A half dozen young professionals, newly introduced, stare down at a trio of naked roaster chickens on a wire rack. They wear white aprons and hesitant smiles.
“You guys are going to have to get down and dirty with your chicken,” says Ashton Keefe, a pastry chef turned cooking class instructor. They lightly dribble a marinade of ramps, serrano peppers, and thyme over the trussed birds, but Keefe isn’t satisfied. “Get on in there,” she implores.
A volunteer comes to the rescue with a generous glop of green-flecked sauce. “Caress,” he purrs with a flirtatious smile, drawing laughs from around the prep table as he massages the skin. An hour later, the novice chefs are convivially tucking into roast chicken, pancetta peas, and panzanella salad. They linger over dessert, sharing photos and exchanging emails. Somewhat remarkably, when they had arrived at 7 p.m. they had just one thing in common: debt.
This year, Social Finance, or SoFi, will host hundreds of events like this class held at Haven’s Kitchen in New York. The privately held financial technology, or fintech, startup, which provided student-loan refinancing when it launched in 2011, now offers its borrowers—or “members,” as SoFi calls them—products such as home mortgages and wealth-management tools. Membership also comes with less conventional benefits that are designed to encourage loyalty (and increase referrals), including social events, networking, and the ability to pause loan payments if you lose your job. Becoming a SoFi member, the company boasts, is akin to joining an elite club for people with prime credit scores and exceptional career potential.
“When you become a member, we want to invest in you,” says cofounder and CEO Mike Cagney. “The real opportunity is in taking traditional banking and recasting it into this concept of money, career, and relationships.” His goal is to redefine how financial services work, and, eventually, to operate on the same scale as the consumer-lending divisions at Wall Street’s biggest banks. Getting there will require Cagney to strike a delicate balance. If he can maintain SoFi’s loan performance while adding members and making the club less exclusive, he’ll be laughing all the way to the, well, bank. If members fall behind on their payments, SoFi could become yet another example of unregulated lending run amok.
The generation that matured during the post-2008 banking crisis appears eager to embrace the growing “bankless world” that fintech leaders promise. Of SoFi’s 150,000 members, 100,000 joined in the past year, and it originates $600 million to $700 million in loans every month (compared to about $200 million per month in the first quarter of 2015). Competition is growing too: An analysis conducted by KPMG and CB Insights reported that venture capitalists poured $13.8 billion into fintech companies last year, up from $6.7 billion in 2014. Despite recent cooling in the fundraising climate, $100 million mega-rounds continue to go to companies tackling financial products like installment loans (Affirm) and wealth management (Betterment).
Even so, SoFi stands apart for the scale of its success in originating loans and hawking them on Wall Street. Like most online lenders, SoFi packages and sells loans to third-party investors and then uses the capital from those transactions, plus the equity it has raised, to fund new loans. But unlike most online lenders, and thanks in part to the $1.2 billion in equity funding it raised last year, the company is now able to “turn over” its balance sheet six to eight times per year, creating a powerful capital engine that has been profitable since 2014. Early competitors like Earnest and CommonBond, which focused on designing a slick student-loan-refinancing experience rather than hiring talent with Wall Street know-how and relationships, as SoFi has prioritized, process a much smaller volume of loans per year.
Now SoFi is working toward other prizes, which, if claimed, would increase the lifetime value of its customers. In personal loans, it’s catching up to Lending Club, the troubled online lender that was once the clear market leader, as well as the top consumer banks. In mortgages, SoFi is targeting underserved categories, such as borrowers with minimal savings but six-figure salaries. And in wealth management, the company is beta testing a platform that will allow customers to turn the money they save by refinancing a student loan into SoFi-monitored nest eggs.
“Once you have a relationship, no one is in a better position to deliver a second product than you are,” says Cagney. “If it’s based on trust and value and reciprocity, you should be able to scale that into a huge opportunity.”
SoFi’s origin myth starts at Stanford, in 2011. There, while on a fellowship, Cagney met his cofounders and developed a prototype that allowed students at the business school to refinance their loans at rates that promised them thousands of dollars in savings. He pulled together alumni capital to launch the venture, pitching investors a model built on confidence in the Stanford community.
Another version of the origin myth began years before that, in the late 1990s, when Cagney learned to structure financial products and balance-sheet partnerships as an SVP at Wells Fargo. He noticed the industry incumbents’ complacency and inefficiencies, all ripe for change. Other fintech founders may know how to design an appealing mobile interface; Cagney knows how to dump loans into a tranche and sell them to the right investor.
An even earlier version of the story—one that Cagney frequently shares with the media—takes places outside Detroit in the early 1980s. When Cagney was 11 years old and living in Grosse Ile, Michigan, his father lost his job as the manager of a steel-rolling plant. “We had to rely on a lot of community support during the two years he was looking for a job,” Cagney says. “The way people stood up and helped out, everything from our local banker to people bringing food, it left a lasting impact on me.”
If SoFi is a composite of all three myths, no one embodies their contrasts more than Cagney himself. He wears the Wall Street uniform—a pinstripe suit and a haggard complexion, born of regular long-haul flights—but speaks with the California-style affects of a Santa Cruz surfer. He spends his days charming the world’s largest sovereign wealth funds to invest more equity and sending blunt critiques to SoFi’s product team. In the evenings, Cagney hosts occasional SoFi member events at his San Francisco home, financed with a SoFi mortgage. Those who attend might get an impromptu lecture on stock options while participating in a double-blind wine tasting. “I try now to concentrate all my extra capacity into the SoFi community,” he says. “If I’m going to fail, I’m going to fail in a big way.”
Not everyone is so sure about Cagney’s unabashed ambition and admittedly “aggressive” approach to winning market share. Peter Renton, who runs LendIt, the lending industry’s leading conference, is concerned that pressure to grow may lead to compromised lending standards. “There’s been an increase in delinquencies—relatively minor, but an increase nonetheless,” he says of the market overall. (SoFi has had 17 delinquencies since its founding, half of which were due to customer deaths.) “Are we about to have a downturn? Are these companies getting a little too aggressive? You need to focus on credit and underwriting,” says Renton. “That is what I think some people have forgotten.”
This spring, Moody’s gave SoFi its first-ever triple-A debt rating, the highest available to a startup online lender. The timing was fortuitous: Though SoFi and its fintech peers are not subject to the most onerous banking rules despite providing many traditional banking functions, they are likely to face increased regulatory scrutiny in the coming months. In May, Lending Club founder Renaud Laplanche was forced out after an internal investigation found that he had sold $22 million in loans to an institutional investor, despite knowing that the loans did not meet the investor’s “express” criteria. A dip in investor interest followed the shake-up; Lending Club reportedly will consider using its balance sheet to fund some of its loans, as a temporary stopgap to keep its capital engine humming. SoFi has recently taken a similar tack—but proactively, to signal its confidence in the underlying loans and court top-tier institutional investors.
One way the fintech companies are dealing with the uncertain landscape is by establishing partnerships with banks, which allows banks to provide services like real-time small business loan approvals. Investors see opportunity in such pairings: Over the past five years in New York, for example, the proportion of fintech venture dollars going to collaborative companies has grown from 37% to 83%, according to Accenture. That trend line and a flurry of partnership activity indicate the potential for a wave of acquisitions in the future. For banks, the stakes are enormous. McKinsey & Company estimates that banks are likely to see 20% to 60% of their profits evaporate in consumer finance, mortgages, and wealth management over the next 10 years as new companies enter the market. Those estimates could be off, and perhaps banks will learn to innovate rather than acquire. Perhaps, as time goes by, they will recapture the digital-first generation.
Cagney, for his part, has no interest in consumer-facing partnerships with Wall Street mainstays. He plans to remain unburdened by banks’ regulatory responsibilities and experimenting all the while: “Our guiding principle has always been, if it’s a [regulatory] gray area but it’s good for the consumer, it’s okay.”