In its early days, Social Finance made loans only to borrowers who had attended name-brand universities. Graduates of elite colleges were paying relatively high interest rates on federal student loans even though they represented a low risk, and the Silicon Valley startup saw in that mispricing a chance to make money.

SoFi CEO Mike Cagney noted in a 2013 interview that traditional banks were aware of this opportunity but were unwilling to pursue it. If a bank charged San Jose State students more than their peers at Stanford, it would create a perception problem, he said.

Since then, SoFi has grown enormously, opening up its membership ranks to the general public and adding a range of loan and wealth management products. But the San Francisco company remains focused on the same general demographic group — young adults with high incomes.

Mike Cagney, co-founder and chief executive officer of Social Finance (SoFi).
Innovative, or end around?
SoFi CEO Mike Cagney has been seeking to offer FDIC-insured deposits to the firm’s customers, many of whom are well-heeled millennials. Obtaining a bank charter would be one way to make that happen. Bloomberg News

Now, as SoFi seeks approval to start its own bank, the 6-year-old company is contending with a perception problem of its own. It needs to convince regulators that it will serve not only well-heeled millennials, but also lower-income Americans, at a time when progressive groups are expressing skepticism about the company’s intentions.

SoFi’s application for a banking charter, parts of which were made public this week, lays out the firm’s argument to the regulators.

The documents state that the proposed SoFi Bank will offer a secured credit card aimed at low-income and moderate-income borrowers. It also says that the privately held company plans to buy housing bonds to support the creation of affordable housing in Utah, where SoFi Bank would be headquartered. And it promises to provide financial literacy education, fund scholarships and partner with local charities.

But those plans are being panned as inadequate by left-leaning organizations, kicking off a fight over the first attempt by a U.S. online lender to enter the banking system.

“What they’re proposing strikes me as very weak,” said Jesse Van Tol, chief operating officer at the National Community Reinvestment Coalition.

Van Tol said that the NCRC will oppose SoFi’s application. Public comments are due to the Federal Deposit Insurance Corp. on July 6.

“We have some significant concerns about their business model, which appears to be geared toward high-income people,” he said.

Credit cards will be the only credit product offered by SoFi Bank, which is to be organized as a Salt Lake City-based industrial loan company, according to the company’s filing.

SoFi plans to continue to operate its flagship student loan business, as well as its mortgage and personal loan businesses, outside of the bank.

“I think structuring it that way may be a clever way of avoiding a regulatory obligation to do more,” Van Tol said.

A SoFi spokeswoman declined to comment for this article.

Another person familiar with the situation said that because SoFi Bank will only offer deposit products and credit cards, it will not have the infrastructure necessary to offer student loans or mortgages to any of its customers, including people with low and moderate incomes.

This source also shed light on SoFi Bank’s business model, saying that the state-chartered bank plans to pay high yields on deposits and to use that money to fund the company’s nascent credit card business as well other investments.

Additional criticism of SoFi’s plan to meet the obligations imposed by the Community Reinvestment Act came from Dory Rand, president of the Woodstock Institute, a progressive group based in Chicago.

Noting that SoFi has a national customer base, she took issue with the company’s proposal that regulators assess its CRA compliance based on its activities in a relatively small geographic area that includes Salt Lake City, Provo, and Ogden, Utah.

“We think that’s unfair when they’re offering products across the country,” Rand said.

Kenneth Thomas, a consultant who is a CRA expert, said that the SoFi Bank application could put pressure on Congress and the federal banking agencies to bring the 1977 law into the digital age. SoFi states in its application that the majority of its customers live in the nation’s 10 largest metropolitan areas.

“Why should all the benefits accrue to one little community because that is where they are physically based?” asked Thomas, who is president of Community Development Fund Advisors in Miami.

Other aspects of the SoFi Bank application seem less likely to encounter opposition.

Arkadi Kuhlmann, CEO at Zenbanx
Digital-banking pioneer
Arkadi Kuhlmann, the onetime founder of ING Direct, would be chairman and CEO of SoFi Bank. He said in a recent interview that millennials want banking to be as easy as making a restaurant reservation or booking an airline ticket online.

The chairman and CEO of SoFi Bank would be Arkadi Kuhlmann, the founder of the online bank ING Direct, which was acquired by Capital One Financial in 2011. Kuhlmann later started ZenBanx, which developed a mobile banking account and was eventually bought by SoFi.

SoFi Bank would be capitalized with $166 million in cash, a hefty sum for a new bank. That big cushion should help address any concerns that the FDIC may have about the bank’s ability to weather tough times, observers said. The FDIC’s approval is necessary in order to offer deposit insurance.

“You’re basically saying to the FDIC, ‘Don’t worry about this. … We have a ton of capital,’ ” said Brian Knight, a senior research fellow at George Mason University’s Mercatus Center.

SoFi’s push to secure a bank charter thrusts the FDIC into the middle of a raging debate over how to regulate the U.S. fintech sector.

Industry lawyers have said that the company may have a hard time getting the agency’s approval, at least during the tenure of FDIC Chairman Martin Gruenberg, whose term ends in November.

In congressional testimony last July, Gruenberg said that the agency welcomes applications for deposit insurance. He also stated that industrial banks must meet the same standards as any other FDIC-insured bank.

SoFi is the first company to file an industrial loan application since 2009, a period that includes a three-year moratorium imposed by the Dodd-Frank Act.

If the FDIC denies SoFi’s application, the company can still move ahead with plans to start taking deposits from its customers, relying on a partnership that Zenbanx established with WSFS Bank in Delaware.

Once the FDIC accepts an application to establish a new bank, it generally acts on the application within four to six months, according to an agency spokeswoman.

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Kevin Wack

Kevin Wack

Kevin Wack is a California-based reporter for American Banker who covers the U.S. consumer finance industry.