When Disruption Drives Inclusion
There has been a growing regulatory interest in non-bank (marketplace) lenders, from the State of California to the Fed, the FDIC and the Treasury. And while some of this attention can be misguided, we should expect and welcome greater interest given the rapid growth of our industry. Foundation Capital suggests one trillion dollars of global marketplace loan origination by 2025. What is sometimes lost in discussions, however,is why this growth is occurring. Simply put, many non-bank lenders are taking an unorthodox approach to lending to meet consumer needs in a way that traditional financial services firms won’t (or can’t). And as a result, the impact is far greater and more inclusive than many realize.
SoFi was created in 2011 to address what the founders believed was an obvious market gap. The government lends money to all students at the same rate. In a few years, when you’ve graduated and gotten a job, you aren’t the same risk you were when you were in school. Why shouldn’t you be able to refinance your loan at a rate that is commensurate with your risk? And while you are at it, why can’t you do this through your phone, with outstanding customer support to help you through the process?
Seems obvious now, but back in 2011 no one – banks or startups – was offering this solution. Since its launch, SoFi has saved its members over $700 million on their student loans – something that wasn’t going to happen without innovation. And not surprisingly, it turns out people like the ubiquity of mobile and dedicated customer support for products like personal loans and home loans, too.
Though our founding story has been told, what’s less known is our inclusive approach to underwriting that’s based on transparency and balancing the needs of our members and investors. Our biggest challenge was that the FICO score was anything but transparent. So we threw it out, and became the only major lender I know of that does not use the score for any lending. We want members who have historically paid their bills on time and make more money than they spend. It’s that simple. We have SoFi members who make less than $25,000 a year, and members who make over $250,000 a year. They work everywhere from McDonald’s to McKinsey. They come from all 50 states, and range in age from 19 to 85. This diversity is one of the strengths of our 100,000 strong and growing community.
SoFi now originates nearly $1 billion in loans each month, across student loan refinancing, personal loans and home loans. To put this in perspective, in 2014 we originated just over $1 billion for the year. We didn’t fuel this growth by fighting for customers with the mega banks, or duking it out within the marketplace community. We identified an underserved market, built an innovative and inclusive way to underwrite credit and aligned our business with our members’ needs. Our approach has led to both a 60% approval rate for student loan refinancing applicants and the highest current pay rate in the financial services industry.
As we’ve grown, misperceptions about our model have increased. Some claim we only lend to Ivy League grads (we don’t – we have members from over 2,700 colleges, though a college degree isn’t required) or that we only lend to rich people (ironic, given most of our customers are refinancing debt). But that’s just part of the story. At the heart of SoFi is our commitment to our community. SoFi helps entrepreneurs start businesses and families buy a home when conventional lending has failed. We provide dedicated career strategies to our members, and have assisted over 150 find new employment after losing their job. We’ve even been known to pay off a loan for a good cause.
Promoting financial literacy through real data is also a core tenet. We believe transparency and knowledge lead to smart decisions, and we were the first company to show actual debt levels and salaries from graduates across schools and programs. We show our members how their salary, debt and investment goals compare to their peers, and we work with our members to build financial wellness they can’t get elsewhere.
Our story is one of many in the non-bank lending space. Though there are many business models, what we share is the desire to fill gaps left by the post-crisis banking world. This means rapid growth – and the regulatory scrutiny that goes with it. We welcome this focus. At the same time, it’s imperative that we don’t lose sight of what’s equally important: our commitment to inclusiveness, value and community – and doing what’s right for the consumer.