Is SoFi The Amazon Of Financial Services?

These days, it seems like every business wants to “the Amazon of [insert industry name].” That applies to financial services just as much as it does to selling cars and completing taxes.

More often than not, people mean that a company provides a lot of services and dominates an industry when they call it “the Amazon of ______.” While you should usually hesitate when you hear this phrase, SoFi actually comes pretty close to meeting the unofficial definition. It manages to provide diverse financial services to a wide range of people. It also has a dominant position in the industry, at least when it comes to online finances and trading.

Is SoFi the Amazon of financial services? Perhaps that’s a bit of a stretch, but the company is trying very hard to reach that goal.

How SoFi Got Started

Put simply, SoFi started strong. Four students at the esteemed Stanford Graduate School of Business (James Finnigan, Dan Macklin, Mike Cagney, and Ian Brady) noticed in 2011 that a lot of students around the country faced challenges funding their college educations. As tuition rates grew (and keep growing), more students need to borrow money. The SoFi founders thought that they could find better solutions.

Interestingly, SoFi received its initial funding from Stanford alumni. Forty of the school’s alumni decided to invest $2 million in pilot programs started by 100 students. While that only comes to $20,000 per student, the SoFi crew put their money together to access $80,000 in seed money. It wasn’t much, but it was enough to get started.

The pilot project grew quickly. Within a year, SoFi attracted $77.2 million in funding from Baseline Ventures, DCM, Renren, and other investors.

The following year, SoFi took on $500 million in debt that it could use to help students pay their tuition. Part of the money included $60 million in credit from Morgan Stanley and $41 million from Bancorp.

By 2013, SoFi had approved 100 schools. Students attending those schools had the option to apply for loans from SoFi. Keep in mind that at this point in the company’s history, it hadn’t generated any revenues. The founders simply had a great idea and knew how to communicate the potential to investors.

Also, SoFi was still focused on student loans. That would change very soon.

SoFi Targets HENRYs (High Earners Not Rich Yet)

In 2014, SoFi made a slight pivot to attract more investors. In pursuit of Series C round funding (SoFi eventually received $80 million), the financial company stepped beyond student loans to focus on the needs of HENRYs.

What’s a HENRY? It’s a term that SoFi came up with that means “High Earners Not Rich Yet.”

In a shrewd move, SoFi’s founders realized that they had a solid list of HENRYs: graduates who had borrowed money to pay tuition at upper-tier schools.

SoFi Expanded From Student Loans

Many of these recent graduates were starting their first or second jobs. They were starting to make money, and they wanted to do things like purchase homes, get married, and start families. Of course, all of these things cost money.

It’s important to remember that recent graduates with high salaries don’t always have much money. For one thing, they’re repaying the student loans that they needed to earn their degrees! Someone making $150,000 right out of college might sound like a well-off person. That isn’t always the case. Assuming that they keep moving in the right direction, though, they will get promoted, earn higher salaries, and repay their debts.

HENRYs provided a source of revenue that encouraged SoFi to dip its toes into other forms of lending. It started to grow into areas like personal loans, home loans, auto loans, and credit cards.

SoFi Financial Products

The diversity and number of financial products offered by SoFi have grown rapidly since the early 2010s.

As of 2021, the online financial company has products including:

• Mortgages
• Mortgage refinancing
• Home equity loans
• Small business financing
• Insurance policies for homeowners, renters, life, and automotive
• Home improvement loans
• Credit card consolidation loans
• SoFi Credit Card
• SoFi Invest, which gives members access to retirement planning, IPO investing, active investing, automatic investing, and cryptos

Of course, the company still offers a variety of student loan products for undergraduate, graduate, and medical school.

SoFi CEO Scandal

The rapid ascent to success always seems to involve at least one scandal. For SoFi CEO Mike Cagney, the blunder came in the form of sexual harassment allegations. The accusations never made it to court, so it’s difficult to confirm what happened. Reporters, however, allege that Mike Cagney crossed an ethical line when he sent sexually explicit texts to a female employee. The lawsuit filed in response claims that SoFi creates a hostile work environment and managers do not take sexual harassment allegations seriously.

(The name of the woman who filed the lawsuit has been without to help protect the victim’s privacy.)

SoFi didn’t seem to be impacted by the scandal very much. It settled out of court for a mere $75,000. Other alleged victims came forward, but it doesn’t seem that they filed criminal or civil suits against the company – it’s always possible that SoFi settled with them before they had a chance to file suits.

The sexual harassment scandal might have, albeit unwittingly, actually helped SoFi. A new CEO came on board and the company has grown from strength to strength, now valued at around $20 billion.

SoFi Wealth Competes with Roboadvisors

SoFi Wealth Management provides a range of tools members can use to manage investments and grow wealth over time. SoFi uses a combination of human managers and automated algorithms to give investors more opportunities for growth – and wealth protection during downturns – than roboadvisors alone can offer.

At the same time, SoFi’s roboadvisor approach helps it to charge significantly lower fees than brokerages that rely on humans exclusively.

SoFi charges a 0% management fee for accounts containing just $1. Wealthfront, which is a pure roboadvisor, requires a $500 minimum account balance and charges 0.25%.

Keeping fees low and providing solid returns has made it possible for SoFi to remain competitive with roboadvisors and brokerages that only use human advisors.

SoFi Customers Are Loyal

SoFi reportedly spent a lot of money acquiring customers. That’s a somewhat risky plan since a company could lose millions of dollars attracting customers that eventually leave for other service providers.

The scheme seems to have worked well for SoFi, though. Interestingly, retaining the customers doesn’t cost much once SoFi attracts them.

SoFi recognizes the power of the consumers, so it’s willing to work with customers to retain them. Someone experiencing a financial crisis today might cost SoFi a few dollars in waived fees. In return, that person will think of SoFi when they recover and want to borrow money to get a mortgage to buy a new home. In comparison, waiving small fees is a no-brainer compared to how much money SoFi can make by nurturing long-term relationships.

Its product line matches the evolution of a borrowers financial journey through life too. Initially SoFi can offer student loans, but upon graduation perhaps a student wants to attend medical school. There again SoFi can help. Or in the next phase of life the borrower may want a mortgage and ultimately wealth management solutions. Each time SoFi can offer a product to match their needs. As a result it’s worth it to SoFi to spend heavily acquiring customers at the outset when they are in need of that first student loan.

From SPAC to IPO: The SoFi Story

SoFi launched its IPO in June 2021. Before then, it pooled investments as a special-purpose acquisition company (SPAC). Since the SPAC had SEC approval, individuals could buy and sell it on the stock market.

Oddly enough, SOFI performed slightly better as a SPAC, reaching $25 per share rather quickly. The price dipped to about $15 right before the IPO, though, which could mean that investors were waiting to see what kind of offer they would get. 

Since the IPO, SoFi’s share price has nearly rebounded. It’s been a very short time, though. There are plenty of opportunities for the company to prove its worth and grow its share value.

Is SoFi Stock A Good Investment?

While it’s impossible to say how a stock’s performance will evolve, SoFi currently looks like a good investment opportunity, especially if its product trajectory continues in the same vein as it has done historically.

Assuming that quarterly reports from SoFi look promising, early investors could see their share values grow tremendously. After all, SoFi brings a much smoother user experience to the borrowing process than most traditional banks, and that keeps customers sticking around. Why jump through unnecessary hoops when you can borrow from SoFi simply.

Plus, the relatively low price-per-share means you don’t risk much by purchasing SoFi. It’s probably worth the minor risk. You don’t have much to lose.

Is SoFi The Amazon of Financial Services?

Is SoFi the Amazon of financial services? It certainly wants to be. It’s important to remember, though, that Amazon didn’t reach its dominance by focusing on one area of the. It generates revenues through cloud technology and credit cards as well as retail sales.

If SoFi really wants a business model as successful as Amazon, it may need to grow its financial services while diversifying into unrelated fields.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.