A little over a year ago Goldman Sachs launched their consumer lending platform Marcus as part of a digital strategy to move into the retail banking segment. They have since grown faster than any online lending platform with originations approaching $2 billion. Goldman Sachs now believes revenues from online loans will equal that of trading in the near future.
While relaxing over the Thanksgiving weekend you might have noticed a new trend occurring in television while watching the games: six second ads. As companies look for innovative new ways to get their products in front of consumers they have begun testing out ultra quick TV ads during a break in the game action.
Leading consumer lender SoFi has always been know for innovation and their recent marketing push is no exception. During the weekend of Thanksgiving NFL and college football games SoFi placed ads throughout many of the games. I saw quick form six second spots and as well as the more traditional longer spots. Not only is the form of the ad changing but the substance of the ads is just as innovative as they present their products in a new way.
SoFi is focusing their message on the consumers lifestyle, presenting an understanding as to why someone needed to increase their credit card debt. College tuition, a sickness or a home expense, these life events happen all the time and the message is that SoFi is now here to help you consolidate that debt in the form of a personal loan. They are clearly appealing to their core base of customers, younger and more affluent families as they hope to be their lifetime financial services firm.
They also placed a Black Friday circular with several national newspapers which you can see in the photo below. The ad is a clever take on the typical sales fliers we all see around this time of year. But instead of an ad featuring low prices we see an ad touting much higher prices. The message is that if you are buying gifts on credit cards this holiday season and carrying a balance you will be paying a lot more than the advertised price. It is a message focused on smart spending, giving a better look at the true costs of products when financed. [Read more…]
The worst week in SoFi‘s history is coming to an end. The company announced today that Mike Cagney has stepped down as CEO effective immediately. This follows the news on Monday that Cagney would be stepping down as CEO by the end of the year. But the bad news this week kept escalating and the board decided it needed to take action now.
The interim CEO will be current their new Executive Chairman Tom Hutton. The company also said they will be accelerating the search for a new permanent CEO. Here is a quote from their interim CEO in the company’s official statement circulated this morning:
SoFi’s management and employees have built a remarkable company, and I look forward to helping the company continue to grow. The business is strong, stable and well-positioned. For now, there is no more important work than paving the way for future success by building a transparent, respectful and accountable culture.
This marks a truly stunning fall for Mike Cagney. I have said many times that I considered him to be one of the smartest people in all of fintech and I have been truly impressed with SoFi as a company. Despite all the troubles there they have done some pretty amazing things and there was a reason why they were considered by many to be the leading fintech company in the US.
But clearly there has been trouble at the company for some time. If even half of the stories reported this week are true the company’s culture was so toxic that it now seems inevitable that a downfall would happen eventually.
SoFi has a huge amount of work to do now to repair the damage that has been reported on this past week. The stories of malpractice in so many areas of the company paints a picture of a dysfunctional organization that needs to be rebuilt from the ground up. As Hutton said the most important work will be “paving the way for future success by building a transparent, respectful and accountable culture.”
It is going to fascinating to watch the once high flying company rebuild. They certainly need to clean house so I expect many managers will be shown the door. Other companies have come back from difficult challenges but it will not be easy. They have a strong balance sheet but attracting and keeping good people will likely be their biggest challenge in the short term. One thing is for sure by this time next year SoFi will be a very different company.
It has been a bad few weeks for SoFi. Back in August there was the news of a sexual harassment lawsuit from a former employee. Before that there had been several senior executive departures, we have had a class action lawsuit and one of Silicon Valley’s most valuable and revered fintech companies was starting to lose some of its luster.
But the truly shocking news came earlier tonight when the Wall Street Journal reported that CEO Mike Cagney was going to step down by the end of the year. He has already stepped down as Chairman, that was effective immediately, and he will step down as CEO by the end of the year.
Existing board member Tom Hutton, managing director of venture capital firm XL Innovate, will take over as executive chairman, effective immediately. Steve Freiburg, another SoFi board member and former CEO of E-Trade will become vice chairman.
In a letter to employees obtained by Lend Academy Mike Cagney said that he had become a distraction for the company:
The combination of HR-related litigation and negative press have become a distraction from the company’s core mission. I want SoFi to focus on helping members, hiring the best people, and growing our company in a way consistent with our values. That can’t happen as well as it should if people are focused on me, which isn’t fair to our members, investors, or you.
The New York Times is also reporting that “Mr. Cagney may have been overaggressive in expanding SoFi’s business, skirting risk and compliance controls.” That is the first I have heard about any compliance issues and if it is true then this could be a much bigger issue for SoFi.
Regardless of the what the real story this is not good for the industry whatsoever. Just when it felt like we had some momentum and the industry was starting to thrive again this is definitely a setback. The press is going to bring up the issues with Lending Club last year and we will have to deal with more negative sentiment.
I have interviewed Mike Cagney twice on the Lend Academy Podcast over the years and I have said many times he is one of the smartest people in all of fintech. And while we don’t know exactly what has gone on inside the company, clearly the board believes that a new leader is needed. Hopefully, they can find an experienced CEO who can right the ship and continue the amazing story that has been SoFi.
In an interview on CNBC last week Goldman Sachs CEO Lloyd Blankfein shared some news about their consumer lending platform. He said that Marcus had already crossed $1 billion in total loans issued and was on track to cross $2 billion by the end of the year.
Having launched in October 2016 Marcus crossed $1 billion in just eight months. For the online lending industry that is truly breathtaking speed. And it got me wondering. How does that speed compare to many of the industry leaders we know today?
Now, before I present this research let me say one thing. While it is an interesting data point, the speed at which a platform reaches $1 billion in total loans issued it is not an indicator of how successful a platform will become. Clearly, there are many other factors that are more important than speed of growth.
Anyway, I did a little digging and through publicly available information I was mostly able to figure out how quickly many of the major platforms reached their first billion in total loans issued. While the data here may not be exact I am confident it is close and the order is correct.
1. Marcus – 8 months
Marcus has something of an unfair advantage given that it has access to the many billions of dollars sitting on the balance sheet of its parent company, Goldman Sachs Bank. It did not need to secure outside capital to fund its loans and is able to grow as fast as the company wants.
2. SoFi – 14 months
SoFi made its start with its student loan refinance product, a category it invented but in this article we are looking only at personal loans. SoFi launched a personal loan product in February, 2015 and while they never publicly disclose the breakdown of their business lines we can glean enough information from its securitizations to make an educated guess as to when they reached $1 billion in total loans funded. Based on data from Kroll Bond Rating Agency, we know that by August 1, 2016 (when the SCLP 2016-2 securitization closed) SoFi had issued at least $1.3 billion in loans based on the loan pool balance of their first three personal loan securitizations. Based on that data I estimate they crossed the $1 billion mark around April of 2016, 14 months after they launched the product.
3. Marlette – 17 months
We first wrote about Marlette back in June of 2015. Back then they had been in business just 15 months with the Best Egg brand having made their first loan in March 2014. In those 15 months they had reached $800 million, taking just five months to go from $400 million to $800 million. So, most likely by August they had crossed the billion dollar mark. [Read more…]
Until last month it was unknown how SoFi, the most successful fintech firm in the US, was going to offer deposit accounts. Once we learned they planned to create a bank through an industrial loan company (ILC) charter we dug into what exactly an ILC was. Now, approximately one month after announcing their plans SoFi has submitted their official application which was published by TechCrunch yesterday.
According to the document, SoFi hopes to offer its customers an FDIC insured NOW account and a credit card product, with no additional services offered by the bank. A NOW account is a negotiable order of withdrawal account or in other words, a deposit account that pays interest. The bank, if approved, will be called SoFi Bank and will be a subsidiary of SoFi with 100% of all issued stock to be held by SoFi.
SoFi intends to market its products in all 50 states and not surprisingly will be an online only bank. The headquarters will be in Salt Lake City, Utah and they will also operate an office out of Wilmington, Delaware. SoFi will invest $4 million to fund bank organization expenses as well as $166 million to capitalize the bank.
The application mentions their core customers as millennials and highlights the “…strong trend among this demographic to not utilize traditional banking channels such as branches and paper checks.” The following was also included in their application:
SoFi Bank is applying for a bank charter because the existing SoFi members have asked for these banking products repeatedly for over three years when surveyed at SoFi member events. The products meet the convenience and needs of the community by offering the following attributes.
- An FDIC insured deposit account that pays a competitive interest rate compared to those available by most brick and mortar banks
- No minimum balance on checking and little to no fees in most cases, except for add on services such as wire transfers
- A credit card underwritten and priced based on a customer’s ability to repay, leading to lower interest rates for some consumers on revolving balances
- A secured Credit Card for provision of credit to LMI community.
- A credit card Rewards Program that can be utilized to pay down balances on SoFi loans.
- A mobile first technology offering which will constantly improve to set the standard for mobile based banked
Arkadi Kuhlmann, who was CEO of Zenbanx (the company SoFi recently acquired) is in the application as the proposed CEO and Chairman of SoFi Bank. Beyond working for Zenbanx, Kuhlmann has experience in traditional banking as well:
Mr. Kuhlmann is the President of Banking at SoFi and was the Founder, Chairman, President & CEO of ING DIRECT, the largest savings and direct bank in U.S. with more than $84 billion in deposits and 7.8 million customers at its peak.
SoFi is leading the way in becoming a full service fintech firm. Not only do they innovate but they continue to do so at impressive speed. While this is far from a done deal it’s great to see SoFi making progress on offering deposit accounts, something that their current customers are clearly demanding.
SoFi continues to set itself apart not just from traditional finance institutions such as big banks that it is looking to disrupt but also stands alone when you compare it to other fintechs. The company successfully invented the student loan refi business but has since expanded aggressively to other verticals. Their most recent aspiration is to take deposits. The acquisition of a digital bank Zenbanx set them on a path to do just that but there was still a question of how they would structure their offering.
Last week we learned in an article from TechCrunch that the company was pursuing an industrial loan company (ILC) charter. In that article, CEO Mike Cagney noted that Zenbanx’s banking stack de-risks the ILC application. SoFi will be applying for the ILC charter in the next month with aims to launch the deposit account later in the year.
What is an Industrial Loan Charter?
Since an industrial loan charter is not a familiar term we have done some research for you to provide some clarity and to understand why SoFi is pursuing this route. Only seven states allow industrial loan charters which are sometimes also known as industrial banks: California, Colorado, Minnesota, Indiana, Hawaii, Nevada and Utah with the vast majority of industrial banks headquartered in Utah.
An industrial bank is very similar to a commercial bank but they are allowed to be owned by regular businesses, like SoFi. Here are the main features of ILCs obtained from the Utah Department of Financial Institutions:
- eligible for FDIC insurance
- exempted from the technical definition of a “bank” for the purposes of the Bank Holding Company Act of 1956 (BHCA),
- otherwise generally subject to the same banking laws and regulations as other bank charter types.
While there are not many ILCs in existence today, the number is believed to be less than 30, there are some very well known brands. Here are some ILCs that are based in Utah:
- American Express Centurion Bank
- BMW Bank of North America, Inc.
- Sallie Mae Bank
- The Pitney Bowes Bank, Inc.
- UBS Bank USA
Many Lend Academy readers will recognize the name WebBank. They have been working with Lending Club and Prosper for many years. To this day most loans issued by these two platforms are actually originated by WebBank and sold on to Lending Club or Prosper investors after a short holding period.
Historically companies have leveraged ILCs to lend money for the financing parts of their business to in turn lend to consumers. For instance, a car company like BMW may seek an ILC for the financing arm of the business to make loans on their vehicles to consumers. But SoFi simply wants to offer deposit accounts to their customers and will not use it as a way to lend money. [Read more…]
Last week the New York Federal Reserve President, William Dudley, gave a briefing on household debt with a particular focus on student loans. The briefing was based in part on a report just released by the NY Fed titled, Diplomas to Doorsteps: Education, Student Debt, and Homeownership.
The briefing highlighted the fact that household debt levels have almost returned to pre-crisis levels but the typical consumer’s balance sheet looks quite different. The big change is that consumers have moved away from housing related debt and accumulated much more student and auto loan debt.
At the same time, this increased student loan debt is having an impact on home ownership. Here is Fed President Dudley:
Those with significant student debt are much less likely to own a home at any given age than those who completed their education with little or no student debt… Of course, home ownership is more than just consumption — it has historically been an important form of wealth accumulation.
It is clear that burdensome student debt is now holding many people back financially. Student loan debt now stands at a staggering $1.3 trillion (as of the end of 2016) an increase of 170 percent over the preceding 10 years. There are three contributing factors to this increase:
- More students are taking out loans.
- The loans are for larger amounts.
- Borrower repayments have slowed down.
There was an article in Bloomberg earlier this week that called into question the performance of a 2015 SoFi securitization. Given that I have always held SoFi out as the gold standard in industry performance I was surprised to read about these issues. So, I did some digging and discovered that Matt Scully (the author) did not provide the complete story.
Now, before I go any further I should point out that I am fully aware that many securitization deals closed in recent years have performed below expectations and that some platforms have breached triggers significantly. But that is not what happened here.
We are talking about the very first securitization of SoFi’s unsecured consumer loans that closed in August 2015 and was issued by SoFi Consumer Loan Program 2015-1 LLC or SCLP 2015-1 for short. It was a private unrated securitization. Sources familiar with this deal said it was a one-off deal organized between the debt buyer and the equity holder. It had unusually tight triggers but this was part of the negotiation of the deal and SoFi did not actually set these triggers.
The Cumulative Net Loss (CNL) trigger for this deal in February was very low, reportedly below 3% and the actual CNL for February barely went above these low trigger points. But what is more important is that it is misleading to use this case as another example of underperformance. As I said this was a one-off deal between a motivated buyer and seller and was much tighter than subsequent deals.
Look at this chart below from the latest PeerIQ newsletter (reproduced here with permission). In this newsletter PeerIQ was examining a new securitization of Lending Club loans but they included a fascinating chart that demonstrates what a one-off SCLP 2015-1 was. [Read more…]
Buying and selling a home is a process that is full of friction. For some buyers financing is a roadblock due to the 20% down payments most banks require. This is especially a problem in some of the most expensive cities in the US. For sellers the process is also frustrating. Even if you’re in a hot market, the process can be delayed by inspections, buyer financing, closing dates, sellers backing out of a deal etc. However there are several companies who are looking to improve the buying and selling process and have some fascinating business models. In this post we’ll share some of the innovations that are happening when it comes to buying, selling and financing homes.
Innovations in Financing a Home
SoFi’s offering is straight forward. They are best known for their 10% down mortgage product, offering jumbo mortgages of up to $3 million with no PMI. They currently offer 30 and 15 year fixed rate mortgages as well as a 7/1 ARM. By halving the down payment, they have opened up home ownership to more of their members. SoFi recently announced they were licensed in New York and I imagine they will get a great deal of traction there. In a recent podcast CEO Mike Cagney said that they’ve had multiple educational meet ups on the new offering in New York and have been inundated with requests from individuals looking to learn more.
Unison’s offering is a bit more unique. Unison can provide up to 50% of the down payment to purchase a property. The money is an investment into the home itself as opposed to being a loan which means your monthly payment remains the same and you are not required to have PMI. The company hopes to share in the profit when homeowners sell the property and will make money if the home has increased in value. Homeowners also have the opportunity buy out Unison after three years. The company details how this works on their website and shares certain scenarios where a property has gained value, lost value or stayed the same when a homeowner decides to sell the property.
Unison also has a program called Unison HomeOwner which provides cash to current homeowners in exchange for equity in the home. Homeowners use the money to eliminate debt, remodel, pay for school, invest, or as a cash cushion for financial stability. Unison HomeOwner was the first program that Unison debuted in the home ownership investment category.
Point’s product is similar to the Unison HomeOwner product and is an alternative to the Home Equity Line of Credit (HELOC). It is targeted at individuals who have equity in their home but would like to unlock some of the capital tied up in the home. Homeowners sell small fractions of equity in their home but must retain at least 20% of the equity after the investment. After a pre-qualification Point will make an offer, which is typically between 5% and 10% of the home’s value. From there an appraiser will come out to ensure the property is valued correctly. Point is paid back in one of three ways: when you sell your home, at the end of the term or at a time when you choose to buy back the value of the home. Similar to Unison there are different scenarios depending on what has happened to the value of the home. [Read more…]