The Mobile Future of Fintech
SoFi on building trust among Millennials
Bloomberg’s Selina Wang stuck around after her conversation with Plenty’s CEO Matt Barnard to speak with SoFi Co-founder and CEO Mike Cagney. SoFi has been generating a lot of buzz for its innovative approach to lending and, more recently, its community- and relationship-oriented approach to personal finance. DCM Ventures was one of the earliest VC investors in SoFi, leading the Series B in 2012. DCM General Partner David Chao continues to sit on the board today. Earlier this year, Selina wrote about SoFi’s $500 million Series F round in which DCM participated.
Here are some of the most valuable takeaways from their discussion.
SoFi has gone from just doing student loan refinancing to everything from life insurance, wealth management and so much more. So what else is missing?
When we thought about how to change financial services, we thought of moving away from transactional — the ATM and the bank teller — and into the ideas of money, career, and relationships. Our view was that there was a way to build more holistic relationships with our members that was stickier and added more value. It’s rooted in the point that the market doesn’t really understand the 35 year old. They think that those customers are fickle, disloyal, and price sensitive, but in fact they’re none of those things. They’re very loyal. They care about price but it’s not very high in the scheme of what they care about. What they want is speed, transparency and alignment. The way we thought about SoFi was that we should deliver that through four key value propositions. Let’s start with building a product that market actually wants and need.
To us, mobile is the branch of the future. We drive the highest service levels in the industry but most importantly it comes back to this community concept. There’s an enormous opportunity to be something more than a financial advisor — to have an alliance with the member.
Wells Fargo and First Republic are probably not going to roll out their own dating apps, but what do you think of the future of banking looks like? Are you concerned that they’re going to figure out the millennial mindset over time?
No, they’re not going to do that. That’s not how they’re thinking about it. One of the things that we’ve done is we’ve built a competitive moat around cost of acquisition that’s related to brand and service. So if you look at what we pay to get loans through the door, we pay lower than any bank, any startup, any business out there. This is because people value the brand and value the service. We don’t have a lot of strings attached, we choose to exercise pricing power, which is a huge advantage for us. So even if competitors were to replicate the model or replicate what we do, they’re at a significant disadvantage of how the business is positioned.
SoFi now is looking to get into bank accounts and credit cards, and recently you acquired an industrial loan charter. So why go the route of an Industrial Loan Company (ILC)?
One of the biggest challenges we have is that we want to be everything to our members and one of the highest interaction points you have with financial institutions is the deposit account. So since we didn’t have that product, it introduced vulnerability to the business. To address that, last December we bought Zenbanx, a technology platform that administers deposit accounts. Concurrently, we applied for an ILC application. But what’s unique about it is that the only thing we want to put in the bank is deposit accounts and credit cards. It’s as much a solution we needed from a defensive position as it was an aggressive proactive approach.
What do you say to those that argue that not everyone has access to these products and that they are for an exclusive audience?
It’s an interesting argument. We’ve looked very carefully at our member base and given that so much of what we do comes out of student loan refinancing, we’ve started with a pool that is by design diversified. We’ve adopted the Consumer Financial Protection Bureau’s assessment in determining disparity of treatment. We’ve maintained an extremely well represented community and expect to continue that.
Are you concerned that by applying for an ILC you’re also opening the floodgates for other tech firms to use ILC offers in making services?
I don’t know why a company like PayPal shouldn’t have access to the license. The parent company doesn’t have to be a bank holding company. A lot of firms would like to be regulated and the ILC is a very disciplined structure.
What do you think the relationship between traditional banks and financial technology companies will look like in a couple of years?
We have a very tight relationship with a lot of banks on the market. There’s a perception out there that we’re really fighting the process but the reality is that we’re part of the ecosystem even though we’re doing things in a very different way.