A Conversation with SoFi’s CEO, Mike Cagney
It’s difficult to find anyone involved in or knowledgeable about fintech that doesn’t have an opinion on SoFi, a profitable San Francisco fintech giant whose office feels more like a big trading floor than a start-up.
FR: Your community efforts aren’t just around your products. What’s the broader scope of that effort?
MC: I think our concept of community value is the key thing that the financial industry just doesn’t understand. We help people with their career. We help them with their resume. They lose their job, we get them re-employed. We’re also going to start showing people how much they get paid within their company on a relative basis because we have more salary data than anybody out there.
FR: How will that work?
MC: We will be in position to say to our members, “You’re in the 25th percentile of Google. You need a raise, right? Ok, we’re going to help you get a raise and here’s the path to do it.”
Cross-selling & Cross-buying
FR: Isn’t all of this extra effort indicative of the challenge you face in cross-selling your services? An implicit recognition that what SoFi is trying to do is very hard for an online financial services company?
MC: My experience is that most financial institutions have not been successful in cross-selling. A lot of the cross-sell stats that you see are people opening up multiple checking accounts or other low margin business product lines, sometimes unbeknownst to you that it was open. Most institutions have failed and I’ll give you a good example as to why.
I once took the COO and a few other senior executives of a top four bank to my bank, which is also a top four bank. I walked in and said, “I would like a mortgage,” and the teller punched-up my name in the computer and saw that I had a little star next to it. Because I’m a private client, they said “Oh, Mr. Cagney, you get to go sit over there.” So, I get taken to a separate area, with this dumb green lampshade overhead, and five dudes in suits behind me. Then a nice lady comes out to greet me and says, “What can I help you with?” I say again, “I would like a mortgage.” She then looks me up in the computer again and says, “Mr. Cagney, that’s great. Let’s get started.” She goes into a filing cabinet, pulls out a piece of paper and she gives it to me. The first thing I have to write on this piece of paper is my name. I then say, “This is all I need. Thank you very much.”
FR: Sounds like standard protocol.
MC: Exactly. I took the document back to our office and explained to the executives what was wrong with this process. Just think about how orthogonal that experience was. I had to go to a branch between 9am and 5pm. Plus, there’s a clear caste system within the branch, which doesn’t resonate to a lot of 30 year-olds. I then had to go through an antiquated process with a private banker. After all that, what is the first thing that this banker does to sell me the highest margin product in the bank? Hand me a blank piece of paper and ask me to write my name on it.
FR: How long have you been a customer?
MC: 19 years. The systems just don’t talk to each other, they aren’t integrated, the business lines are different. The banks will try to justify why you have to put up with this experience, but they’re hurting themselves by making the next product as hard to sell as the first one. But it’s not just the banks. It’s the same issue in fintech too.
FR: How do you mean?
MC: A few years ago, there was a lot of hubbub about businesses that were supposedly revolutionizing the lending space. But they went out into a finite market, such as car consolidation, and competed for the same borrower. There was no incremental value proposition and yet they expected the cost of acquisition to go down over time.
FR: Customer acquisition costs have been challenging non-bank lenders ever since.
MC: Right, because the only way you get this model to work is to deliver a value proposition where someone goes from your first product into your second without friction. You can’t pay for it and you can’t push it. In fact, you can’t actually sell another product at all, which is why cross-sell isn’t the right term for what we do. Customers have to want to go on their own, which is why I like to call our approach a cross-buy.
FR: Mike, this is a beautiful, frictionless ideal. But doesn’t it only work with a small slice of the population?
MC: Actually, lots of people have great credit. I have great credit, but when I went to the bank, it immediately introduced a paper process into the middle of our interaction, which is nothing more than friction. In order to get the economics to work in our model, you’ve got to be effective at getting people from one product to the next in a frictionless way. If you look at our mortgage production today, I think in February, over 40% of our mortgages were done for existing members. That’s huge because that’s a high margin product where we’re making anywhere from $5,000 to $20,000 of margin each time.
Wealth Management
FR: On that note, I’d like to discuss wealth management. After doing some searching online, I couldn’t find out much about your effort other than to note that you have some form of nominal presence already. What is the current status of the effort? Because if I were on your management team, I would be pounding the table to ramp-up wealth management.
MC: It makes a ton of sense, but so far, we haven’t advertised our wealth management solution. We just put a tab up.
FR: You mean it wasn’t my bad googling?
MC: (Laughs) Your natural language skills are intact. Look, wealth management is a complicated and scary space for people. One key takeaway from our research is that the reason people like financial advisors is because they’re afraid of making mistakes and they’re afraid of doing something outside the scope of their peer set.
FR: You’re saying that peer analysis is central to a future wealth management offer?
MC: Yes. I think one of the single greatest things you can do to empower individuals is to give them peer analysis. Showing them how much they are saving relative to their peers and how aggressive they are is powerful. As for the advisor, it’s not too difficult to design an optimal portfolio for your level of risk. In fact, I would argue that it could be massively simplified from how it’s done today.
FR: Do you envision some kind of performance benchmarking or is it just on the savings side?
MC: Both. I come the hedge fund world where absolute returns are good, but what people really care about is how they’re doing relative to peers. If you did 20% this year and I did zero, that makes me feel really bad. If we both did negative five, I’d actually feel better in that context than if I did zero and you did 20%.
FR: So it sounds like SoFi has been actively exploring how to differentiate its wealth management offer. Is it fair to say that over the next few years, regardless if you’re public or private, SoFi is going to have a very robust wealth management business?
MC: Five years from now, you will see a robust wealth management platform. You’ll also see a very robust lending business and full service banking functionality. You will also see an asset management platform that feeds into that wealth management business and you’ll see some kind of an insurance initiative, which I haven’t figured out yet.
Insurance
FR: I saw the deal SoFi did with Protective Life, but I assume it’s just a toe in the water. Are you debating between trying to ramp up quickly as a carrier, re-insurer and/or broker or are you inclined to acquire one or more insurance start-ups?
MC: We’re always inclined to grow organically, and from an insurance standpoint, we have a community that has interesting characteristics.
FR: Like what?
MC: For example, on an actuarial basis, we should’ve had close to 600 of our members die. But I think something like 25 to 30 people have actually died. There’s real value there from a life insurance standpoint.
FR: You’re talking peer-to-peer insurance akin to Lemonade?
MC: Yes, it’s along the same conceptual idea, but I think that if you have a common deductible, you end up creating a really interesting structure. That structure was the old mutual concept, but the key to making it work is the community, and nobody has a better community to address adverse selection and moral hazard pitfalls than us.
Rhetoric & Positioning
FR: Now that you have fresh capital, and a greater ability to pursue your aspirations across financial services verticals, I think about some of the provocative rhetoric you’ve used in the past to describe big banks. But increasingly, one day you’re competing against banks and the next day you’re partnering with them. Do you ever think about softening your rhetoric?
MC: Yes, I think that I have softened my tone in dealing with the banks. People resurrect very old comments of mine, that were often taken out of context, and insert them into current publications. But I believe that there’s an enormous market out there and there are roles for banks to play in this market.
FR: It is fair to say then that some of your old comments were trying to convey a broader message?
MC: Yes, I think we’re going to drag the financial industry, maybe kicking and screaming, but we’re going to drag them into a different kind of delivery model for a new generation of customer.
FR: As you mentioned, you’re a hedge fund guy by background. Are you still involved managing money and does your trader DNA inform how you have built SoFi?
MC: Well my board didn’t like the idea of me running a relatively large macro fund and running SoFi, so we rolled it into SoFi. And yes, I see the markets everywhere.
FR: To that point, is SoFi a financial services firm or is it a technology firm?
MC: We consider ourselves a financial services business that exists because of technology. The rooting of that business is in our capital markets, risk, compliance, branding and marketing expertise, which you’re not going to find in any other fintech company.
Originally published at www.thefinancialrevolutionist.com.
