“This is the beginning of a bankless world,” SoFi boldly advertises on the startup’s homepage.

SoFi is part of a new generation of FinTech startups taking the banking industry by storm. SoFi launched to help solve a significant student debt problem in the United States by refinancing student loans, and offering additional bonus services such as career counseling and entrepreneurship courses to a millennial clientele. The company aims to assist American students who collectively are burdened by 1.3 trillion dollars worth of student loan debt.

An entire generation of underserved graduates now turns away from the banking industry, looking towards a platform with an entirely new set of criteria for granting loans. Investors are bullish on the prospects for the socially responsible lending platform. In September of 2015, SoFi raised another $1 billion to facilitate the company’s projected growth, which is expected to at least double in 2016.

A Part of a Larger FinTech Revolution

FinTech as a whole has disrupted the financial industry, democratizing education and access to financial services and products. FinTech provides access to investments, the stock market, the lending market and other financial tools. (To learn more, read: 10 FinTech Companies to Watch in 2016.)

Robo-advisors came to the market with easy-to- access, automated technology that allowed the average person to hand over their funds to virtual wealth managers. In the same fashion of democratizing access, SoFi provides loans to those who wouldn’t otherwise qualify.

Solving the U.S. Student Debt Crisis

SoFi launched in 2011, founded by four former big bank executives turned social entrepreneurs, seeking to alleviate the mass of underserved college and professional school graduates burdened with hundreds of thousands of dollars in student loans. In the U.S., most skilled labor jobs expect that the applicant has a four-year college degree under his or her belt. As costs in the U.S. for a four-year degree can exceed $200,000, government financial aid programs can’t keep up with tuition demands.

Two-thirds of graduates hold student debt amounting to upwards of $1.2 trillion – more than both credit card and auto loan debt. Mark Kantrowitz, a leading expert in student financial aid published a policy paper claiming that 27.2% of students who borrow for college graduate with “excessive debt.” According to Kantrowitz, excessive debt describes a situation in which “half the after-tax increase in income that a student gains from obtaining a college degree is not sufficient to repay that student’s loans in ten years or less.”

SoFi aims to tackle the average student loan debt of $47,712 per American household starting on graduation day. Within the online lending space, SoFi specializes and leads the market in online student loan refinancing.(For related reading, see: Technology Can Help with Student Loans.)

How SoFi Works

SoFi leads a new wave of tech startups that provide loans based on alternative criteria that differ from the method used by big banks and other traditional lenders. As an online lending platform, SoFi can defy the normal procedures for approving, funding and servicing clients. SoFi takes into account clients’ career experience, monthly income vs. expenses, financial history and education. SoFi charges no application and origination fees, and no prepayment penalties. SoFi’s relatively low rate offerings are paired with unemployment protection, which allows clients to hold off on loan payment in certain circumstances.

Although SoFi’s underwriting approach cannot be replicated in the banking industry, that’s not what makes it such a huge disrupter in the FinTech space. (To learn more, read: The Rise of Socially Responsible Lending.)

The New Kid On The Block Is Gaining Popularity

SoFi’s taking a comprehensive, uniquely personal approach to lending services. Although student loan refinancing defines SoFi’s core business, the startup also offers home mortgages and personal loans, which comprise a significant share of the company's business. 

SoFi took it one step further in appealing to a generation disenfranchised by the banking industry. Thousands of clients have benefited from career counseling services, which help with resume building, personal branding, networking, and more. SoFi made it to CNBC’s Disruptor 50 List primarily due to its Entrepreneur Program. The six-month program provides a myriad of support for innovation, including workshops, formal pitching, and peer networking opportunities. SoFi also advertises member parties and happy hours, drawing in social millennials by the thousands.

The Largest Equity Funding Round in FinTech History

In January of 2015, a Series D fundraising round led by Third Point Ventures valued the FinTech startup at $1.5 billion. SoFi joined the historically high number of “tech unicorns” or startups valued over $1 billion of 2015. (To learn more, read: The Tech World Sees Number of “Unicorns” Boom). The startup has raised a total of $1.37 billion from 6 rounds of equity funding.

In September of 2015, SoFi announced it received $1 billion in a Series E fundraising round led by SoftBank. Existing shareholders involved in the deal included: Third Point Ventures, DCM Ventures, Baseline Ventures, Wellington Management, RenRen and Institutional Venture Partners. The deal represents the biggest equity funding round in the FinTech industry to date.

Such a large equity stake may raise concerns about the dilution of shares. However, SoFi has reported that it needs the capital to achieve the high growth it expects in 2016. Investors have jumped on the opportunity to throw capital at the startup, which has been making net profits for two years. SoFi has generated over $7 billion in loans to date.  

The Bottom Line

SoFi leads a mass of new FinTech companies that are changing the game in the world of finance. The goal is to make quality financial services and tools available to the entire population – to move towards a bankless, digital world. As an online lending space, SoFi is not bound by the same rules and regulations as big banks. SoFi acts as a disruptor in the industry, tapping into an underserved market and offering unique services such as career counseling and entrepreneurship courses to clients.

Investors see the potential for widespread market disruption, recently funneling in another $1 billion in financing to the nearly 5-year-old startup at the end of 2015. SoFi management projects a growth of at least 100% in 2016. For ethical investors, SoFi provides a perfect opportunity to increase the social good and generate big profits in the process.

 

  

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