While the term “non-bank lender” may sound intimidating, it doesn’t have to be. SoFi is a good option for those looking for a new loan, but don’t want to deal with the hassle of traditional bank lending.
SoFi (short for “Social Finance”) is an online lender offering loans, lines of credit, mortgages, credit tracking, and traditional stock/ETF & cryptocurrency trading. It was founded in 2011 by Andrew Rosenfield and Mike Cagney to cut out the banks from the mortgage process, offer competitive rates on loans, and spearhead the new wave of FaaS (Finance-as-a-Service).
It has been gaining popularity since its inception, particularly among millennials looking to buy their first home or refinance their mortgage at lower interest rates than they would find at traditional brick-and-mortar banks.
SoFi has been making a lot of headlines recently, especially since it started courting high-net-worth individuals. SoFi was the first non-bank approved by the Federal Reserve for an expanded lending program for those with higher income levels and credit scores. As such, today’s investors have access to loans from $100K up to $25 million. But is it a company worth investing in?
Here’s a full breakdown of SoFi so you can decide whether it’s a suitable investment for you.
What Is SoFi?
SoFi, a financial technology firm known as Social Finance, has ambitious plans to become the future of banking.
Founded in 2011, this fintech business initially targeted debt-ridden student millennials who were still trying to recover from the Great Recession years after it had ended. Since the early days, when SoFi primarily targeted student loan repayment, it has drastically expanded its offerings into several industries. Some of these include auto loans, mortgages, credit cards, crypto, and investing.
In this FaaS model, the customer can utilize SoFi as a one-stop shop for loans, banking, and investing with a modern twist: live comparisons with other users’ holdings, solvency, and longitudinal financial performance.
Adding to its clout, SoFi has officially become a publicly traded company, going IPO in June 2021. It’s listed on the New York Stock Exchange (NYSE) under SOFI.
With a total of $14 billion in revenue, this company has made its mark on Wall Street. It effectively disrupts traditional banking by offering competitive interest rates and making it more convenient for customers to get loans quickly.
Its goal was initially to become the “Zappos of finance,” but it has since shifted into becoming something more akin to the “Amazon of finance.”
What Makes SoFi Different From Other Lenders?
SoFi uses technology that allows borrowers to manage all aspects of their loan online rather than go through multiple steps with numerous people involved, so everyone can be sure the process runs smoothly. The borrower will never have direct contact with a bank or lender, which means SoFi does not have to work with big banks.
In addition, SoFi has a “social lending network” that allows borrowers to find friends and family members who can help them get a loan or give them a better rate on their existing loans even if they don’t qualify for one from SoFi. This provides borrowers with more flexibility in getting loans when traditional lenders may turn them down due to the lack of credit history or low FICO score.
Borrowers also need less documentation, as no collateral requirements come into play like other types of lending. This streamlined structure makes it easier for those who might be cash-strapped, but still want access to capital quickly.
What Is a Non-Bank Lender?
While the term “non-bank lender” may sound intimidating, it’s not necessarily scary or confusing. At its core, a non-bank lender is simply not affiliated with a traditional bank.
Typically, a non-bank lender is someone like a mortgage manager who borrows money at wholesale rates from a bank and lends it out with a margin premium. Thus, despite not being “backed by a bank”, this new type of lender is still backed by plenty of liquid capital.
Benefits of a Non-Bank Lender
There are a few significant advantages to using a non-bank lender instead of a traditional bank. Here are three of them:
- Non-bank lenders have a lot of room to work with, as they borrow their cash at market rates, and often give lower interest rates than the banks.
- Non-bank lenders are typically smaller than a bank. Since they are smaller, they are subject to a different set of rules, making non-banks more adaptable in lending. They have a better chance of customizing their loan offerings to meet the needs of their customers.
- Being smaller in size not only improves customer service by allowing for more personal contact, but it may also contribute to improved customer satisfaction. Many borrowers highly value personal attention, particularly those who have previously received poor banking service, and non-bank lenders are well-positioned to deliver personalized attention and faster loan processing.
Since SoFi falls into the non-bank lending category, it takes advantage of the benefits that most non-bank lenders have. However, SoFi has gone above and beyond to ensure it separates itself from traditional institutions and other organizations in its field.
SoFi Business Model
SoFi is a non-bank lender with a unique spin on its business model. To fully understand the SoFi business model, let’s start by analyzing traditional and non-bank lenders’ usual business models.
The Traditional Way
In a traditional lending arrangement, there are two different parties involved. The lender loans out money to borrowers at a specific interest rate, which will be determined by factors such as credit score and other economic indicators.
The second party in this arrangement is the borrower or client of the lending institution. They are required to pay back their loan on a term basis until the loan is paid in full. This payment typically includes both principal and interest charges.
Lenders work with clients on a per-need basis. So the traditional way would be to promote single services within the branch or organization. When a client or customer needs that service, they book an appointment, and the lender tries to sign the individual to a long-term contract to maximize revenue.
The SoFi Way
While SoFi still functions with the traditional lender and borrower relationship, the core difference is how it services the needs of its clients.
The SoFi business model doesn’t depend on signing up for multiple products at once as traditional lenders do to make their revenue from interest rates. Instead, its primary focus is to offer a lower interest rate while still giving clients what they need because it’s not mutually exclusive anymore.
The client can get all their needs met through one company, versus going out and finding five different companies that could potentially give them merely part of what they need. This increases the potential customer lifespan, and expands the corresponding lifecycle.
To help illustrate this concept, here is the progression of the ideal SoFi client:
- The client first signs up for student lending.
- The next step in the financial journey begins when SoFi offers them mortgages and HELOCs.
- Once the client has purchased a house, they may need auto refinancing services where SoFi comes back into play.
- As the client matures and wants to grow their finances, SoFi comes back into the picture and offers wealth management services.
- Following that, other options include trading services, life insurance products, and 401K rollovers.
To further incentivize clients to keep using its products, SoFi implemented a rewards program that provides points, discounts, and more with each transaction you make while using a SoFi product.
For this strategy to work, SoFi must provide high-end customer service and quality products, and that is precisely where its primary focus is. The affordable interest rates gain clients in the student loan phase of their lives, and as they graduate and progress through their financial journey, SoFi is always at the top of their minds.
SoFi Growth Drivers
SoFi has a solid balance sheet and does not rely on banks to fund its lending. This allows it to offer more competitive interest rates for customers looking for loans, which means it can attract new business much more straightforwardly than traditional lenders. So what drives revenue for this company?
Here is a look at the three main factors for growth for SoFi.
1. Customers Like SoFi Because of Its ‘Technology-First’ Approach
It is an entirely digital platform where lenders never contact borrowers, except through automated emails or text messages. This is designed to keep everyone up-to-date regarding the stage of the loan process, providing a much smoother process for customers.
One of the more frustrating aspects of a traditional loan agreement is being unsure which stage you are at in the application and whether or not you will get your loan approved.
SoFi’s method provides full transparency and helps increase customer satisfaction with the SoFi experience.
2. It Offers a Diverse and Robust Product Line
SoFi has a great list of products that are targeted for multiple demographics. Here is a breakdown of SoFi’s current products that drive the revenue for the business.
SoFi Invest is a robo-advisor service that SoFi developed to work alongside its lending platform. SoFi Invest is a prime example of wide-appeal FaaS, offering a “fractional stocks” feature that lets anyone buy into stock for as little as $1 (regardless of the market price per share).
It’s an excellent way for customers who may not have the funds or time to invest in stocks, bonds, ETFs, and crypto on their own to gain access to wealth management services at an affordable price point.
SoFi Money is a popular SoFi cash management account that allows its users to access their money from anywhere in the world.
Customers’ funds are swept into participating banks, where they enjoy FDIC insurance like a typical cash account. SoFi’s cash account has a higher interest rate than average if you deposit at least $500 every month and no monthly or overdraft costs.
SoFi is also a member of the Allpoint network. It offers more than 55,000 free ATMs to withdraw money and allows customers to deposit cash into their SoFi account at participating Green Dot shops.
SoFi Credit Card
The SoFi credit card is another product that is at the front of industry innovation. This just recently became the first credit card that lets you cash in on crypto.
This card allows you to earn 2% cashback on all purchases, and you can redeem the cashback rewards directly into crypto with your SoFi active investment account.
This is an excellent way for SoFi to increase the revenue on their card and gain a first-mover advantage over traditional lenders that have yet to make a crypto investment.
For those who are not interested in the cryptocurrency benefits, the credit card also offers 2% unlimited cash back on all purchases. There is no annual fee, and making payments on time for 12 months will lower the client’s APR by 1%.
SoFi Student Loans and Student Loan Refinancing
SoFi student loans and refinancing is probably the company’s most popular product.
SoFi offers lower rates on student loans than traditional lenders do, which is why so many millennials are flocking to the company for this service.
Here are some base numbers for the student loan program that SoFi offers:
- A $500 welcome bonus
- Fixed interest rates starting at 2.49% APR
- Autopay implementation
SoFi is so determined to provide the lowest student loan interest rate that they have the policy to match any rate you have been quoted. If you find a lower offer, they will also pay you an extra $100.
SoFi Relay is for credit monitoring and fraud protection.
SoFi Relay is very similar to Mint, which means it offers customers a way to keep track of all of their finances in one place without having to log into multiple websites or apps every day.
This product will help individuals make smarter financial decisions and avoid identity theft by regularly checking their credit reports for suspicious activity.
SoFi Protect is a product that SoFi offers to those looking for life insurance.
SoFi has teamed up with some of the best insurance companies in the industry—bringing clients fast, easy, and reliable insurance.
It is excellent for individuals who have not been able to qualify and/or afford traditional insurance products in the past.
3. SoFi Focuses on the Customer Experience
Since SoFi relies heavily on repeat customers and a long client life cycle, having a solid customer service department is crucial for its success. The SoFi team is committed to taking care of every customer because they want them as clients for life.
Here are some of the strengths of SoFi’s customer service strategies:
- Strong Support Lines: Customers can contact SoFi through email, phone, or live chat Monday through Friday between the hours of 6 a.m. and 5 p.m. PT.
- Active Social Media Presence for Updates: The company also has an active social media presence on Facebook, Twitter, and Instagram, where customers can find helpful information about financial health and updates on new products that are added to the platform.
- Online Updates Throughout the Application Process: Also, as previously mentioned, transparency and openness throughout the application and approval process lead to client satisfaction.
- One-Stop Shop: SoFi’s lineup of products offers various services designed to help individuals manage all aspects of their finances in one place with ease. Whether you’re looking for student loans, insurance, or credit monitoring/fraud protection, this lender promises excellent value at affordable prices, backed by superior service from friendly agents who will go the extra mile for their clients.
SoFi Revenue Growth
SoFi is gaining market share and attracting a significant number of consumers. SoFi’s platform is expanding rapidly, and it will soon become home to millions of additional clients.
The second quarter of 2021 saw SoFi add 279,000 new members to its platform, which increased the total customer count to 2.56 million, nearly twice as many as in the year-earlier period.
One analyst raised SoFi’s price target to $25, increasing the stock by more than 10%. One of the primary reasons for the higher price target is SoFi’s potential to cross-sell existing customers on its services.
While most industries took a severe hit during the pandemic, SoFi found itself in a unique situation and added 1.47 million new clients to its platform. This was over five quarters, averaging nearly 100,000 new subscribers monthly.
Here are some critical notes about SoFi’s revenue reports for 2021:
In August, SoFi announced its second-quarter 2021 results, which showed growth of 113% year over year in members, 123% year over year in financial products, 74% year over year growth in adjusted revenue, and 119% growth in Galileo accounts.
SoFi’s businesses are all experiencing substantial expansion, which is one of the main reasons investors are bullish on its price.
Investors should be aware that a firm like SoFi will continue to experience highly volatile days. A long-term investment approach usually results in greater returns for a portfolio.
Analyst Optimism on SoFi
Many analysts are optimistic about the success of SoFi in the future. They expect strong revenue growth over the next few years, which could significantly spike SoFi’s share price if these projections are accurate.
SoFi will continue to expand its customer base through new product lines and acquisitions while also satisfying existing members with constant value-added services that keep them interested in returning for more business. The company has built a powerful brand image and has a loyal following of satisfied customers who constantly refer others to join the platform.
Overall, analysts predict steady long-term success for SoFi because of management’s ability to adapt quickly to an ever-changing market landscape. A great example of this is the early adaptation to providing incentives involving cryptocurrency trading. While some banks are banning clients from investing in crypto entirely, SoFi is embracing the trend and becoming a thought leader in this space.
On August 12, 2021, SoFi last provided its most notable quarterly financial statements. The company reported ($0.48) earnings per share for the third quarter, missing the consensus forecast of ($0.07) by $0.41. While the earnings failed to surpass forecast numbers, the revenue did exceed analyst expectations.
SoFi’s quarter-over-quarter total loan book growth rate for 2021 is projected to be at a positive (14%), which will outpace any other competitor in its industry. Additionally, SoFi has built a brand that encourages customers to stick with them instead of going elsewhere when consolidating debt or making home improvements, etc.
As SoFi continues on this path and captures more market share from traditional lenders, its value, as well as its customer satisfaction, could begin to impact peers that have not been able to adapt fast enough. This could result in changes across the board within all sectors involved in consumer finance.
Regarding current valuation levels versus competitors such as Lending Club, SoFi is trading at a premium to its revenue multiples.
SoFi’s main competitors include Lending Club, Prosper, Earnest, Commonbond, and Upstart.
These companies all share very similar business models, but they differ in the size of their loan portfolios and various other factors such as administrative costs and interest rates.
The Lending Club personal loans marketplace allows borrowers to find competitive interest rates for their loan applications.
This platform has facilitated more than $15 billion worth of loans since it opened up shop in 2006. This means that, just like SoFi and several others, Lending Club (LC) targets young professionals looking for funds after they graduate from college or university.
Prosper personal loans is a peer-to-peer lending company founded in 2005.
Prosper has fewer qualifications for loans, and borrowers can look to gain $2K–$35K. Depending on your credit history and risk level, loans can be as low as the high single digits.
However, they can get up to the high 30s as well. Prosper’s pre-qualification tool can help you better understand what your rate will be. Borrowers can select repayment periods of up to five years.
Earnest offers loans to young professionals and graduate students. This company is different from other lenders because it offers loans with no hidden fees or origination charges. This allows it to offer lower interest rates than traditional banks and other financial institutions.
Earnest requires borrowers to have a bachelor’s degree and at least two years of professional experience. The lender has the highest approval rate of all the companies mentioned, which means that if borrowers meet this criterion, their chances of getting approved for one of its loans is higher than it would be with SoFi or any other lender.
Another peer-to-peer lending company worth mentioning here is CommonBond. This business was established by three Wharton graduates back in 2011, and it offers refinancing options for graduates and undergraduates. It also provides student loans to MBA students at select schools across the country.
CommonBond gives students the ability to refinance up to $500K in loans and the option to choose among a variable, hybrid, or fixed rate.
CommonBond is also loan-level price sensitive, meaning that the more students borrow from it each month, the lower their rates become. These variables can be adjusted to better suit a borrower’s financial situation and needs.
Upstart (UPST) is an AI-based lending company that provides personal loans to young professionals and students looking for funds.
This business is a newcomer in the peer-to-peer lending space since it was founded in 2012 by fellow ex-Google execs Dave Girouard and Anna Counselman. Upstart uses variables such as borrowers’ credit scores, employment status, and even the school they attend to determine how much money will be lent.
Upstart focuses on improving the credit score of its borrowers and can help them get rid of defaulted loan accounts, which usually drag down someone’s credit rating.
SoFi Discounted Cash Flow Forecast
The discounted cash flow model is used to estimate the present value of future cash flows. This model is most commonly applied in capital budgeting to determine whether an investment proposal should move forward or not based on its expected rate of return.
This model works by forecasting a company’s free cash flow several years into the future, then applying a required discount rate that reflects risk and opportunity costs, including inflation rates.
After calculations, SoFi has a fair value of $51.35. In correlation with SoFi’s current price of $22.76, it has over 100% upside potential.
While the discounted cash flow (DCF) method is a solid metric to estimate a company’s value, you can also use several other valuation techniques. These include the price-to-earnings multiple method, dividend discount model, and others depending on what you’re trying to calculate precisely.
Investors are urged to research each of these techniques before applying DCF to a company in order to get the full picture.
SoFi Valuation: Conclusion
SoFi is attempting to revolutionize the fintech sector with its innovative lending and investment products. Its year-over-year user growth attests to the fact that customers like its services. It provides retail clients with a one-stop platform for their financial needs. While SoFi isn’t yet profitable, it has shown positive cash flow. This is an indication that the firm is doing something correctly and providing services that work.
There are many reasons to be excited about the future of SoFi and SoFi’s valuation. Thus far, it has lived up to the hype and expectations. SoFi should continue to see strong growth in the upcoming months, and as many analysts have claimed, it appears to be a strong contender for a long-term hold in your portfolio.
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.