After acquiring multi-currency digital bank Zenbanx, US online lender Social Finance (SoFi) plans to apply for an industrial bank charter so it can offer bank accounts and credit cards. However, whether it will be successful in its attempt is far from certain. Robin Arnfield speaks to industry analysts to find out more
SoFi CEO Mike Cagney told US magazine TechCrunch in May 2017 that SoFi plans to apply for an industrial loan company (ILC) banking charter within the next month. A SoFi spokesperson confirmed to CI that the TechCrunch story is accurate, but declined to provide details.
Cagney said Zenbanx’s technology provides the infrastructure for SoFi’s move into banking and that, by combining banking services with its lending products, SoFi could offer discounted rates to members who set up auto-pay between their accounts. Cagney admitted that FDIC approval for its ILC application cannot be taken for granted.
“SoFi’s plan to apply for an ILC charter is a progression step on its part,” says Joseph Walent, associate director, customer interaction advisory service, at Mercator Advisory Group. “By becoming an industrial bank, SoFi will be able to build its banking functionality from the ground up and take total control of the financial institution.”
The topic of fintech regulation is controversial in the US. In December 2016, the US Office of the Comptroller of the Currency (OCC) proposed that fintechs such as online lenders be offered special charters, allowing them to offer banking services nationwide.
New York State’s banking regulator, the New York Department of Financial Services, filed a lawsuit in May 2017, arguing that the plan to offer national charters was “lawless, ill-conceived and destabilising of financial markets” which are best regulated by the state, Reuters said. In April 2017, the Conference of State Banking Supervisors filed a similar lawsuit against the OCC.
Celent banking analyst Stephen Greer says there is strong opposition from established banks to fintechs being granted banking licences. If SoFi’s ILC application is approved, it would be the first firm to be granted an ILC charter in a decade in the US.
ILCs differ from standard banks as they are not owned by a bank holding company, but by a commercial venture such as a car manufacturer. Currently, seven US states including Utah, California and Nevada, offer ILC charters. If its ILC application is unsuccessful, SoFi could conceivably partner with Wilmington, Delaware-based WSFS Bank which provides banking services for Zenbanx in the US.
According to the Utah Department of Financial Institutions: “An industrial bank is a state-chartered depository institution that is eligible for FDIC insurance, exempted from the technical definition of a bank for the purposes of the Bank Holding Company Act of 1956, and otherwise generally subject to the same banking laws and regulations as other bank charter types.”
Industrial banks are subject to FDIC regulation. Following the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act set a three-year moratorium on FDIC approval of ILC applications for deposit insurance after November 2009.
In a July 2016 speech to the US House of Representatives’ Committee on Oversight and Government Reform, FDIC chair Martin Gruenberg said: “The current economic environment with narrow net interest margins and modest overall economic growth remains challenging for US banks and the establishment of de novo institutions.
“The FDIC is committed to working with, and providing support to, groups with an interest in organising a bank or an industrial loan company. As outlined earlier, the FDIC continues its efforts to provide interested organising groups with a clear path to forming a new insured depository institution, regardless of the type of charter pursued by an organising group.”
Rush of new entrants
“If SoFi’s application for an industrial lending licence is successful, this could really start a rush of new fintech entrants applying for similar licenses,” says Greer.
“My feeling is that it won’t be easy for SoFi to get an industrial lending licence. Also, there are implications about being an industrial bank as opposed to a traditional chartered bank, namely that industrial banks’ holding companies aren’t subject to oversight by the Federal Reserve. It’ll be interesting to see if fintechs go this route, or try to take advantage of the OCC’s fintech charter. However, this won’t include deposit insurance, so it’s unclear what the value will be.”
Launched in 2011, SoFi initially refinanced student loans, and then expanded into personal loans, mortgages, wealth management and life insurance. On its website, SoFi states: “We look behind just credit scores and debt-to-income ratios to consider factors like estimated cashflow, career, and education. While other leaders charge higher rates to account for the possibility that borrowers won’t pay back their loans, our unique underwriting process helps ensure our members have a high likelihood of making their payments.”
In 2016, SoFi originated $8bn in loans, up from $5bn in 2015, and expanded its member base to 225,000 from 100,000 over the same period. At the end of 2016, the company had 750 total staff.
Last year, SoFi launched Student Loan Payoff Refi for home mortgages and student loans in partnership with Fannie Mae. In addition to new lending products, SoFi introduced its SoFi at Work brand for employee financial wellness, SoFi Wealth for modern investment management, and a partnership with Protective to offer term life insurance.
SoFi focuses primarily on student lending to clients who are at top universities and have the potential to become HNWIs,” Greer says. “It wants to offer banking services on top of loans to these clients. SoFi makes money from securitising its loans and from its refinancing and lending process.”
According to the Wall Street Journal, SoFi estimates it will generate $600m in revenue in 2017, after receiving $40m in adjusted profit in the first quarter.
In April 2017, SoFi launched an investment fund to give investors access to its loan portfolio, disclosing in a Securities and Exchange Commission filing that it raised $105m for its SoFi Prime Income Fund. Each investor contributed a minimum
In February 2017, SoFi bought Delaware, California- and Toronto-based Zenbanx for an undisclosed sum. It also raised $500m in Series F financing in February 2017 led by private equity firm Silver Lake Partners. The investment, which brings the company’s total funding to $1.9bn, will be used to speed up SoFi’s expansion into new product areas and countries outside the US.
In a SoFi blog, Cagney wrote: “We’ve never been shy about SoFi’s ambitions to become the center of our member’s financial lives. Offering deposits, credit cards, and payment solutions is key to that ambition, and we think we can offer something better than incumbent players with the same kind of innovation we’ve brought to other areas of finance, like student loan refinancing, personal loans, and mortgages.
Zenbanx, established in 2012 by Arkadi Kuhlmann, founder of ING Direct Canada and ING Direct USA, offers mobile banking accounts that let customers save and send money in multiple currencies domestically and internationally.
Its mobile app was designed to eliminate the complexities of international banking for people who bank cross-border. US Zenbanx accounts are available through WSFS Bank, and in Canada through Toronto-based DUCA Financial Services Credit Union. Kuhlmann has taken an executive role leading banking products at SoFi, and Zenbanx staff have also joined SoFi.
“With Zenbanx joining SoFi, we’re moving one step closer to becoming the centre of our members’ financial lives by adding SoFi deposit, money transfer, and credit card products to our offerings for members,” Cagney said in February 2017.
“The logic behind SoFI’s acquisition of Zenbanx is twofold,” explains Ron Shevlin, director of research at US-based Cornerstone Advisors. “SoFi needs deposits to fund its lending business, and it wants a bank offering to become the provider of choice to young upwardly mobile consumers.
“It isn’t going to scale. Zenbanx has little name recognition and won’t be much of a draw to many SoFi customers who are perfectly happy with the mobile offerings of their existing banks.”
Following its purchase of Zenbanx, SoFi plans to launch a range of mobile deposit, credit, and payment products to its US members in 2017, as well as offer its products in Australia and Canada by 2017 end, SoFi said in a news release.