US neobank SoFi has members, and not customers

SoFi is a unique financial services institution in the US, that mostly finances student loans, but is a successful model for neobanks:

US neobank SoFi, or Social Finance, was originally a student-loan platform, but now it aims to be a source for everything in personal finance. Headed by Anthony Noto, who was instrumental in Twitter becoming a global platform for information, and had worked with Goldman Sachs as its Managing Director, SoFi today offers personal and home loans, investment services, smallbusiness financing, a credit card and several other financial products. It considers its customers as members and encourages them to avail more than one financial offering, a strategy aimed at cutting down customer acquisition costs. In the process, it is creating for the customers a high-level seamless experience.

In May 2021, SoFi became a publicly traded company, called SoFi Technologies, following a merger with Social Capital Hedospophia Holdings Corp. It is now a leading, publicly traded consumer-focused financial technology platform on Nasdaq. It raised $2.4 billion in cash proceeds from the transaction, which it intends to use for growth, market expansion and development of new product offerings, as well as for geographic expansion and building the first digital one-stop-shop for members to ‘borrow, save, spend, invest and protect’ their money. At present, its offerings mainly constitute student loan refinancing, mortgages, personal loans, credit card, investing and banking through both a mobile app and desktop interfaces. Its target customers are ‘high earners not well-served’, or people who have taken out financial offerings from multiple institutions.

NEWS FEED FOR CUSTOMERS

Noto, who has vast understanding of technology and finance, believes that no one in the past had really built a financial services experience on one digital platform and used data to drive great value. Something unique that Noto has designed for SoFi is a feed of financial information like the news feeds on Twitter and Facebook, and which include daily podcasts and newsletter. It also includes third-party content, using data to determine what is most relevant to a particular user. Its customers can enjoy learning freely from a certified financial planner or avail free estate planning services. The neobank plans to have a customer base of 3 million by the end of 2021.

While SoFi at the moment does not have a banking charter in the US, it is regulated by 50 states for lending, which means it has to comply with 50 different sets of compliance rules. It has in March this year, acquired California-based community bank Golden Pacific Bancorp for $22.3 million and through it hopes to obtain the national bank charter. By being a bank, SoFi will be able to offer more loans and no longer have to limit its number of mortgages. The license will also allow it to determine its own interest rates instead of relying on a sweep partner.

SoFi has partnership with 6 banks, including Metabank, Hills Bank & Trust, EagleBank and Wells Fargo.

The neobank intends to become profitable on a GAAP basis by 2023, projecting $200 million in GAAP net income in that year. While its revenue comes from lending, it expects the business to become more balanced by 2025 with greater revenue from financial services and the company’s technology platform.

BUYING GALILEO

SoFi now owns the Galileo platform, which it acquired in April 2020 for $1.2 billion. Salt Lake City-based Galileo is the API standard for card issuing and is the platform that powers world’s leading fintechs, financial services providers and investment firms. The platform uses APIs to enable enterprises build financial services offerings. The APIs enable account setup, funding, direct deposits, money transfers, bill payment and other capabilities. Galileo now provides SoFi’s main technology infrastructure.

One unique thing about SoFi is that it does not use credit scores, or FICO scores, from any of the US’s credit bureaus to determine the creditworthiness of its customers. It has its own AI-based underwriting model that examines free cash flow, professional history and education in addition to a history of responsible bill payment to evaluate its borrowers and to increase customer engagement. It does not take deposits and finances its loans through venture capital, bond issues via securitization and debt financing. It has its own hedge fund to purchase the loans it issues.

STUDENT LOAN REFINANCING

SoFi today is the largest provider of student loan refinancing, with over $5 billion dollars in loans funded. Unlike traditional lenders, its proprietary underwriting approach takes into account merit and employment history to offer unique products that its ‘members’ will not find elsewhere.

SoFi’s key milestones are:

$5B+ total loan originations

Secured $1B in Series E funding in September 2015, the largest single financing round in the fintech space to date

First rated P2P securitization

$2 billion + in securitized products issued GAAP profitable