SoFi's Unique Model for Personal Finance and Rising Deposits Drive Strong Growth

Equity Analyst

Michael Miller

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SoFi Technologies targets young, high-income individuals who may be underserved by traditional full-service banks. The company is purely digital and engages with its clients exclusively through its mobile app and website. Unlike existing digital banks, which generally have limited product offerings, SoFi offers a full suite of financial services and products including everything from student loans to estate planning. The intent is that this will allow its customers to structure the entirety of their finances around SoFi. By acting as a one-stop shop for its customers' finances, SoFi intends to create powerful cross-selling advantages that will reduce its cost of acquisition.

To meet this goal, SoFi has used a mix of internal development and external partnerships to rapidly expand the services offered to its clients. Partnerships have allowed SoFi to build out its product offerings with impressive speed, transforming it from a student and personal loan company into a one-stop shop for financial services in just a few years. But SoFi's largest segment is still its lending business, which provided more than 70% of its revenue in 2022.

While SoFi has offered banking services for some time, the company has only recently become a true bank. Having gained a national banking charter in early 2022, SoFi is now able to retain deposits in its SoFi Money accounts and use them to support its lending operations. Before SoFi obtained a charter, deposits in these accounts were swept out to its partner banks, leaving it to finance its lending arms entirely though external financing. Access to these lower-costs funds will give SoFi the opportunity to drive net interest income growth as it leans into its unique model for digital banking. Since SoFi received its charter, its deposit base and loan book have grown rapidly, with total deposits of $12.7 billion at the end of June 2023 from just over $1 billion at the end of March 2022. SoFi's success in deposit gathering has supported significant net interest income growth, helping to offset the negative impact of student loan forbearance.

Business Strategy & Outlook

In our view, SoFi has identified an unfilled product need in the marketplace that could allow it to build a defensible competitive advantage. The company targets young, high-income individuals that may be underserved by traditional full-service banks. The company operates without physical locations and engages with its clients exclusively through its mobile app and website. Unlike existing digital banks, which generally have narrow product offerings, SoFi has built a broad offering of lending products and financial services that encourage its customers to structure the entirety of their finances around the company. SoFi hopes that by acting as a one-stop shop for its customers' finances, it can create powerful cross-selling advantages that will reduce its cost of acquisition and make its existing relationships stickier through implicit switching costs. While it has made good progress toward these goals, it is simply too early to assume SoFi will be successful in building a competitive advantage. The majority of the company’s revenue currently comes from its existing student debt refinance and personal loan businesses, neither of which have any sign of a moat. While we are encouraged by the momentum seen in recent results, the company has not made enough progress for us to have sufficient confidence that it will be earning returns above its cost of capital 10 years from now. Thus, we assign SoFi a no-moat rating. 

SoFi generates the majority of its revenue through its lending business, which operates on an originate-to-distribute model where the loans that it makes are either transferred through securitization or sold for a gain. While still a small part of its revenue base, the company intends to rapidly expand the scale and scope of its financial-services offerings in order to become a one-stop shop for its clients' financial needs. Over the last few years SoFi has been able to create a product and service suite broad enough to meet that goal, and recently growth has accelerated as a result. By partnering with other firms and banks, SoFi has been able to build out this product offering with impressive speed. SoFi’s cash-management and investment accounts were introduced in 2019 along with a relaunch of home loans. This was followed by limited estate planning and credit cards in 2020 and auto loans in 2021. The company hopes that its broad scope will allow its clients to consolidate the entirety of their financial assets and liabilities on its platform and drive growth. However, while SoFi has created an impressive suite of product offerings, much of it is still very new and the majority of clients have only one or two products with the firm, despite the substantial incentives offered. While we do expect the number of multiproduct clients to increase, this process will take time and likely require further reward and incentive spending.

Once SoFi can build a multiprong relationship with a customer, we expect clients to face implicit switching costs that will make it harder for them to leave. But until SoFi can do that, there is little to hold customers to the firm beyond price and reward spending. Additionally, the speed at which SoFi has been able to create new products and services for its customers cuts both ways. The company has been able to accelerate development by strategically partnering with other providers and banks. Its brokerage accounts, insurance, estate and financial planning, auto loans, and cash-management accounts are all offered through partnerships. There is nothing to prevent another firm from taking a similar path, creating the potential for new competitors to enter the market in short order. Furthermore, while follow-through and execution may be lacking, historically some traditional full-service financial firms have expressed interest in breaking down the silos between their various product lines and creating a more integrated product offered digitally, like the one SoFi has. While SoFi is currently the only firm with an integrated digital full-service model, there is nothing to prevent others from recreating that. For SoFi to build a competitive moat, it will need to use its first-mover advantage to establish a profitable membership base before anyone has a chance to replicate its product suite. This creates a great deal of uncertainty for SoFi’s chances of building a moat as the company has demonstrated handily that the products it offers can be brought to market quickly.

While SoFi has rolled out new lending products, such as in-school student loans in 2019 and auto loans in 2021, the majority of its loans are originated through its existing student loan business and personal loan business, most of which is driven by credit card consolidation. In fact, 78% and 93% of SoFi’s total origination volume in 2020 and 2019 came from student debt and personal loans, with mortgages making up most of the remainder. SoFi’s student debt business is heavily weighted toward refinance over new loan origination, with less than 2% of its more than 400,000 student loan products being in-school student lending at the end of 2020. The reliance on credit card consolidation and student debt refinance is significant because these markets compete largely on price. A loan that has been outstanding for some time is less likely to default than one that is newly originated, as it has proven credit, reducing the need for high-quality underwriting. This also removes barriers to entry for small firms with disruptive business models (like SoFi). The space is highly competitive, with the interest rate being offered to the debtholder being the primary form of competition. As a result of the lack of a clear durable competitive advantage present in SoFi’s existing business, we give the company a no-moat rating.

None

Economic Moat

SoFi Technologies

SoFi Technologies, Inc. operates as a financial technology company. The Company offers financial services platform for borrowing, saving, spending, and investing. SoFi Technologies serves customers in the United States.

Earnings data Q4 2023

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SoFi Technologies, Inc. is a financial service platform, which engages in the provision of student loan refinancing options to the private student loan market. It offers home loans, personal loans, and credit cards. It operates through the following segments: Lending, Technology Platform, and Financial Services. The Lending segment includes personal loan, student loan, home loan products, and related servicing activities. The Technology Platform segment focuses on technology products and solutions revenue. The Financial Services segment includes the SoFi Money product, SoFi Invest product, SoFi Credit Card product, SoFi Relay personal finance management product, and other financial services such as lead generation and content for other financial services institutions. The company was founded in 2011 and is headquartered in San Francisco, CA.

SAN FRANCISCO & PALM BEACH GARDENS, Fla.--(BUSINESS WIRE)--Today, TMRW Sports formally announced a multi-year, wide-ranging commercial partnership with SoFi Technologies, Inc. (SoFi), the digital personal finance company. SoFi will become presenting sponsor of TGL, the new tech-forward, primetime, team golf league developed by Tiger Woods and Rory McIlroy's TMRW Sports. Additionally, the league's purpose-built arena in Palm Beach on the campus of Palm Beach State College will be named the SoFi.

SoFi & TMRW Sports Announce Long-Term Partnership Including Presenting Sponsor of TGL & Venue Naming Rights Partner

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News for SoFi Technologies Stock (SOFI)