With an eye on providing banking services later this year, online lending startup SoFi is planning to apply for an industrial bank charter in the next month, according to CEO Mike Cagney. If approved, it would become the first company to receive a new industrial loan company (ILC) charter in a decade.
Since launching in 2011, SoFi has gradually added new financial products and services to serve its member community. Banking is one area that it’s keen to enter, as it sees an opportunity to provide checking, deposit and credit card accounts to its users.
SoFi has long been interested in applying for an industrial banking charter, and has even weighed the possibility of acquiring a regional or community bank to offer those services. In a profile of the company published last summer, The Wall Street Journal reported SoFi had met with Utah and federal regulators about applying for a charter in March 2016.
In a conversation with TechCrunch, Cagney explained why he thinks the time is right for SoFi to move forward with its application, and what it expects to do if approved.
In short, a lot has happened since SoFi spoke with regulators a year ago. Earlier this year, the company announced it has raised an additional $500 million in equity financing from Silver Lake Partners. But more importantly, it acquired online banking startup Zenbanx, which gives it the tech infrastructure it would need to process deposits and manage checking, savings and credit card accounts.
“With Zenbanx, we got a banking stack that de-risks the ILC application,” Cagney said. “We will have the ability to get our deposit product out later this year.”
Also, with $1.9 billion in venture capital backing it and its tech stack in place, Cagney told me that the company has plans to apply for an ILC charter in the next month.
Industrial bank charters, or ILCs, provide a way for companies that aren’t banks to provide banking-like services to customers. And while ILCs have been around for more than 100 years, they’ve fallen out of vogue in the last decade due to increased regulation against them.
According to Cagney, that’s because companies like Harley-Davidson have used ILCs as a way to take advantage of FDIC-insured deposits to fund the financing arms of their businesses.
“Our situation is very different,” Cagney said. “We’re not doing this to fund our loans. We see this as an opportunity to deliver a better product to our members than what’s available today.”
By combining a banking option with its lending products, Cagney said SoFi could offer discounted rates to members who set up auto-pay between their accounts. And with a SoFi-issued credit card, he said the company could potentially use its reward program as a way to help users pay down student loans.
“I’m optimistic about this as a solution that delivers a ton of consumer value,” Cagney said.
Cagney admitted there was a bit of uncertainty around the approval of such an application. Among other things, he noted that current FDIC chairman Martin Grunenberg is serving out a five-year term, but that will end in November. “It wouldn’t be prudent to assume anything at this stage,” Cagney said.
The greater challenge for SoFi is that there haven’t been any new ILC applications approved in nearly a decade. In the wake of the 2008 financial crisis, the Dodd-Frank Act placed a moratorium on industrial bank charters. The moratorium ended in 2013, but still no company has tested the waters with an ILC application since.
That means SoFi’s application could be a watershed moment for the industry. While it might not necessarily open the floodgates for other companies seeking an ILC charter, approval would send a signal to the market that regulators are once again open to the idea of issuing this type of license to non-banking institutions.
“I think this is going to be the biggest challenge with the FDIC, and absolutely something the FDIC has to take into consideration,” Cagney said.
As a result, the company is working on other ways that it could begin offering a SoFi-branded banking product later this year. Even if the company is not able to get approval for an industrial bank charter, it would still be able to offer checking, deposit and credit card services through a regional banking partner.
“There are ways we can do this without an ILC. The benefit, though, is that it allows us to have a bank subsidiary,” Cagney said.