SoFi's CEO hiatus stalls its big-time banking ambitions

SB Technology

02/10/2017 05:01

By Heather Somerville and Anna Irrera 
    SAN FRANCISCO/NEW YORK, Oct 2 (Reuters) - Under the 
leadership of Chief Executive Mike Cagney, Social Finance Inc 
(SoFi) set its sights on becoming a one-stop shop for every 
well-to-do millennial looking for financial services and a 
romantic partner.  
     One of the most valuable private financial technology 
startups in the United States, SoFi's $4.3 billion valuation was 
based on expectations it could develop into a major lender but 
Cagney's departure this month and the circumstances around his 
exit complicate efforts to create a new-generation bank that 
could compete against JPMorgan  JP.N  or Bank of America. 
    "This will be a headwind for them for some time," said 
Robert Wildhack, an analyst for financial technology and 
marketplace lending firms at Autonomous Research. 
    "It is hard to see how management turnover wouldn't delay 
the growth and penetration of products." 
    Cagney stepped after a lawsuit alleged he presided over a 
hostile work environment for women that enabled senior 
executives to harass female employees.  
    Cagney did not respond to a Reuters request for comment. In 
a blog post to SoFi employees before he resigned, Cagney said 
the allegations were "being thoroughly investigated by outside 
attorneys we have engaged." 
    The company has hired headhunters over the past few days to 
help find his replacement, but an appointment is not expected to 
take place until the end of the year, a source familiar with the 
matter told Reuters. 
    The gap at the top is likely to stall SoFi's application for 
a banking license, according to the source, because regulators 
assess whether a company has a capable CEO before allowing it to 
accept deposits.  
    In addition to Cagney, SoFi has to replace other senior 
executives that have left over the past few months, including 
former chief financial officer Nino Fanlo, ex-chief revenue 
officer Michael Tannenbaum and former chief technology officer 
June Ou. The CEO search is the company's first priority, 
according to a spokesman.  
    A banking license was a key part of Cagney's push to grow 
SoFi beyond its core business of student loans and unsecured 
personal loans. 
    "Longer term deposits are a key financial product obviously, 
so their ability or inability to offer that is an opportunity 
for borrowers to jump to a competitor," said Wildhack. 
    Rare for a startup, SoFi is profitable. It earned $61.6 
million in the second quarter of 2017, after adjustments, for 
depreciation and amortization, taxes, stock-based compensation 
and other miscellaneous charge offs and investments.  
 
    MORE DISCIPLINE 
    Cagney, a former bank trader, had been the driving force 
behind SoFi's big-time ambitions, pushing it into mortgages, 
personal loans up to $100,000, wealth management services and 
life insurance. He told investors after the second quarter that 
the company was undertaking aggressive growth.  
    But without Cagney at the helm, the emphasis is expected to 
shift. 
    The company will be more disciplined about testing new 
products before selling them widely, a source close to the 
company said.  
    In 2016, SoFi announced that it would no longer factor FICO 
credit scores into its underwriting process. The company 
scrapped the initiative after default rates started ticking up 
for loans that had been FICO-free, according to a source 
familiar with the matter.  
    SoFi went back to using FICO among other data points when 
assessing borrowers' credit worthiness, according to a 
spokesman.  
    SoFi's core business is still the $1.4 trillion U.S. student 
loan market and there are plans to set up in Australia and 
Canada, where students graduate with average debts of $22,000 
and $20,000 respectively. Those plans have been put on hold as 
the company awaits the appointment of a new CEO, according to 
the first source. 
    The spokesman said the company had no changes to announce on 
international launches.     
    "People fundamentally want this product," said Manu Gupta, 
general partner at Lakestar, a venture capital firm that has 
invested in SoFi. "While we had a lot of confidence in Mike 
Cagney, we still have high expectations in the company because 
everything is not about one leader." 
 
    DATING APP SCRAPPED 
    SoFi started in 2011 offering student loan refinancing to 
graduates of top-tier schools such as Stanford University. It 
could offer a better interest rate than federal government 
loans, on the basis that Ivy League graduates will have 
higher-earning jobs and are less likely to default. 
    But competitors quickly appeared. So SoFi added new 
products. It also ensured its marketing tactics differentiated 
it from rivals. Customers referred to as "members" are invited 
to SoFi-hosted events from cooking classes and yoga sessions to 
cocktail parties and single meetups. 
     "We don't think of ourselves as a finance company, we think 
of ourselves as money, career and relationships," Cagney said at 
a technology conference in May. 
    In line with this philosophy, he had championed the creation 
of a dating app but that idea has now been scrapped. 
    SoFi was successful in getting its members to sign up for 
other products. In the second-quarter letter to investors, 
Cagney said 40 percent of SoFi's mortgages and 56 percent of its 
wealth accounts came from existing members. 
    The problem is that SoFi's core clients -- so-called Henrys: 
high earners not rich yet - do not have the means yet to be 
lucrative wealth management clients. 
    SoFi Wealth had amassed only $12.25 million in assets under 
management at the start of September, according to a company 
filing. 
    Investors say Cagney's successor will need to communicate a 
steadier growth strategy. 
    "I think the company needs to slow down, focus on winning 
products, dump others; build a resilient non-frat house culture; 
and take a longer term view," said Ryan Gilbert, a partner at 
venture capital firm Propel Venture Partners, which has backed 
at least a half dozen fintech companies but not SoFi. 
 
 (Additional reporting by Gregory Roumeliotis; Editing by Carmel 
Crimmins and Susan Thomas) 
 ((Heather.Somerville@thomsonreuters.com; +1-415-321-2320; 
Reuters Messaging: Twitter @heathersomervil)) 
 
Keywords: SOFI FUTURE/