Social Finance Inc., the marketplace lender known as SoFi, has been in the news twice this week. On February 1st, Bloomberg reported that SoFi acquired Zenbanx’s technology for $100 million in stock. Today, American Banker reports that SoFi has arranged with Promontory Interfinancial Network to sell its student loans to community and regional banks.
Sometimes the swirl of news coming from the FinTech world can make it difficult to separate signal from noise. But these two announcements are important for two reasons.
First, SoFi’s expanding loan participation network should solidify its position as perhaps the premier marketplace lender. Competitors such as Lending Club and Prosper experienced liquidity challenges and had to make operational cuts, partly because they had relied upon institutional “investors” such as hedge funds to provide a supply of funds. SoFi, on the other hand, from the outset sold its loans via the securitization market.
While securitization has its own volatility, it has proven more stable than relying upon a limited universe of investors who may simply be chasing yield. Now, the Promontory participation deal enables SoFi to sell its loans to nearly half of all FDIC-insured depository institutions, thereby further strengthening its’ access to lendable funds.
SoFi originated $8 billion in loans last year—including student loans, personal loans and mortgages—and now appears set to scale rapidly. Mike Cagney, SoFi’s CEO, has positioned SoFi to become the primary financial institution for Millennials who are “high earners, not yet rich”. That market focus is confirmed by SoFi’s average FICO lending score, which is reported to be above 750.
Second, and perhaps more importantly, the Zenbanx acquisition brings SoFi Arkadi Kuhlmann, the founder of Zenbanx and previously founder of ING Direct. Kuhlmann founded ING Direct in Canada in 1996 and then launched ING Direct in the U.S. in 2000. Within eight years, ING Direct had become the largest direct (i.e. digital) bank in the U.S. with $90 billion in deposits and nearly 8 million customers.
ING Direct U.S. was sold to Capitol One in 2011. The following year, Kuhlmann founded Zenbanx, a mobile-based bank that, according to TechCrunch, offers savings and debit, money transfer and bill pay, and the ability to deposit or hold money in up to nine currencies. Zenbanx partners with WSFS Bank, a Delaware-based bank, to gain access to a national banking charter.
While ING Direct was phenomenally successful in gathering deposits, it never optimized the lending side of its balance sheet. The marriage of Zenbanx and SoFi combines both deposit-taking and lending in a purely digital format. If there is one thing ING Direct proved, it is that Arkadi Kuhlmann is a master at building a banking model that resonates with young people.
The SoFi-Zenbanx combination brings together a strong marketplace lending organization, a full banking charter, and two successful pioneers in digital banking. I expect this team may soon deliver the standard for the mobile bank of the future. This one bears watching!