SoFi Wants to Steal Your Most Coveted Customers

Don't look now, but the 'in your face' fintech firm, SoFi, is moving from offering just student and personal loans to providing wealth management and opening checking accounts. And their target market is one of the most coveted by banking: the educated, affluent, digital-first Millennial.

Social Finance, or SoFi, wants to change the way people view banking. They do this by refinancing or approving a loan that a traditional bank would have turned down. They do this by adding a human component to a roboadvisor wealth management service. And they do this by providing career counseling or by inviting ‘members’ to exclusive happy hour events in large metropolitan areas around the country.

Known for developing some highly provocative ads in the past (“Don’t Bank” campaign), SoFi only lends money only to young, wealthy borrowers — whom it refers to as ‘Henrys’ (high earners, not rich yet). The concept of SoFi came when CEO Mike Cagney and his fellow co-founders found a huge gap between what the average 35-year-old wanted from a financial services company and what their bank actually provided.

Founded in 2011, SoFi had an initial focus on refinancing student loans. The prototype of Sofi allowed students at Stanford Business School to refinance their loans at rates that promised them thousands of dollars in savings. The company quickly expanded into other product lines, including personal loans and mortgages. Now, the firm has set it’s sights on both wealth management and checking accounts. Using an all-digital banking model, with no physical facilities, SoFi has targeted well-educated, affluent, urban Millennials.

The goal is to leverage advanced customer insight modeling to provide an experience digital Millennials aspire to. “When you become a member, we want to invest in you,” says Cagney. “We’re really trying to combine this idea of money, careers and relationships, which we see as the main drivers for this demographic we’re targeting. If you lose a job, we don’t call you up and threaten to take your car. We help you find a new job.”

In an interview with Mike Cagney, “Mad Money” host Jim Cramer said, “If Bank of America or Citi had the Internet when they were forming, this (the SoFi model) is what they would have started.” Cagney responded saying, “Absolutely. I think what’s going to happen is the banks are going to move toward our model over time. And we certainly don’t have the hubris to expect that we’re going to change all of banking, but we are going to drag them into a different kind of service model. One that’s a lot more aligned to the customer.”

“The ability to deliver that contextually to people when it matters, as opposed to just spamming them with it all the time, is a big difference-maker,” the CEO said.

Roboadvisor With a Human Touch

Sofi has actually been testing its roboadvisor wealth management technology for months. Combining AI-based recommendations with live advice, delivered via phone or chatbots, the service is offered to current SoFi customers for free. New customers can also access the services, but will pay a small management fee.

SoFi hopes to differentiate itself by offering better advice based on advanced analytics of customer data already on file. The service also allows investors to ask licensed advisors for unlimited guidance, either via phone or online chat, before making investments. SoFi can offer this enhanced level of personalized service for free because of their relationship-based business model. Through cross-selling, the relationship becomes more integrated, with the customer less likely to leave. This is a good strategy for Millennials, since this segment is the most mistrustful of traditional banks.

The company is also developing financial planning services, which it expects to launch this summer. These include joint financial planning for couples and first-time home buying.

Going After Checking Accounts

The firm has also set its sights on expanding into checking accounts, debit cards and credit cards, leveraging its February acquisition of online banking start-up Zenbanx. With that acquisition, SoFi also acquired Zenbanx’s partnership with Delaware-based WSFS Bank and access to the bank’s charter and banking license.

With back office operations in Salt Lake City, Utah, SoFi is hoping to take advantage of a unique industrial bank charter opportunity in Utah to apply for Federal Deposit Insurance. Funding the new bank subsidiary is being done with capital raised from companies like Softbank and venture capital firm Silver Lake.

“The latest round of funds will be used to advance the firm’s long-term vision of being a one-stop shop for our members,” the bank stated. “Our goal is to be the central point of our members’ financial lives — and the funds will help SoFi move more quickly into a wider range of financial services products.

“Zenbanx’s focus on a fast and simple mobile experience on top of solid banking technology makes them a natural fit for SoFi and our members, who demand to be able to manage their money whenever and wherever. They’ve also been at the forefront of conversational banking built into popular messaging apps, an area core to our current development.”   – SoFi CEO Mike Cagney

SoFi will support product line and member expansion by ramping up the staffing at the former Zenbanx office in Delaware. The plans include adding 100 workers by August, 200 workers by the end of 2017 and 400 employees by the end of 2018. The majority of the openings will be call center jobs.

A Better Banking Model

As SoFi begins to make competitors aware of its disruptive model, Cagney said that bigger banks could shift to SoFi’s model without cutting profit margins.

“If you look at SoFi, we run over 65 percent contribution margin across our three lending businesses. We’re the most profitable fintech company in the marketplace. And there’s huge opportunity to expand from that, and it comes down to cost of acquisition. If you build really strong brand, really strong evangelism, really strong what I call ‘cross-buy,’ you can drop that cost of acquisition significantly and that drives margins,” Cagney said.

“It is a very different strategy than the more transactional lenders,” said Matt Harris, a partner at Bain Capital Ventures. “If you are playing a lifetime value game — a relationship game — you have a lot more leeway to subsidize more products and you are less subject to commodification and the vagaries of competition.”

There are a lot of factors that will impact SoFi’s success. Up till now, most of the growth has been funded by capital investment. While this provides some flexibility for the lending model, it also limits growth. The biggest issue for most fintech challenger banks has been the ability to achieve scale while still remaining nimble. More importantly, can the differentiation of SoFi (human supported roboadvising and high value social interaction) be maintained with an expanded member base?

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