NewCo Shift Dialogs, in partnership with EY
Mike Cagney, founder and CEO of SoFi, on his ambitions to get bigger (and better) than the Too Big To Fail Banks
Mike Cagney, the CEO of financial services startup SoFi, does not lack for confidence. But then again, confidence is what you need to raise billions of dollars and take on some of the largest and most powerful companies in the world — global financial giants like Chase, Citi, and Bank of America. To get there, Cagney’s got a pretty clever playbook: He’s partnering with those same banks, who buy the loans he originates and profit from SoFi’s unique skill at acquiring new customers.
Cagney feels the banking industry’s approach to managing customers is broken — instead of threatening to foreclose on customers who may have lost their job, SoFi promises to help them find a new one (the same goes for finding a new love interest as well). That community approach just one of many innovations that Cagney hopes will make lifetime members out of SoFi customers. Below is the full interview of our interview, and a transcript, edited for clarity.
John Battelle: Let’s start with what SoFi is? What is its mission?
Mike Cagney: SoFi is an alternative lender, today. But, the ambitions are much more than that – to be a holistic financial solutions provider for a particular demographic we focus on, which is that 25- to 45-year-old customer set. There’s a lot of misperception about the millennial market, the loyalty there, and aptitude for financial services.
What we found is, there’s an extremely large addressable market where we can deliver a lot of value, but we have to do things a little bit differently than traditional financial services. In particular, we have to focus on things like speed, transparency, and alignment. In doing that, we can build a very long lasting engagement with this customer.
What’s broken in the financial services business that you are addressing? You spent your whole career in that business for the most part, right?
Right. I think you start with method of [customer] acquisition, the traditional financial services branch acquisition method is not an online acquisition method.
What we’ve done with SoFi is we’ve pioneered getting your loan on the phone. We’re the first to do that with student loan refinancing. We do that now with mortgage and personal loans as well. But we also brought a level of alignment to the table where we’re on the same side as our members. We help them with their career, with their networking, even now with dating. The intent is that we’ve got their back. I think that alignment was missing in financial services. It’s something that’s very important for that customer segment.
You started the company, four and a half years ago. The world was still reeling from the downturn. Was that part of your equation, that there was a huge loss of trust in the financial services business?
It’s interesting because in 2008 when the crisis was starting, I was running a hedge fund. One of my largest investors pulled me aside and said, “The banking system’s going to break every 25 years. You’re a smart guy, fix it.”
…no big deal.
He had a lot of faith in me, I think. But that was the beginning of me looking at alternative financial services and thinking about it. A couple of years had passed. Then in 2010, I had the chance to go down to Stanford, do a fellowship at the Graduate School of Business. That’s where I got a chance to really think about incubating SoFi.
SoFi stands for Social Finance, is that right?
Yup.
I want to unpack this idea that you do more than just platform based financial services. You actually want to be more involved in the social life of your customer.
That’s right. We like to think that we’re aligned with them for their goals and success, whether it’s financial or life or career. We wanted to build something that was more holistic as a value proposition. Things as basic as if someone loses a job, rather than a traditional financial services play of going up and threatening to take your car…we call up and say, “How can we help you get re-employed? How can we use our network, how can we use the community that we have to facilitate getting you another job?”
We hold two to three networking events across the US a week. They’re always oversubscribed. The dating event was a logical outpouring of that because half the reason people came to the networking events was to meet people for dating. Obviously, I have the non-altruistic aspect here that if I create family units, I can sell them mortgages.
That’s really a vertically integrated company.
That’s right. We want lifetime relationship. To us, it’s really a membership. There’s value there. We want to be with these members through their entire life cycle. Whatever they need from financial services, we want to be there to provide it.
You started with one product…
Student loan refinancing.
You moved into mortgages. At full scale, are you doing everything that Citigroup is doing?
More. What we started with student loan refinancing, it was a way to build a beachhead into a very interesting customer segment, build credibility in the capital markets, build credibility around our brand. But very quickly, we expanded into mortgages. We’ve extended into personal loans.
Today, we launched insurance, so we sell term life now through a partnership with one of the insurance providers. Our intent is to have wealth asset management and actually a banking product this year, so a checking account and a credit card tied to a SoFi account.
Wow. That means you have to be a bank?
There’s ways we can do that without being a bank. That’s an important distinction for us.
Are there things in the regulatory environment that you think need to change in order for your type of financial services to be more conveniently and more efficiently delivered?
Yeah. I think that the biggest challenge in the regulatory environment right now is there’s no national lending license for a non-depository institution. We have no aspiration of collecting FDIC-insured deposits today, but we do lend. Consequently, we can either rent a bank charter, which is not necessarily the most robust way to do that, or we can get state lending licenses, which we do.
Today, we have a 49-state footprint. Nevada is the only state we don’t lend in because it requires a physical branch. But the state lending rules are inconsistent. It delivers an inconsistent customer experience and there are some challenges there.
To the extent that there can be a national lending license that would help considerably. There’s some discussion of the OCC doing this, but I’m not sure that this is going to happen any time soon.
Those guys in Washington have a lot on their minds at the moment.
That’s right.
You have been personally known as iconoclastic in the financial services industry. It’s fun to research you because the quotes are really colorful. You’ve called the banking industry a dinosaur, and SoFi the meteor. You’ve also said that banking is the second biggest waste of human capital outside of the IRS. But there is this Silicon Valley hype cycle. SoFi was in the class of 2014-2015 Billion Dollar Unicorns. Then there was a classic backlash against unicorns this year. You’ve raised a lot of money. How do you feel about being dubbed a “decacorn” or a “unicorn?”
If you go back to some of how we position to the market and unfortunately, the meteor comment keeps getting brought up over and over…
I’m sorry. But that was a good one.
It’s almost two years old. I think if you look at what we are really talking about, what we’re talking about wasn’t the industry itself, the idea that the bank is going to go away. The banks will be here for some time. It’s the model, the service model, the way that they interact with customers. That’s really what we were talking about.
There’s a better way to deliver more value to a consumer than what banks do today. We like to think that we’re pioneering that. We have a very extensive network of working relationships with banks who buy our loans to provide us financing. They’re important partners for us in terms of the change that we’re trying to bring to market.
We hope there’s a lot they can learn from us in terms of how we deliver value to consumers. That’s really the crux of what we are pushing on there. Obviously, we raised a decent amount of capital. We’ve gone from being a unicorn to whatever the multiples of that is. For us, it’s a capital-intensive business. It’s been a necessary process for us to do.
The capital has been extremely valuable. We have a billion for equity on our balance sheet today, and about six billion of lending capacity at the balance sheet today. That’s a huge competitive advantage in the marketplace for us.
Give me a little sense of the scale of SoFi. You’ve mentioned how much you’ve raised. If you can, tell me what metrics you can in terms of growth or loans originated …
Sure. We like to double the lending business every year. This year, we’ll do around nine and a half billion of loans. We’re doing, right now, close to a billion dollars a month. Next year, we’d like to be in the $18 to $20 billion origination range. That introduces a lot of strain on the capital market side of the business. There’s a lot of loans to sell.
The way your business works is you’re in the origination business, so you acquire loans through your customers.Then you move them off your balance sheet and you sell them to some of these big banks and others who then hold them, and you still do the service. You almost have a UX layer in a way between a customer and that big non-transparent financial services matrix in the background.
That’s right. We sell every loan that we originate, but we retain the servicing and the customer ownership. That’s critical for us because they’re SoFi members. The economics of the sale is purely for financing purposes. Rather than us raising even more equity and having even bigger balance sheet, the balance sheet that we have is there to facilitate loan origination, but ultimately it’s sold.
We sell into a whole set of buyers. That includes banks, insurance companies, sovereign funds. We sell loans in Asia, in Europe, in the US. We continue to build out that relationship base. Today on transactions we do, they generally are seven-times oversubscribed. It’s been very well received in the market.
That means that your track record is starting to prove itself.
That’s right.
How do you make decisions about loans themselves? How is that different than maybe the way they were made before? You said in the past that the FICO score is not that important to you, but that was the true north of the industry for years.
FICO and DTI have, and continue to be the prominent way that people earn credit. Our view on this is that good credit will have high FICO, but high FICO doesn’t necessarily mean good credit. There’s a better way to look at how robust someone’s going to be in terms of paying a loan off.
It starts with looking at their credit history. You want to make sure that they behave well. They didn’t have 27 inquiries in the last month. Things that indicate problems or potential issues. More importantly, you want to look at their cash flow.
You want to look at your incomes, less your taxes, less the bills that we see, less the bills that we don’t see that we think you have. Do you actually have net money left over? That’s the most important thing in servicing, that…
Wasn’t that the problem in ’08, ’09, that that wasn’t really looked at?
That’s exactly the problem, or it wasn’t verified. We do 100 percent income verification, so you can’t say that you make $100,000 a year. You actually have to prove that you make $100,000. Then from that, we can underwrite.
The last thing that we look at that is important is we look at income volatility. We look at where you went to school, how long you worked for, what you do for living. It’s going to tell us how robust you’re going to be in terms of if you lose your job, how fast you get re-employed.
Interesting, and then of course you might help them get another…
We absolutely will help them get another job.
This leads me to your Superbowl ad. You told me you weren’t happy with it. It was controversial. Every well-known startup that does a Superbowl ad is immediately going to get criticized just for doing it, but the ad itself, there was a line in the end that got cut, which basically said, “You’re probably not good enough to get a loan from us.”
It’s a little bit orthogonal to the spirit of our company. We want to be inclusive. We believe that some of the innovation in financial services is about inclusivity, and we want to promote that. SoFi is an aspirational brand. The reality is not everyone can get a SoFi loan today, but what we want to do is help people understand how they get to the point of becoming a SoFi member.
I think we lost a lot of that in terms of the ad. What we really should’ve been embracing is some of the positive stories from our members and how we’ve affected their lives and impacted them in a positive format.
The ad itself, I’d have to point out, was very effective. It absolutely flooded our funnel. We had more loan demand than we’ve ever had. If you look at it purely in the context of did it drive volume? It did. But it was just a little orthogonal to the spirit of the business at the time.
As someone building a business particularly in the white hot center of disruption, what do you make of the era we’re in right now where it seems like every single person who got a year of college under their belt feels like they can be CEO of a hot new startup?
I think it’s a wonderful thing. I think we should facilitate and encourage as much entrepreneurialism as we can. The reality is that it ebbs and flows. I’ve been through the boom of the late ’90s and the crash of the early 2000s, and more subsequently, this boom that we’re in now. These are great times in the end.
I actually would encourage anyone who wants to start a company to go and do it. Personally, I’m unemployable at this point…I don’t think I could work anywhere. But I don’t know why anyone wouldn’t just go start a company. It is such an incredible backdrop right now and so much opportunity. The issue is, the term disruption’s tossed around a little too much. A lot of what’s going on out there isn’t really disruptive, but it is needed and it can be innovative.
You said that you’re disappointed in the FinTech sector. You don’t think it’s reaching high enough. Tell me more, unpack that.
This is a story I talk about where there is a logo, it’s a Wells Fargo logo, and it’s got about a hundred startups interspersed on it…
They’re all eating the Wells Fargo logo, right?
Yeah. SoFi is one of those startups interspersed on it. I think it’s the wrong way to think about the opportunity in financial services, because this is promoting this dis-aggregation of banking concept, that banking is going to be broken out into the best of breed across a hundred different platforms.
The reality is that’s not what the true opportunity is because all those startups at the end of the day just are really plumbing. They’d all love to be bought by Wells Fargo and it’s just a matter of fact, SoFi excluded. We’re quite happy being independent.
But the reality is that there aren’t a lot of people thinking about changing the whole system. How do you change banking? How do you change brokerage, rather than how to use technology to be a better banker, be a better broker. That’s what’s missing in the space right now.
You’ve touched on this, but I just want to see if I can ask you again. What needs to change in banking, in financial services? What fundamentally needs to change?
It’s really alignment to the customer, to the member in that what’s happened is banking’s become more like a the utility and less like a service. The premise is that you have to use it. It’s all the same. There is no distinguishing factor between Bank A, Bank B, Bank C.
Consequently, the service levels aren’t high. The alignment to the customers isn’t high. The investment in technology and innovation isn’t high. All these could change. You could start off with a platform where you’re aligned to this person.
You’re there to help them. You’re there to guide them through whatever it is they have to do in life. Even if it’s not always in your best economic interest, if it’s in their interest, you’re there for them. That fundamental foundation is missing in financial services today.
You mentioned independence and not just wanting to be acquired. On the show we’ve had people from Schwab and from Citi, who have said, “Yeah, they’re really interesting, those new FinTech startups, but it’s really just a UX layer.” They’re good at that, but we’re good at the other stuff. At some point we’ll either buy or we’ll just build what they’ve already built. It’s not that big a threat.” What are they missing in that conversation?
I think if you’re business is purely being a UX layer that’s true in a sense that Schwab and Citi have more engineers than I have and ultimately they can recreate what we do. This comes down to how we think about differentiating ourselves within the banking universe. What we did very earlier on is we said we’re going to build a business around brand and service.
We want a very strong brand. We want a very high service level. If we can do that, we can acquire customers. There’d be better costs than a bank can, and we can compete. What we did is we invested in things like the community, networking and career services, and dating. We run net promoter scores around between 70 and 90 across products.
That doesn’t happen in financial services. That’s very high.
Top four banks are between -15 and -45.
That’s a big difference.
The issue is why does that happen? Why do they run a -15 to a -45? It’s a lot more than just technology or UX layer that’s embedded in that. What’s happened is we had enough run way to build our business out there. We had critical mass. Our cost of financing now is comparable to bank cost of financing. They don’t really have that huge advantage.
Just the cost of the money that you need in order to finance the loans?
Our cost of financing varies by product, but it’s comparable to where a bank would finance a portfolio.
So you don’t have to get over that hill anymore until you’re operating business finds scale…
That’s right. Once we had AAA on securitization side, it basically dropped the cost of financing to equivalent. It’s now around acquisition and retention. I think by leading with brand and service, we have an advantage in acquisition and retention. We’re showing that in the markets we compete in. We’re the largest student refinancing provider.
We don’t have the lowest rates. Number two providers in the spaces of bank. We’re the largest prime personal loan providers. We don’t have lowest rates. Number two in that space as a bank. We’re the largest non-bank prime general mortgage originator. We’d like to be the largest prime general mortgage originator in the next 12 months bank and non-bank.
So this has proven the power of the brand premium?
That’s right. And the service model.
Back to the independence question, a little over a year ago you were asked about the prospects of an IPO. You said, “Yeah, I think maybe in about a year.” What’s happened in the market for a company like yours in terms of that liquidity event?
I think a year ago we were thinking of it in the context of a lending business. We weren’t thinking about what the real ultimate opportunity is. The way we look at SoFi is we want to build the next hundred billion dollars financial services company.
That’s sounds ambitious, but if you look at where US banks are priced today, on the low end or regional banks worth $15,000 a customer. On a high end, they’re worth $100,000 a customer. We’ve got 200,000 members today. We’re adding about 20,000 a month. We have enormous addressable market in the US and outside of the US.
We don’t see it unrealistic that we could have two million members in the next five years and be worth $50,000 a member. To get that $50,000, we don’t just have to have the lending products. We have to have the asset management, the wealth management, the insurance. We want to make sure that we have time to build those products out and build them to the bigger opportunity.
Going public today, we’d have a lot of pressure on margins. We could be more profitable than we are. We are one of the few profitable FinTech players in the space. We could be more profitable if we weren’t investing in new initiatives. We don’t want to take our eye off the ultimate price here which is building something big and transformational.The next generation of financial services platform or the next generation customer. We’d like a little more runway. We’ve raised a billion dollars last fall. We’re in the market. We’re going to raise another half a billion dollars now, which has gone very well.
You found that that’s enough capital, the tradeoff of a private investor potentially a bit of a lower valuation against a public market and having to manage the vicissitudes of that.
That’s right.
We’re in the Nasdaq studio…
Ultimately we do want to go public, and it’s critical for us to go public. As a direct to consumer financial services business, you have to be public. That’s where you get your credibility. It’s a huge brand exercise to do that. It’s just today it’s not the right time.