How Does SoFi Make Money? Business Model of SoFi


How Does SoFi Make Money

SoFi is a fintech company and online bank. The company started by offering student loan refinancing and has since expanded into other financial products.

SoFi primarily makes money via its student loan refinancing products. SoFi also makes money on things like personal loans, private student loans, home loans, brokerage accounts, a robo-advisor, crypto trading, bank accounts, and life insurance.

Founded in 2011 by Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady, the company is based in San Francisco. They started SoFi, short for Social Finance, to provide more options around student loans.

While the company originally started by refinancing student loans with alumni-funded peer-to-peer lending, the company has since branched out into a number of other financial products.

SoFi (SOFI) is a public company that trades on the NASDAQ. Rather than launching an IPO, the company went public in 2021 via an acquisition by a special purpose acquisition company (SPAC).[1]

What is SoFi & How Does It Work?

SoFi is a fintech company and online bank that provides financial products, including student loans, auto loans, mortgages, personal loans, credit cards, investments, and online banking, among other products.

SoFi was originally launched as a student loan refinancing company. Their goal was to provide graduates with lower loan rates and a community where they would get career counseling and networking opportunities that would help them in their careers.

Now the company has over 4 million members who take advantage of SoFi’s broad range of financial products and services. SoFi considers itself a modern take on money and builds its products around its members with the goal of giving them more control over their money.

Despite branching out into other product offerings, student loan refinancing remains the main part of SoFi’s business. They offer fixed, and variable rate refinance loans with no application or origination fees. They also don’t charge pre-payment fees like some student loan lenders. The company has helped over 375,000 members refinance their student loans. That represents over $30 billion in student loans refinanced.

SoFi also offers low-rate and no-fee student loans. They give rate discounts for those who set up autopay and the ability to choose the monthly loan payment that fits borrowers’ budgets. Their student loans also come in fixed or variable rates.

The company has a number of other lending products, including personal loans. These are also no fee loans. Applicants can get same day funding. They offer loans of $5,000 to $100,000 over loan terms of two to seven years. They also offer unemployment protection on these loans in case members lose their jobs.

It takes just 60 seconds to pre-qualify, then applicants can complete the loan application with the help of a SoFi consultant. The company also offers auto loan refinancing with similar terms.

Finally, SoFi also provides mortgage options. They allow first-time buyers to put as little as 3% down. Other buyers are required to put down 5%. They also offer a real estate commission rebate of up to $9,500 when you use a HomeStory agent.

They allow home buyers to lock in their rates for up to 90 days while they look for a home. They offer fixed rate term lengths of 10, 15, 20, and 30 years.

SoFi has three different investment products: a brokerage account, a robo-advisor, and cryptocurrency investing. With their active investing brokerage account, SoFi offers retirement accounts, exchange-traded funds (ETF) investing, the ability to buy fractional shares, and the ability to invest in IPOs before they trade on an exchange.

With their brokerage account, they give out a bonus of up to $1,000 when investors put at least $10 in their account in the first 30 days after opening their account. Their brokerage account operated on a fee basis with no commissions. They also provide investor news updates in their app to help brokerage account investors succeed.

SoFi’s robo-advisor helps people who aren’t confident investors save for retirement or a down payment with automatic portfolio rebalancing and diversification. Their crypto investing product allows their members to trade crypto. They give new members up to $100 in Bitcoin. Over 30 coins, including Ethereum, Dogecoin, and Cardano, can be traded on their platform.

The company also offers its customers a credit card where they can earn 3% cashback towards their financial goals. The card has no annual fee, and the funds are automatically deposited in a SoFi bank account.

SoFi’s move to becoming an official bank was previously greeted with much fanfare in early 2022. The company offers online banking options with an interest of up to 2% per year and no account fees. They offer their members the ability to get paid up to two days early. They also offer up to 15% cashback at local businesses when their members use a SoFi debit card.

Their bank account has a partnership with Allpoint, and their members can simply visit any of Allpoint’s 55,000 ATMs. They offer both checking and savings accounts.

Finally, SoFi offers a number of different forms of rental insurance, including auto insurance, life insurance, homeowner insurance, and renter insurance. They also offer estate planning through a partnership with Trust & Will, a leading online estate planning platform. They give members 25% off their trust, will, or guardianship plan.

SoFi offers a number of special services for their members via a service called SoFi Relay. These services make doing business with the company more appealing and include things like free credit score monitoring, spending breakdowns, and financial insights.

SoFi also offers a number of membership benefits. These include things like free financial planning, career coaching, member rate discounts, and an online community. They also offer member experiences that bring members together for a social event. SoFi pays for food and drinks for all attendees. Some examples of experiences include a disco yoga session, dinner, or a happy hour.

They also offer local networking events and expedited access to SoFi Stadium in LA, as well as access to the SoFi Member Lounge at the stadium.

Finally, SoFi offers a SoFi Rewards program. Every time a member does an activity SoFi wants to reward like logging into their app or making a payment on a loan, they earn a point. Those points can later be redeemed for things like cash in a checking or saving account, towards SoFi loans, for fractional shares of stock, towards the member’s credit card balance, or even towards cryptocurrency.

SoFi is well loved by its members, but the company is no stranger to controversy. One of the company’s founders, Mike Cagney, stepped down as CEO when SoFi was sued for sexual misconduct and a toxic work environment by a former employee in 2017.[2]

The company has also been fined or cited by the Securities and Exchange Commission and the Federal Trade Commission on multiple occasions. In 2018, the company was accused by the FTC of making false claims about its student loan refinancing savings.[3] In 2021, the company was fined $300,000 over moving their clients money into proprietary exchange-traded funds (ETFs) without properly disclosing their conflicts of interest.[4]

 

Business Model of SoFi

Like many banks and lending companies, SoFi’s revenue comes from underwriting loans and extending credit to their customers. However, SoFi has a slightly different business model than legacy financial services firms.

The company makes money on its lending products in several ways. They make money by holding loans and getting the interest, by selling loans to investors while maintaining some ownership, through securitizing loans, and through whole loans sales.

They sell securitized loans to institutional investors like pension funds, asset managers, and insurance funds. This allows them to access capital at relatively low rates. They then pass those savings onto members via low rates.

When it comes to Sofi’s investment products, the company makes money in a few ways such as interest from uninvested cash in member’s accounts, by lending out shares to members who are short selling, by sending customer orders to market makers, and by charging a markup on their cryptocurrency transactions of 1.25%

The company also has its own suite of ETFs that charge annual management fees. SoFi also makes money on their checking and savings account. They earn interest on the money in the account and from merchants whenever a customer uses their debit card.

They also earn commissions when their members purchase products from their partners, like their insurance products, which are all offered by third-party underwriters.

SoFi is not the only online bank. Companies like Discover and Ally Bank were pioneers in the online banking space. However, SoFi’s trajectory to an online bank is unique. Having originally started as a student loan refinancing company, SoFi might have remained simply a student loan lender.

However, the key differentiator behind SoFi’s student loans was their member community. They hosted experiences, had online community, and provided members with career advice. That made many members loyal and meant they looked to SoFi for financial advice.

By expanding into other financial products and services, SoFi was able to leverage their membership to cross-sell them for other financial services and products. The company’s membership and rewards program are key differentiators from other types of companies.

Their focus on student loan refinancing also means that SoFi targets customers during a major life transition. In banking, there are very few life events that correlate with a willingness to switch banks. SoFi has expertly targeted graduates in their early careers – a time when they are more likely to consider making a change.

This also means that SoFi is able to attract members who have college degrees. This likely makes their average customer income higher than other banks. That gives them more opportunities to cross-sell financial products over the course of their lives. SoFi’s Rewards are designed to encourage and reward cross-selling.

SoFi is an updated take on an online bank. It also has a number of competitors for all of its financial products individually and then also for its online banking ecosystem as a whole. For loans, companies like Klavi, CommonBond, Funding Circle, Avant, Lending Tree, and Lending Club are competitors.

Online banks like Alliant, Discover, Varo, One, and Ally are also competitors.

SoFi is a profitable company, but it has considerable expenses and low margins on their transfers. That means that to maximize their revenue potential, they have to increase the amount of money that they transfer.

SoFi has considerable staffing, platform, capital, and development expenses. In 2021, the company spent $276 million on technology and product development, $426 million on sales and marketing, and $498 million on sales and operations.[5] Their total expenses came to $1.4 billion on revenue of $984.8 million.[6]

While SoFi is bringing in a significant amount of revenue, the company’s expenses have consistently outpaced their revenue.

 

How Does SoFi Make Money?

SoFi makes money in many different ways. These include student loan refinancing products, personal loans, private student loans, home loans, auto loans, brokerage accounts, a robo-advisor, crypto trading, bank accounts, life insurance, and fees from partners.

As the company divides their products into lending, investing, banking, insurance, and partnerships, we’ll break down the company’s products into those four categories as well.

While SoFi is a public company, it doesn’t list the revenue it receives from all its revenue streams. However, the company did state that they made $337 million from loans, $497.6 from loan origination and sales, and $191.8 million from technology platform fees.[7]

Loans

SoFi makes the majority of their revenue from loans. The company started by offering student loan refinancing products but has since expanded into personal loans, private student loans, home loans, and auto loans.

  • Student loan refinance: SoFi offers both fixed and variable rate student loan refinancing options. They don’t charge fees on their loans and have refinanced over $30 billion in student loans.
  • Private student loans: SoFi also originates both fixed and variable rate student loans. They allow borrowers flexibility to choose their monthly loan payment amounts.
  • Personal loans: SoFi offers loans of between $5,000 and $100,000 over two to seven year terms.
  • Home Loans: SoFi offers mortgages with the option for first-time homebuyers to put just 3% down. They offer loans for terms of 10, 15, 20, and 30 years.
  • Auto loan refinance: The company offers auto loan refinance options to help borrowers pay less on interest.

SoFi primarily makes money on these loans by selling them to pension funds, insurance funds, and asset managers. They pay a premium upfront for the ability to make money off the loan interest.

For example, they might sell a five-year loan with a 5% annual percentage rate to investors for 105%. The loan is worth 125% but they sell the loan at a discount because of the risks. SoFi then has funds available to make other loans.

In 2021, the company made $337 million from loans, and $497.6 million from loan origination and sales.[8]

 

Investing

Another source of income for SoFi is their investing products. They offer both a brokerage account and a robo-advisor. They offer the ability to set up retirement accounts, invest in ETFs, buy fractional shares, and invest in IPOs before they trade on the open market.

With their robo-advisor, customers pay a small fee to have their money managed by their proprietary algorithm that automatically rebalances and diversifies members’ accounts.

Finally, SoFi, makes money via selling cryptocurrency. They allow their members to purchase 30 different types of cryptocurrencies right in their banking app. These include Bitcoin, Ethereum, and Dogecoin.

Sofi makes money from its investing products via interest in cash held in accounts, lending out shares to short sellers, via third-party market makers, and by charging 1.25% on all crypto orders. The company also charges an annual management fee on their ETFs.

 

Banking

SoFi offers savings and checking accounts. Customers can earn up to 2% in interest on deposits in their account with no account fee. SoFi also allows them to get access to automated deposits up to two days early and provides cash back when members shop at businesses near them.

SoFi makes interest on money held in their online banking account and on merchant fees when members use their debit cards.

 

Insurance and Other Partnerships

SoFi also offers insurance products, but the company doesn’t underwrite them itself. SoFi has a number of partnerships with external providers like insurance and estate planning companies. When their members purchase or apply for these services, they get a marketing or partnership fee in return.

 

SoFi Funding, Valuation & Revenue

SoFi is currently a public company that trades on the NASDAQ under the SOFI symbol. The company went public in 2021 through a SPAC acquisition. As of September 2022, SoFi’s stock price was around $5.30. That works out to a total valuation of $4.9 billion.

Prior to going public, the company went through 19 funding rounds and raised $3 billion. Investors in the platform include HOF Capital and ASAS Capital.[9]

SoFi has greatly increased its revenue in recent years. In 2019, the company brought in $442.6 million in net revenue.[10] SoFi was able to increase that to $565.5 million in 2020 and then again to $984.8 million in 2021.[11] However, despite that impressive revenue growth, the company has continued to experience losses. In 2021, the company experienced a loss of $483.9 million.[12]

YearRevenueNet Loss
2019$442.6 million$239.6 million
2020$565.5 million$224 million
2021$984.8 million$483.9 million

 

Is SoFi Profitable?

SoFi is not profitable. The company has consistently lost money, including seeing a $483.9 million loss in 2021. However, SoFi is in the process of growing their financial offerings and market share. That has required considerable investment, including in marketing.[13]

The good news is that SoFi has also grown their revenue considerably. They’ve more than doubled their revenue from 2019, when they brought in just $442.6 million, to 2021, when they brought in $984.8 million.

If the company is able to continue to grow their revenue, there is a good chance that they might be profitable one day.

 

Conclusion

We’ve covered a lot of ground here, and it’s time to wrap things up. 

SoFi is an online financial services company that provides banking, loans, and investment opportunities to its members. Its business model is based on providing members with a comprehensive suite of products that can help them manage their finances in a way that works for them.

The company has grown rapidly over the past few years, not only because they’re providing an innovative service but also because they’re working hard to keep costs low and provide value for customers.

As more people become aware of what SoFi offers, we expect its membership numbers will continue to rise as well. We’ll be keeping an eye on what SoFi does next as it continues on its mission toward disrupting the industry!

We hope that this article has been helpful for you. We know that it can be confusing to figure out how a company like SoFi makes money, so we wanted to take the time to break it down for you.

Thanks for reading!

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Sources

  1. The Motley Fool
  2. New York Times
  3. FTC
  4. City Wire USA
  5. SoFi
  6. SoFi
  7. SoFi
  8. SoFi
  9. Crunchbase
  10. SoFi
  11. SoFi
  12. SoFi
  13. SoFi