WellBy and
Insurance and wealth management units have missed targets
Sexual harassment allegations are scaring off some customers
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 target millennials with products ranging from insurance and mortgages to wealth management.
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 given the intense competition from entrenched players and fintech startups alike, but now the SoFi brand 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 Cagney “pet projects,” according to a person familiar with their thinking. Directors prefer to focus on more mature businesses such as personal loans and mortgages that are more predictable and established, said the person, who requested anonymity to discuss a private matter.
In an emailed statement, a SoFi spokesperson 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 initiatives.
Despite the internal turmoil, SoFi’s core business is doing pretty well. The company lends money to people with stable jobs and relatively high wages, called HENRYs, or high earners not rich yet. 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. And while some of SoFi’s recent bond securitizations have generated less demand than initially expected, they’ve continued to receive high marks from ratings agencies.
The firm reported revenue of $134 million in the second quarter, according to an email from Cagney to investors in August. It had adjusted earnings before interest, taxes, depreciation and amortization 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 existing consumers have so far struggled.
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 the firm had set as an internal goal, people familiar with the matter have said. SoFi started offering this service to current customers in 2016 and launched to the general public earlier this year. By contrast, Ellevest, a robo-adviser geared for women that rolled out just months ago, already has $50 million in assets under management.
SoFi’s life insurance business has trailed initial aspirational expectations, according to another person familiar with the matter. SoFi offers policies that are issued by Protective Life Insurance Co., promising applicants they can qualify for the policy with a quick online application. But Protective has struggled to build an online product because it lacks such 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 brick-and-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 harder, according to former U.S. Securities and Exchange Commission chairman Arthur Levitt, who has advised SoFi since 2015.
“Very often, the fintech entrepreneurs think they march to their own rules,” Levitt said at the Finance Disrupted conference last week. “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.
Then there’s brand damage. SoFi 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 have also 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, mentorship services and even dating events for its “members.” 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 one member who requested that only his first name, Tyler, be used. Others have said that while they won’t be refinancing loans elsewhere, they also won’t be using the platform again or suggesting it to friends and family.