[This post is by Jason Jones, one of my new partners at Lend Academy. He has been following SoFi since they launched and believes they are a very important player in this space. – Peter]
The name SoFi is interesting, it is short for Social Finance. When Mike Cagney chose the name, we think it was very intentional that he focused on the type of transaction rather than on the student lending category. Now that SoFi has raised another $80 million in their Series C round, their grand vision is starting to become clearer.
SoFi improves lives through Social Finance. Their business model already shows us the benefit of building a support network and social ecosystem around lending. Their alumni funds make it possible for school alumni to lend to students from their alma mater and then mentor those students through their career. SoFi ties together affinity, ecosystem, and lending in a social financial exchange. We think that the grand vision for SoFi is to completely change the way we view banking by making it more personal. They took a big step towards that vision last week when they announced their expansion into a new category.
SoFi’s First Move Beyond Student Loans: Mortgages
The biggest news of this funding round is not the absurd amount of venture capital money raised (side note: this investment is a statement about Peter Thiel’s college debt crusade), it is that SoFi is embarking on a transition from a student lender to a generalist lending marketplace. Their first step beyond their friendly confines of student lending is to enter the mortgage sector.
SoFi will tap into their network of incredibly high quality student loan borrowers to assist with another major life event, the purchase of their first home. Their focus category is on “thin file” clients who are just starting out and, by all indications, will have incredibly successful careers. These borrowers may have difficulty accessing a traditional mortgage because of their misleading credit profile snapshot (little credit history, little job history, high student loan debt). As a result, SoFi’s borrowers may require high LTVs and their DTI ratios are probably higher than average, but these are recent graduates from top graduate schools who are poised to do well. SoFi call these borrowers “HENRY’S” for High Earners Not Rich Yet.
A New Trend
So there you have it. Last month Lending Club announced that they were expanding from consumer credit to small business lending. This month SoFi announces that they are expanding from student lending to home mortgages. Do you see the trend here? Traditional banking categories are being disrupted one at a time. SoFi is going after the huge categories where Lending Club isn’t focused. This is really smart. There is less competition and the market sizes are huge.
SoFi’s challenge is that they have focused on the longer duration, lower yielding categories so far. In comparison to Lending Club, their yields are much lower and the time to maturity takes years, which makes it a tougher sell to retail. So far SoFi has appealed more to institutional lenders (pensions and insurance companies) that are attracted to the safe and secure nature of their loans, which was best demonstrated by SoFi’s securitization in late December.
But we expect that over time SoFi will become increasingly retail friendly. We can tell by talking to Mike that retail is really important. Right now the split is approximately 80% institution and 20% retail but over time their goal is to grow retail closer to 35% of total originations. If they really want to be THE Social Finance company, then they should continue to expand to new lending categories that help borrowers with life events and they should really emphasize new ways for individual investors support the success of others. SoFi is poised to make it happen and we are rooting for them.