640x0 25 Ways That SoFi Threatens Bank Of America


This is a forbes.com article.


As an investor in Social Finance (SoFi), a San Francisco-based fintech startup, and customer of Bank of America BAC -3.81%, it’s clear that the upstart is winning the consumer finance battle.

Ever since the financial crisis, I have been hoping that a new form of financial institution — one that’s free of the moral hazard of relying on government-guaranteed consumer deposits to finance risky lending that enriches unaccountable bankers — might replace the traditional banking industry.

SoFi and many of its fintech peers are beginning a journey that will result in a shift of depositors and borrowers away from traditional banks like Bank of America.

Before getting into that, let’s look at what’s wrong with traditional banks. As I wrote here about four years ago, “the idea is not new — I  wrote about it in June 2009 and again in April 2010. And it could offer a way out of the nasty problem we have created by allowing bankers to risk our deposits while guaranteeing a government bail out of the ruined banks even as those bankers keep their million dollar bonuses.”

My idea was to create Deposit Only Banks (DOBs) which would offer consumers an ATM network where they could deposit funds in safe money market funds that would be financed with fees or advertising to depositors.

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SoFi has a better idea. It offers below-market-rate student loan refinancing, mortgages, and other consumer loans using funds obtained from institutional investors and wealthy individuals to whom it pays as much as 6.5% annual interest — depending on the borrower’s rate of loan repayment.

But SoFi — which raised $1 billion last month valuing it at an estimated $4 billion — has bigger ambitions. As CEO Mike Cagney told CNBC, “We actually are trying to change a fundamentally broken [banking] system.”

And with the new capital, Cagney plans to expand through “initiatives in wealth management, banking account alternatives — things that allow us to give a holistic solution [that will lead] people to leave their existing banking relationship and just work with SoFi,” Cagney said.

Here are five reasons that SoFi could take business from Bank of America.

1. Market segmentation

Traditional banks are highly regulated and they can’t get away with cherry-picking the best borrowers and ignoring the rest. SoFi — which does not take deposits and is regulated at the state level by the Consumer Financial Protection Bureau – has more strategic flexibility.

SoFi prospers by targeting students at relatively selective schools–such as Stanford and Harvard– whose alumni tend to get high-paying jobs and to be financially responsible.

Moreover, SoFi’s original concept matched up wealthy alumni of those schools who in addition to providing the money to refinance those loans helped borrowers seeking career advice.

2. Lower loan rates

SoFi estimates that it can save the typical student loan refinancing borrower about $14,000 and that its rates “start at 3.50% fixed and variable rates start as low as 1.90% [annual percentage rate] APR (with AutoPay).”

My efforts to find the interest rate that Bank of America charges for a student loan refinancing came up empty.

But rival, Citizens Bank charges what sounds like more – from 4.74% APR to 8.90% APR (with autopay) for fixed rate and 2.33% APR to 6.97% APR (with autopay) for a variable rate loan.

3. Higher deposit rates

Like most traditional banks, Bank of America pays a barely detectible 0.03% interest rate to depositors — but it can go up as high as 0.08% for those with an account at its Merrill Lynch unit.

SoFi does not take consumer deposits. However, individuals who qualify to provide cash to borrowers can earn much higher yields — up to 6.5% depending on the rate at which borrowers repay.

To be sure, the people who provide capital to SoFi are taking a much bigger risk than a depositor at Bank of America. But with deposit rates near zero for the last eight years, SoFi offers a substantial reward to those willing to take that risk.

4. Better customer experience

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