Financial technology firms continue to make headway by taking away loan and mortgage business from traditional banks. One of the most valued fintech companies today is SoFi, short for "social finance." The company, which considers its approach to banking as radical, deems itself "a modern finance company that's fueling the shift to a bankless world." Started by four students who met in business school, SoFi's original lending model connected students and recent graduates from specific schools with alumni and institutional investors. It became a win-win: investors received a financial return, and borrowers were able to borrow at lower than federal government rates.

SoFi soon expanded its product range to include online-only student loan refinancing, mortgages, wealth management services, credit cards, and personal loans. What makes the company unique is its nontraditional underwriting model, which focuses on a person's overall financial well-being instead of a consumer credit score. Intent on lending to financially responsible individuals, SoFi analyzes "forward-looking" factors to determine a prospective borrower's future potential. Many start-ups are betting that more progressive and predictive lending models like this will work well in challenging business environments and allow them to lend, on average, to 10% more applicants.

SoFi believes that traditional credit scores are "backward-looking" and do not capture borrowers' current income or ability to repay loans. Most important for SoFi is a borrower's current income, history of paying off debt, and remaining monthly cash after expenses are paid. A borrower's education and employment background are also considered to be important. A high credit score may help secure traditional loans, but without a healthy cash flow, a loan simply doesn't make sense, according to the company's CEO.

In addition to competitive interest rates, SoFi offers "community benefits" to borrowers such as social events, career services, and mentoring for those who are interested in starting a business. Traditional banks are taking notice of SoFi, who hopes to soon have its members invest in cryptocurrency.Backed by venture capital firms, including PayPal founder Peter Thiel, SoFi's 500,000 members may someday see their favorite nontraditional lender as a public company.

Questions for Critical Thinking

1. SoFi has gone to a place where traditional banks have not refinancing student loans. SoFi takes into consideration the reputation of a borrower's university when evaluating an applicant for refinancing. Discuss the pros and cons of this approach, along with SoFi's nontraditional credit evaluation techniques.

2. Discuss how SoFi has caused disruption in the financial services sector, and whether, in your opinion, traditional financial institutions are struggling to adapt to the way consumers and businesses want to use SoFi's services.