SoFi: what they do and how they make money

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What does SoFi do?

SoFi’s divides its business into four broad categories:

  • Ready
  • Technology
  • Financial services
  • Assurance.

We’ll explore each of them below.

SoFi Technologies Inc. History and Business Model

SoFi was started in 2011 by four Stanford University students: Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady. The idea was to create a social lending platform that brought together borrowing students, graduates and institutional investors. Borrowers got lower rates on their student loans than were available at the time, and investors received a financial return.

Initially, SoFi raised $2 million from Stanford alumni for Stanford students. It then raised $77 million in Series B funding and expanded to over 50 universities, lending over $100 million. The social nature of SoFi has encouraged both mentorships and peer affiliations.

In October 2013, SoFi announced that it had raised $500 million that was available to refinance student loans at 100 eligible schools. Some of that money included lines of credit from Morgan Stanley and Bancorp. In 2014, additional rounds of funding allowed SoFi to expand into mortgages in more than 20 states and into personal loans.

In 2015, SoFi raised $1 billion from SoftBank and announced it had funded $4 billion in loans. In 2016, Moody’s rated Sofi triple A when the company announced it had 175,000 borrowers it calls “members” with a total lending volume of $12 billion.

In 2017 and 2018, SoFi struggled with then-CEO Mike Cagney resigning over sexual harassment allegations and failing to meet compliance checks. In 2018, SoFi settled a Federal Trade Commission (FTC) claim that the company was misrepresenting the amount of money that could be saved by refinancing student loans.

In 2019, SoFi entered into a 20-year agreement with two NFL teams, the Los Angeles Rams and Los Angeles Chargers, to name their stadium SoFi Stadium. The following year, SoFi acquired payment company Galileo and investment app 8 Securities.

SoFi ticker and share price

In 2021, SoFi went public through a special purpose acquisition company, or SPAC, at an $8.65 billion valuation. It trades on the NASDAQ stock exchange under the ticker symbol SOFI. As of March 25, 2022, SoFi was trading at $9.01 per share.

4 Ways SoFi Makes Money

1. Ready

SoFi generates loan revenue from:

  • Net interest income: which SoFi describes as “the difference between interest income earned and interest expense to fund loans”.
  • Securitizations: in which loans are grouped together and their aggregated cash flows pay investors’ collections, called tranches, in a specific order.
  • Whole loan sales: a group or pool of loans is sold to investors such as pension and insurance funds who are willing to pay an upfront premium for future cash flows; SoFi’s loan packages are considered highly secure because its borrowers almost never default, allowing SoFi to charge higher than normal premiums.

A real benefit of SoFi’s lending model is that it doesn’t charge origination fees, insufficient funds fees, or late fees. SoFi’s repayment terms on its private student loans are five to 15 years, and the terms on its refinance loans are five to 20 years. SoFi provides a six-month grace period on all of its private and refinance loans.

the current interest rate on federal student loans is about 4% for undergraduate students and 5.5% for graduate or professional students. According to Bankrateprivate student loan rates for undergraduate and graduate students range from 2.99% to 12.99%.

2. Technology

SoFi’s technology platforms include:

  • Apex Glade: provides investment custody and clearing services.
  • Galileo: provides digital banking, card issuance, payment processing and B2B payment services.

3. Financial services

SoFi’s financial services offerings include:

  • SoFi Silver: cash management accounts that are similar to checking and savings accounts and have no minimum balance requirements or monthly fees; SoFi earns interest on deposits and, in partnership with MasterCard, on payment network fees for SoFi-branded debit cards.
  • SoFi Invest: SoFi offers a minimum account of $0 and trading commissions of $0 except on cryptocurrency transactions; SoFi derives revenue from stock lending to other financial institutions whose clients wish to short the market or hedge their short positions, and SoFi also receives rebates from market makers for order flow services.
  • Automated investing: SoFi’s robo-advisor product automatically builds and rebalances portfolios; SoFi does not charge any management fees.
  • ETF management fees: SoFi charges an annual management fee on its suite of ETFs which includes SoFi Select 500 (SFY), SoFi Next 500 (SFYX), SoFi Social 50 (SFYF), SoFi Gig Economy (GIGE) and SoFi Weekly Income (TGIF) .

4. Insurance

  • Term life insurance: thanks to their partnership with LadderSofi earns a marketing commission when its members apply for insurance.
  • home insurance: thanks to their partnership with Lemonade.
  • Car insurance: thanks to their partnership with Root Insurance.

SoFi valuation

SOFI has a market cap, or net worth, of $7.20 billion. Its enterprise value is $10.62 billion and it currently has 799.63 million shares outstanding.

Over the past 12 months, SoFi recorded revenues of $984.87 million and losses of $483.94 million.

Conclusion

Today, SoFi has over 1.5 million members in the United States and Canada. It employs more than 1,500 people in its 10 offices in North America. Due to the student loan repayment moratorium, SoFi’s stock has recently been beaten, but past performance is not an indicator of future results.