SoFi seeks to upend the banking business

Nestled above the tasting rooms and tourist shops surrounding Healdsburg’s town square is the city’s fastest-growing business, one that is on pace to be its largest private employer. But it’s neither a winery featuring the latest pinot noir with a 90-point rating nor a restaurant aiming for its first Michelin star in this hamlet known for both.

Nope, it’s a financial services firm.

But to call SoFi just another bank is a misnomer, literally as well as figuratively.

Social Finance Inc., as it is formally known, is a marketplace lender that started offering student loan refinancing in 2011 and has since branched into mortgages and personal loans.

But SoFi, which said it has loaned $3 billion to more than 40,000 customers since its inception, is setting its sights on a much larger mission: a major disruption of the consumer banking industry by using Silicon Valley ethos to upend an ossified Wall Street business.

The company is targeting millennials who expect much more from their banks than previous generations and giving them a one-stop offering for all of their financial needs, including financial and career counseling. In essence, what Uber and Lyft are trying to do to the taxi industry, SoFi and its other peer-to-peer lenders want to do to the big banks.

“Ultimately, we hope to completely displace the relationship with the bank,” said Mike Cagney, co-founder and chief executive officer of the San Francisco-headquartered firm.

Bravado? Maybe not. Such talk is being taken seriously in New York financial circles even though the big four banks - JPMorgan Chase & Co., Bank of America Corp., Citigroup and Wells Fargo & Co. - have retained solid market share in the aftermath of the financial crisis, representing 51 percent of total banking sector assets.

“Silicon Valley is coming,” JPMorgan Chase CEO Jamie Dimon warned shareholders earlier this year. “There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.”

Cagney noted Wells Fargo, which had $861 billion in loans at the end of the first quarter, dwarfs SoFi, which loaned $1 billion for the entire second quarter. “The notion that today we are a threat is probably overblown,” he said in an interview.

But the future offers opportunity given widespread dissatisfaction with banks. A 2014 survey by the American Customer Satisfaction Index found customer satisfaction slipped in the banking industry, with the big banks trailing other competitors, especially credit unions. Bank of America brought up the rear in the Big 4 rankings.

“If your bank treated you in the same way your significant other did, you would get a divorce,” Cagney said.

To get a sense of how SoFi is attempting to change the U.S. retail banking structure, a visit to its Healdsburg satellite office is especially telling. Forget your notions of a retail bank branch. Here, customer interaction is virtual, whether digitally, especially through mobile devices, or on the phone.

Inside, the 110 employees, many decked out in SoFi T-shirts, including Cagney, work in an open space environment with long tables from Restoration Hardware, where employees and team leaders sit together in a collaborative manner. Lunches and dinners are catered from local providers such as The Farmer’s Wife. Small meeting rooms have the look of a therapist’s office; soft music played from one. The decor is nothing like Bailey Brothers’ Building and Loan Association of “It’s a Wonderful Life,” instead invoking the feel of an Apple store.

The selection of the site, located nearby such top attractions such as Healdsburg SHED and Bear Republic brewery, is not typical for a customer service center. And for SoFi executives, that’s the whole point as they were looking for the exact opposite of a bland office park. Not surprisingly, its headquarters is in the Presidio.

“Happy employees make happy customers,” said Sonja McIntosh, a company vice president who was in charge of setting up the Healdsburg office. It opened in September after a two-month rush once the site was selected. She noted that SoFi does customer surveys and “a lot of them mention the person’s name (who handled their account). How often does that happen?”

The growth is continuing as SoFi is doubling its workforce in Healdsburg. The company has taken out a lease on approximately 10,000 square feet of additional office space just across the street. It is looking for entry-level workers as well as those with financial services backgrounds in mortgages and underwriting. The vast majority of its Healdsburg employees live in the North Bay.

They are people like Teresa Jackson, a Santa Rosa resident who is vice president of credit and underwriting. As her financial services career progressed, she had to leave Sonoma County. Post crisis, she was forced to commute to Orange County for the week, doing a grueling one-way 460-mile trek for two-and-a-half years before finding a spot at Redwood Trust Inc. in Mill Valley.

“There is a huge, huge number of (North Bay) people that could qualify and have a background and skill set. My guess is they are underemployed, having left the industry because there were no jobs,” Jackson said.

The customer service aspect goes together with another integral part of SoFi’s business plan: its structure as a nonbank lender. The main difference is that it does not have deposit accounts insured by the FDIC nor regulation by entities such as the Federal Reserve and the Office of the Comptroller of the Currency. Instead, it is primarily regulated by state banking regulators and the federal Consumer Financial Protection Bureau, the brainchild of Elizabeth Warren that was created in the 2010 Dodd-Frank financial reform law.

“That gives us a little more flexibility than the banks have,” Cagney said, noting he has less red tape and federal regulations to deal with.

The business was born out of an idea that Cagney - who refers to himself as a “reformed banker and hedge fund manager” - and three co-founders had at the Stanford Graduate School of Business. They noted the incredibly low risk of default by graduates from the Palo Alto university, given its reputation as one of the best colleges in the nation, and sensed that there was an opportunity to provide graduates a lower-cost alternative in what is now a $1.2 trillion student loan market.

For their project, they enlisted 40 alumni to fund $2 million in loans to about 100 students in a peer-to-peer funding scheme. From that pilot program, it has exploded to now more than 2,200 schools. As it expanded, SoFi sought out institutional investors as well as securing credit warehouse lines from major investment banks such as Goldman Sachs Group Inc. and Barclays to provide funding for loans. It takes the loans and then bundles them up into packages to sell to investors in the secondary market, keeping them off its books.

The future is bright. There is talk of a future initial stock offering, following on the heels of No. 1 online lender, the LendingClub Corp., which went public as the largest tech IPO in 2014 in raising $900 million.

The advantage, Cagney contends, that SoFi has over more traditional banks is that it takes into account the customers’ future earnings potential and is not hidebound by a strict reliance on credit scores, focusing on such factors as where the borrower went to school and what he or she studied as well as where they work.

“Someone with a nursing degree BA who is employed is rock solid,” he said. “Maybe more than someone with an advanced degree from an Ivy (League).”

So far, said spokeswoman Debra Jack, there have been only three loan defaults for the company, which were all caused by death and were forgiven. In its pitch, the company claims it can save its customers about $12,000 over the lifetime of their student loans.

The ultimate goal is to develop that financial relationship early in the borrower’s career, starting with refinancing student loans, and continue on as they look to purchase a house or need a personal loan, as well as providing personal services such as job search and networking assistance. SoFi’s median borrower is 33 years old.

In contrast, Cagney said, traditional banks are blind to the future potential of the millennials, noting a recent American Banker op-ed by a Chicago banker that to him read as “wait until they’re 40, have some money and need a mortgage, then market to them.”

“A 55- to 66-year-old Boomer is much more money to them,” Cagney said of traditional banks.

Such growth will likely attract more regulatory scrutiny. These new online marketplace lenders operate more in a shadow banking system than traditional banks, and regulators are under pressure to prevent the practices that led to the financial crisis of 2008 from reappearing again.

In a recent article from the Wharton School at the University of Pennsylvania, finance professor Franklin Allen noted that regulators in the future will have to pay closer attention to “the integrity of lending platforms, check out their credit scoring models and see how reliable they are.”

SoFi is in a good position, Cagney said, as it focuses on prime and super-prime borrowers and not markets for revolving debt, such as credit cards.

Rohit Chopra, who served as student loan ombudsman for the CFPB and is now a senior fellow at the Center for American Progress, said he welcomed the new entrants.

“I hope Silicon Valley gives Wall Street a run for their money when it comes to the student loan market, which is in desperate need to reform,” Copra said.

He added that he received relatively few complaints about refinancing lenders during his CFPB stint, though he cautioned that borrowers need to be careful when refinancing federal Stafford loans, as opposed to private loans, given that they come with lower fixed-interest rates and protections such as forbearance and deferment options.

SoFi said it is cognizant of making sure refinancing is in the best interest of the borrower. “In the case of federal loans, if you have a really low rate and we can’t beat the rate, we caution the people they should not give up the protection of federal loans,” McIntosh said.

Many of the 3,100 complaints the CFPB received between October and March focused on companies that service student loans. Borrowers complained their loans were automatically placed into default when a co-signer died or filed for bankruptcy, while others said they were stymied when they tried to have a co-signer released from a loan. The CFPB is accepting comments on the industry through Monday and may issue new rules.

Cagney said SoFi has good relationship with the bureau and agrees that the servicing market needs to be improved. “The servicers make it incredibly difficult to pay off a loan,” he said.

In a letter to the CFPB, Cagney wrote that “we have identified problems in getting timely information from servicers that make it difficult for borrowers to refinance and obtain a lower interest rate on their student loans.”

You can reach Staff Writer Bill Swindell at 521-5223 or bill.swindell@pressdemocrat.com. On Twitter @BillSwindell.