Paige Smith
A pause in student-loan repayments made sense in the early days of Covid-19, Anthony Noto says, but not three years later — and the moratorium that lingered on too long has cost his company hundreds of millions of dollars.
Noto, chief executive officer of SoFi Technologies Inc., made headlines in March by suing the US government over the pandemic-era pause. Some called the move gutsy, others called it rash. Now that the dust has settled — the Biden administration has agreed to lift the moratorium as part of a debt-ceiling deal with Republicans, leading SoFi to drop its complaint — Noto is standing by his decision to sue.
“We’d gone past a point in time where there needed to be broad-based relief and a moratorium,” Noto, a former Goldman Sachs Group Inc. banker and Twitter Inc. executive, said in his first interview since the suit’s dismissal. “It needed to be more targeted, and we felt like the government was using American tax dollars inappropriately.”
For some current and former senior employees, the lawsuit was an ill-advised move that jeopardized SoFi’s reputation for promoting consumer financial wellness. But it was hardly the first risk the 55-year-old Noto has taken in his five years leading the company, which has expanded on its original business of refinancing student loans. (On Friday, the US Supreme Court tossed out another Biden administration plan related to student loans, one to slash debt for more than 40 million borrowers.)
In mid-2021, Noto took San Francisco-based SoFi public by merging with a special purpose acquisition company at the height of the SPAC boom. Eight months later, SoFi purchased Golden Pacific Bancorp Inc., a tiny California lender with just three branches — a move that effectively turned the financial-technology maverick into a full-fledged bank able to accept customer deposits and issue loans.
That’s a far cry from the fintech that once defiantly told customers “don’t bank” and hosted singles’ events as a way to stand out from the oft-stodgy financial-services crowd.
That tagline made sense in the immediate aftermath of the great financial crisis, when SoFi was founded, but company executives walked that message back after it rubbed the banks they relied on for funding the wrong way, according to a former employee with knowledge of the discussions.
Now, with the exception of a few turbulent months earlier this year, there’s generally more trust in the banking system, and Noto is capitalizing on that.
“Our goal is to get to a 30% ROE,” Noto said, roughly double JPMorgan Chase & Co.’s return on equity. “But it’s also to become a top 10 financial institution in the United States.”
SoFi wants to succeed in an intensely competitive environment, where fintechs battle with banking giants including JPMorgan and Bank of America Corp., which have poured billions of dollars into technology to win over customers increasingly accustomed to using smartphones and websites to manage their finances instantly.
Record Revenue
As other fintechs struggle with muted appetite from venture-capital firms and resort to staffing cuts to contain costs, SoFi reported in May an eighth consecutive quarter of record revenue. Thanks to its new bank status, it’s nearly quintupled net interest income — a key revenue metric for traditional lenders — in two years, and expects to be profitable for the first time by the end of 2023.
“If you don’t have a bank license, it’s generally not up to you to decide what interest rate you can offer on checking and savings — it’s dependent on your bank sponsors,” Noto said. “Owning a bank, we get to control that interest rate, and that interest rate’s a key element in building a value proposition that drives high-quality, durable deposits.”
But what will becoming a bank mean for SoFi’s status as a fintech that’s billed itself as pro-consumer? The company is suffering from something of an identity crisis, even as shares in the former anti-bank are up more than 80% this year, according to Todd Baker, a senior fellow at Columbia University’s Richard Paul Richman Center for Business, Law and Public Policy. Existing as neither “fish nor fowl,” as Baker sees it, means there are few comparable firms in the market to guide traders and investors.
Stanford Students
Founded in 2011 by Stanford University graduate students, SoFi aimed to connect high-earning investors with degrees from top universities with students at their alma maters. SoFi termed them HENRYs — high earners not rich yet — and believed they were inherently less risky for lenders. SoFi attracted customers by offering to refinance their student loans at rates lower than those offered by the federal government. The concept took off, and SoFi entered an industry that included peer-to-peer lenders such as LendingClub Corp.
“The company grew fast, assisted by large amounts of venture-capital funding, but was unprofitable and lacked a clear path to profitability,” Baker said.
SoFi moved into mortgages and other corners of the financial-services market, and there were talks of an initial public offering. But the company soon hit a series of speed bumps. Growth plans were slowed in 2016 by a less-than-friendly funding environment for fintechs. Then, in 2017, sexual-harassment allegations were made against managers including then-CEO Michael Cagney, who ultimately stepped down
Goldman, NFL
Enter Anthony Noto. In early 2018, SoFi him as CEO from Twitter, where he was chief operating officer. He brought with him years of investment-banking experience at Goldman Sachs and a stint as chief financial officer of the National Football League. As an undergrad, Noto attended the West Point military academy — a notoriously grueling environment — and he has a master of business administration from the Wharton School.
“He’s very hard-charging in terms of his energy levels,” said Harvey Schwartz, CEO of Carlyle Group Inc. and a SoFi board member. “He creates a lot of loyalty, a lot of enthusiasm.”
With stability returning to the company’s upper ranks, thoughts of going public returned. By 2020, SPACs were all the rage, offering companies a less burdensome way of listing shares. SoFi agreed in January 2021 to merge with Social Capital Hedosophia Holdings Corp. V, a blank-check firm started by former Facebook executive Chamath Palihapitiya in a deal that valued SoFi at around $8.7 billion
That slightly unorthodox method for going public was soon followed by SoFi’s $22.3 millionpurchaseof Golden Pacific. Before the acquisition, SoFi had been rapidly expanding its suite of consumer offerings into things such as crypto tradingcredit cards, diversifying its revenue sources in the process. But a bank charter has given SoFi a level of security pursued by few fintechs though coveted by many.
Customer deposits now offer SoFi a less-expensive source of funding to continue to expand its product offerings, while the ability to hold loans on the company’s balance sheet for longer periods gives SoFi the opportunity for bigger gains in net interest income. Interest-bearing deposits soared to more than $10 billion as of March 31 from just $1.06 billion a year earlier.
“At some point, strategically, I think, if you want to be in the banking business as a fintech bank, you have to be a bank,” Schwartz said. “You can’t hit escape velocity by just being some fintech platform.”
Moratorium’s Cost
Just as it seemed like SoFi was entering a period of sustainable growth, Noto made another surprising move. In early March, the firm filed its lawsuit against the Department of Education in an effort to force borrowers ineligible for student-debt cancellation to resume repayments. The moratorium — put in place by President Donald Trump during the early days of Covid-19, extended by President Joe Biden and allowed to linger after the national emergency was declared over — had allegedly cost the company about $200 million in profit and double that in revenue.
The strategy was unusual. Companies rarely sue the federal government, instead letting trade groups do so on their behalf, providing distance from the confrontation.
“Frankly, I think it was nuts,” said Columbia business professor Baker, who’s consulted fintechs. “The company had largely avoided press focus on the way in which its student-loan refi business undermines the public-policy goals of government student lending by siphoning off the best borrowers, but this lawsuit brought all that to the foreground.”
Others called the lawsuit a smart if brazen move. Student-loan refinancing was among SoFi’s most profitable businesses, and it was effectively reduced to operating at a small percentage of its previous capacity, according to Keefe Bruyette & Woods analyst Michael Perito. The business also was how SoFi acquired many of its customers, leaving the company with a “very challenging backdrop” to navigate, he said.
‘Push a Little’
“Somebody had to push a little bit on this,” Oppenheimer & Co. analyst Dominick Gabriele said. “They’re one of the refi leaders, if not the refi leader.”
A SoFi spokesperson said the company’s board had a robust dialog around the decision to sue. It wasn’t known at the time, though, that the moratorium was nearing its end anyhow. Tucked into the debt-ceiling agreement reached by President Joe Biden and House Speaker Kevin McCarthy was a stipulation to end the repayment pause. SoFi dropped the suit
“I do feel like we were vindicated,” Noto said.
But SoFi’s reputation was put on the line. The suit marked a significant shift for a company that had spent its early days marketing itself as different from out-of-touch banks. Demanding that debt-burdened borrowers resume loan payments could be seen as undermining the pro-consumer image SoFi had cultivated.
“A customer’s view of their bank,” Perito said, “is really important.”
So far, the lawsuit hasn’t caused much pain for SoFi. The company’s shares rose more than 11% the day the lifting of the moratorium was announced, and the stock has soared this year. Noto, for his part, sees SoFi as remaining committed to its original vision.
“Our bigger focus is on our mission, which is to help people achieve financial independence so they can realize their ambitions,” he said. “There are other examples of big decisions we’ve had to make, but I would always attribute it back to having one consistent strategy that people have bought into and been supportive of.”
