In the latest example of a fintech organization receiving a bank charter, SoFi Technologies announced that the Office of the Comptroller of the Currency (OCC) and the Federal Reserve have approved its applications to become a bank holding company upon completion of its acquisition of Golden Pacific Bancorp in February. SoFi plans to maintain GPB’s community bank business and footprint, which includes three physical branches. The company said this major step will help it offer more attractive deposit products, better interest rates on lending services, and add to its portfolio of financial offerings.
SoFi Technologies was initially created as a student loan refinancing business in 2011. Over the past ten years, it has become one of the top fintech players, offering a comprehensive array of digital financial services, including the ability to spend, save, invest and borrow money on its mobile banking platform. Unlike the majority of fintech players, the company has reported positive adjusted earnings (EBITDA) for the past five consecutive quarters.
Despite losing money on student loan financing, SoFi’s user base increased 96% from Q3 2020 to Q3 2021, hitting 2.9 million, adding 377,000 members in Q3 2021 alone, which is the second highest quarterly increase in the history of the company. Total products used by members increased 108% to 4.3 million in Q3 2021, representing the fifth consecutive quarter of year-over-year triple-digit growth.
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Diversified Platforms for Growth
SoFi has three primary business segments (lending, financial services, and digital banking) that provide diversified growth potential. While the lending business is by far the most profitable, SoFi’s financial services segment is the most consumer-facing of the three.
In the lending part of SoFi’s business, revenues reached new highs, driven primarily by increases in volume and revenue in SoFi’s personal loans business. The lending business at SoFi currently includes student, personal, home and auto loans.
Beyond aggressive pricing and a strong marketing campaign, SoFi benefits from industry-high personal loan NPS scores driven by very fast approval and funding rates enabled by automation enhancements.
Top products driving growth in SoFi’s financial services business include SoFi Money, Sofi Credit card, and SoFi Invest, with other services including money tracking, credit score monitoring, and insurance with SoFi Protect. One of the many unique features of the SoFi app is that they have gamified their platform. A member can earn points for engagement with the app, from daily login streaks to checking a credit score to reading a financial article. The app has a 4.8 star rating based on 133.5k reviews.
Expansion Beyond Student Lending:
SoFi’s target customers are what it calls ‘high earners not well-served,’ as well as people who have taken out financial offerings from multiple banks.
The significant growth in brand recognition, user growth and product cross-selling was supported by a series of marketing campaigns introduced in the third quarter of 2021. The marketing included an integrated, multi-channel campaign that included nationally televised NFL games and events at SoFi Stadium. According to SoFi, “Product growth exceeded our member growth in absolute terms in the third quarter of 2021, indicating high product satisfaction and greater willingness to adopt additional products, further reinforcing the value of our strategy.”
SoFi’s technology platform, called Galileo, was acquired in 2020 and may be the most interesting platform for future growth within SoFi. Galileo, which had been the technology foundation for SoFi before the acquisition, provides application programming interfaces (APIs) and software services for traditional and non-traditional fintech firms (neobanks) to build digital banking products.
Client accounts enabled by Galileo rose by 80% from Q3 2020 to Q3 2021, to nearly 89 million from 49 million. SoFi’s management has indicated plans to invest heavily in R&D and technology to enable future expansion of this Banking-as-a-Service (BaaS) platform domestically and internationally over the next few years. According to an interview with Galileo’s CEO Clay Wilkes in 2020, 95% of digital banking in North America were powered by Galileo and 70 of the top 100 fintech companies globally were clients of the firm.
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What Comes Next for SoFi?
With only 2.9 million members at the end of Q3 2021, SoFi still is a relatively minor player in a marketplace of several fintech giants. Organizations including Chime (13 million customers), Current (4 million customers), Square (24 million monthly customers), and PayPal (300 million customers) have a scale that SoFi covets. And, as Square and PayPal expand their financial services portfolios, the competitive marketplace only gets more challenging.
Digital Experiences People Crave:
As consumers continue to test alternative financial providers, will they ever return if the new experience exceeds what they have currently?
That said, the acquisition of a banking charter will certainly bolster the brand recognition and trust associated with SoFi, helping the neobank achieve continued growth among its peers. The key to success will be whether consumers will use SoFi as a primary banking provider, increase product usage and increase ongoing engagement that is required for loyalty and revenue growth.
The question may not be whether SoFi is bigger than some of the largest fintech players, but whether they are better than the majority of legacy banks and credit unions in terms of delivering exceptional digital experiences?
With the acquisition of a banking charter, customers of traditional financial institutions may be willing to ‘kick the tires’ of an innovative financial institution that has higher savings rates, lower borrowing rates, an exceptional mobile banking experience and the best digital technology.
If these customers like what SoFi has to offer, will they return?