The Customer Effect
SoFi prepares to become a bank
- SoFi announced its intent to apply for an industrial loan company charter, a type of banking license that lets non-banks offer retail bank-type services.
- SoFi's move represents an evolution of the startup space rather than a turning point for the industry, say analysts.
Online lender SoFi is making an about-turn from its "Don't Bank. SoFi." tagline by actually becoming a bank. CEO Mike Cagney's announcement this week of the company's intention to apply for a industrial loan company charter -- a bank license that allows a non-bank to offer services a bank would provide -- is a move that puts the financial technology company in a better position to go head-to-head with the big banks. The time is ripe for the online lender to move forward with an application, following the acquisition of mobile banking startup Zenbanx, and $1.9 billion in venture capital funding. The industrial loan company (ILC) license would allow it to take FDIC-insured deposits, letting customers open bank accounts, credit cards and undertake other day-to-day banking services that were once only the preserve of the incumbents. "The fact that we don't have a deposit product means that we really can't offer a ‘fire your bank’ proposition," Cagney told The Financial Revolutionist in March. "[The license] allows a non-bank parent to have a captive bank subsidiary. The reason why that’s important for us is around marketing and brand. It also relates to things that are intrinsic to SoFi that you can't do as a bank holding company." SoFi would not comment for this story. While some may interpret SoFi's decision to proceed with an ILC as a turning point for the industry, Brian Knight, a senior research fellow at the Mercatus Center at George Mason University, said he doesn't expect a rash of financial technology company applicants, as a bank license doesn't suit all business models. Analysts say the ILC charter is the only surefire way to become a bank, given the uncertainty whether the OCC Charter for Fintech Firms will weather the departure of Comptroller of the Currency Thomas Curry last month and a challenge from state regulators. "With the ILC, there's no question about the legality of the charter," said Knight. Since a moratorium on ILCs initiated on the heels of the financial crisis expired in 2013, no companies have pursued it in a decade. From a startup perspective, SoFi's entry into the banking space should concern big banks wary of the competition. "I think the big banks are worried, almost all of them are identifying fintech as something to watch out for and most of them are trying to innovate," said Brion Nazzaro, group compliance director at WorldRemit, a financial technology company that offers a digital money transfer service. "Many banks will partner with fintech companies to keep their products and services at a lower cost or offer more value for the consumer." Others argue that it's too early to tell if the growth of financial technology companies will truly present a challenge to the banks -- if a firm poses a threat, they can just buy it. Pockets are big enough, as shown by BNP Paribas' acquisition of digital bank Compte-Nickel last month for 200 million Euros ($217 million) or Ant Financial's purchase of eye-scan firm EyeVerify in 2016, reportedly for $100 million. "[The banks] are watching every one of these companies, and they know who's going to try to pick their pockets, and if they think it's a good idea they're going to acquire the company," said Gerald Blanchard, senior counsel at Bryan Cave.