SoFi: The Trojan Horse of Banking?

This is the remarkable story of how SoFi, a firm that began as a student lender, has become the trojan horse of the banking industry.

The story begins with the stats. In the United States, 43.4 million people have outstanding federal student loans, which equates to nearly 20 percent of the nation’s adult population. Total student loan debt surpassed $1.7 trillion in 2021 — a stunning increase over 2004’s $250 billion.

The trouble with student loans is that there are few avenues for escape or forgiveness. Even bankruptcy isn’t enough to discharge this debt unless borrowers can demonstrate that student loan payments prevent them from maintaining a minimal standard of living.

Monthly payments can be more than a mortgage, which is difficult for recent graduates who are just starting their careers. In the years that are traditionally reserved for buying homes and starting families, many borrowers find that they must put off big financial moves, which has contributed to a decline in homeownership.

There are no easy answers to this massive, expensive, and complex problem, but a variety of innovators and entrepreneurs are doing their share to create solutions. For example, in 2011, four students in the Stanford Graduate School of Business developed a plan to make student loans more affordable.

How SoFi Got Started

SoFi, which started under the name Social Finance, began with $2 million in investments from 40 Stanford alumni. Through its initial pilot, SoFi offered low-interest loans to roughly 100 students. The program was wildly successful — a win/win on both sides. The alumni investors earned a return, and student borrowers paid less interest than they might have with federal loans.

However, the philosophy behind SoFi lending went deeper than generating a return on investment. It focused on connecting Stanford alumni with Stanford students, which came with important benefits.

Alumni had an opportunity to pay it forward by supporting the success of a new class, and borrowers took their repayment obligations more seriously because funds were offered through their network. The concept was similar to peer-to-peer lending, though perhaps it could be more accurately described as “group-to-group” lending. SoFi changed the dynamic between borrower and lender — the returns realized by alumni and the interest savings realized by students were just a bonus.

By April 2012, SoFi had proof of concept, and its founders were ready to branch out. The company launched low-interest loan opportunities for students at approximately three dozen schools.

In addition to the program centered around new student loans, SoFi began accepting consolidation loan applications from recent graduates of four more schools — the Massachusetts Institute of Technology (MIT), Harvard, the University of Pennsylvania, and Northwestern. Alumni of those schools began funding loans, as well.

SoFi was the first company to permit refinancing of both federal and private student loans, which was yet another differentiating factor that set SoFi apart from other lenders. Interest in the company grew rapidly, and it became clear that SoFi had the potential to disrupt the colossal student loan industry. By the start of the 2013-2014 school year, SoFi had 2,500 borrowers at 100 schools with $200 million in loans.

SoFi Student Lending Was Just The Beginning

Good ideas beget more good ideas, and SoFi’s success in student lending prompted the management to consider expanding the company’s product line. Consumers were delighted with the all-digital SoFi experience, so in 2014, the company decided to see whether the model would work with mortgages. It did. Next up, personal loans in 2015 — and SoFi had another successful product.

Investors were excited to be a part of SoFi’s triumphant disruption of the traditional financial industry. There was a $200 million funding round in February 2015 and a $1 billion funding round in September of that same year. That figure stunned the market, as it made SoFi the first US-based fintech to generate such a large amount.

A year later, SoFi announced its SoFi at Work program, which enrolled around 600 corporate partners almost immediately. SoFi at Work made it simple for businesses to enhance employee benefits with employer-paid student loan contributions, financial wellness education, and more.

SoFi’s family of lending solutions grew to include nearly all of the most common credit products by 2019, but there was still something missing: the other side of the financial equation — building wealth. SoFi launched SoFi Money, a cash management account, and SoFi Invest, an online trading platform.

Consumers responded by expanding their relationship with the company and enrolling in multiple products. In January 2020, SoFi celebrated its one-millionth member. By the end of the year, the number of members nearly doubled to 1.85 million. It was time for the next big step.

In January 2021, SoFi — valued at $8.65 billion — announced it would begin trading publicly through a special purpose acquisition company (SPAC) merger backed by renowned venture capital investor Chamath Palihapitiya (net worth $1 billion). On June 1, 2021, the merger was complete, and SoFi stock was available to everyone.

What Makes SoFi Different

Fintech companies have transformed the financial services industry from one that is tailored to the needs of the wealthy to one that works for everyone. Examples of fintechs that have had a tremendous influence include:

• Chime – Provides free online banking to its eight million users, currently valued at $1.4 billion
• Klarna – Gives consumers the option to buy now/pay later when shopping online, currently valued at $45.6 billion
• Kraken – Makes trading cryptocurrencies simple, currently valued at $20 billion
• Robinhood – A leading digital trading platform that provides zero commission transactions for its 22.5 million users, currently valued at $13 billion
• Stripe – Online payment platform and credit card service provider for its 3.1 million active users, currently valued at $95 billion
• Wise –  Offers reduced-fee international transfers, currently valued at $11 billion

SoFi fits into this space in a different way for several reasons. First, though it no longer relies on a group-to-group lending model, it is true to its roots through the inclusive, community-style culture it has created.

Second, SoFi’s product lineup is unique. The platform now offers most of the standard products available through a commercial bank, but it remains strictly digital. That means lower overhead — no need for brick-and-mortar branches and face-to-face tellers. That savings is passed along to SoFi members in the form of fewer fees, lower interest rates for borrowers, and higher interest rates for depositors.

Third, though SoFi’s members include individuals from all walks of life and all levels of income, the company targets a niche audience — one with the potential to be very profitable long-term. Often referred to as HENRYS, or “high-earners not rich yet,” this group includes people who are early in their high-paying careers.

HENRYS’ incomes range between $250,000 and $500,000, but they haven’t had an opportunity to save or invest enough to be considered truly wealthy. Their expenses are high, and their paychecks are eaten up by housing, transportation, food, clothing — and of course, student loan payments. Of course, their incomes are likely to grow over time, along with their assets. If, as SoFi intends, HENRYS maintain their relationship with the platform, SoFi will usher in a new era of banking.

SoFi Bank Charter: The Trojan Horse

Recently, SoFi Technologies, the holding company for all SoFi-owned businesses, received regulatory approval for its national bank charter application.

At first glance, it’s easy to see why this news didn’t make the same sort of splash as SoFi’s Nasdaq listing. After all, the company already offered SoFi Money through a partnership with Bancorp Bank, which was close enough for most members. The fact that some kept a separate checking and savings account with another commercial bank was inconsequential.

However, when SoFi’s nationally chartered bank is fully up-and-running, members will see big benefits. SoFi Money account will be upgraded to SoFi Checking and Savings, and those products will reflect the SoFi difference — a digital platform, access to a full menu of financial services, and extremely competitive rates.

The banking charter is a trojan horse of sorts because SoFi will have full authority to set its own terms and conditions instead of relying on Bancorp Bank.

At the moment, SoFi is promising SoFi Money clients an APY of 1 percent when the SoFi Checking and Savings product is fully rolled out. That might not sound like much until you consider national averages. In the US, the rare checking accounts that pay interest at all average 0.03 percent, savings accounts average 0.06 percent, and money market accounts average 0.09 percent.

SoFi Product Suite

With the addition of a nationally chartered bank, SoFi is now in a position to provide its members with all of the same products offered by commercial banks. The SoFi product suite includes these financial tools and services:

• Home Loans – Online prequalification for standard mortgages, mortgage refinancing, and home equity loans
• Personal Loans – No-fee unsecured loans between $5,000 and $100,000 for home improvement, debt consolidation, large purchases, emergency use, etc.
• SoFi Credit Card – Among other features, there is no annual fee and unlimited 2 percent cash back on purchases
• SoFi Invest – A digital trading platform that offers access to stocks, ETFs, cryptocurrency, and IPOs
• SoFi Money (soon to be SoFi Checking and Savings) – A no-fee account designed to make spending and saving simple
• SoFi Protect – The insurance division of the business, offering renter’s policies, homeowner’s policies, auto policies, and term life insurance
• SoFi Relay – No-fee access to personal financial insights such as credit score monitoring and spending breakdowns
• SoFi at Work – A partnership with companies that wish to provide financial wellness benefits to employees, including 529 plan contributions, student loan contributions, and educational tools
• Small Business Financing – A full suite of small business financing options for entrepreneurs, including SBA loans, startup financing, equipment financing, and lines of credit
• Student Loan Refinancing – An opportunity to consolidate and refinance student loans for parents, medical residents, medical professionals, lawyers, and MBAs
• Student Loans – The original SoFi product, no-fee private loans for undergraduate students, graduate students, and parents

It’s reasonable to say that the list of products SoFi doesn’t offer is shorter than the list of products available through one of SoFi’s subsidiaries or partners. At the moment, the only notable exception to SoFi’s lending lineup is auto loans, and it appears that those may be coming soon. In the past year, SoFi launched an auto loan refinancing option with the goal of eliminating unreasonable auto loan interest rates to help its members save money. Low-interest auto loans are the next logical step.

SoFi Competes with RoboAdvisors, Too

Because SoFi started out in student loans, many consumers overlook later additions to its product lineup. That’s unfortunate because SoFi’s trading platform has most of the features offered by popular roboadvisors, like Robinhood, as well as a collection of unique advantages only available to SoFi members.

Like other app-based brokerage service providers, SoFi members enjoy low-fee/no-fee stock and ETF trades through a user-friendly interface. Unlike its competitors, SoFi has its own family of ETFs with themes that can’t be found elsewhere.

The six funds currently available include:

• SoFi Weekly Dividend (WKLY) – Tracks index of domestic and international stocks that pay consistent dividends, and shareholders receive dividend distributions weekly
• SoFi Weekly Income (TGIF) – Actively-managed fixed-income ETF that pays distributions each Friday
• SoFi Gig Economy (GIGE) – Focuses on high-growth tech companies in the growing gig economy, e.g., Airbnb, DoorDash, Lyft, and Uber
• SoFi Select 500 (SFY) – Includes the 500 largest publicly-traded companies in the US
• SoFi Next 500 (SFYX) – Includes 500 publicly-traded US mid-cap companies
• SoFi Social 50 (SFYF) – An ETF with a social element, this fund holds the top 50 most-widely-held stocks on the SoFi Invest platform

SoFi wants to create long-term relationships with its members, so its trading platform was developed with long-term investors in mind. Since SoFi isn’t intended to be a full-service brokerage, it doesn’t offer mutual funds, bonds, futures, foreign exchange (forex), or options trading.

Robinhood has the same trading limitations with the exception of options trading, so investors interested in options typically find that Robinhood is a better choice. It is also worth noting that SoFi doesn’t offer margin accounts, so short-term investors who need that flexibility are better off with another platform.

What SoFi does offer — and Robinhood doesn’t — are tools to build wealth over time. For example, SoFi Invest members can open joint accounts, and they can make contributions to traditional IRAs, Roth IRAs, and SEP IRAs. More importantly, because SoFi members are not typically focused on active trading, the platform offers a low-cost “auto-pilot” option that keeps assets growing with minimal intervention from account holders.

SoFi Invest accounts are designed to work with other SoFi products. For example, the cash-back rewards from the SoFi credit card can be transferred directly into SoFi brokerage accounts. In short, SoFi Invest benefits exceed those of competing brokerage platforms for consumers who want a one-stop solution for all of their financial needs.

Why Did SoFi Stock Fall?

SoFi stock has been trading on the public exchange for less than a year, and in that time, it has experienced its share of highs and lows. Prices have ranged from around $10.50 per share to just over $25 per share. That sort of volatility is to be expected with any startup, but given the market’s high hopes for SoFi, some investors are concerned. Why did SoFi stock fall?

There was no company-specific reason for SoFi’s decline. Tech stocks, in general, experienced a dramatic selloff in late 2021, and fintechs like SoFi, Block, and Shopify were hit particularly hard. SoFi’s share prices started dropping in November, around the time that the Federal Reserve signaled interest rates would rise in 2022, which could offer some explanation.

Ultimately, there is no single reason that SoFi stock went down other than the fact that these major price swings are part of the experience when investing in high-growth startups. A more important question is whether SoFi stock will recover. If so, investors who buy at today’s discounted prices may see outsized returns over time.

Will the SoFi Bank Charter Spur SoFi Stock To Rise?

News of SoFi’s bank charter approval has already prompted a rise in its share price. The company saw double-digit stock price gains in the first two days after the news broke, and analysts almost immediately increased their 12-month target prices.

Among other benefits, the bank charter makes SoFi a formidable competitor to traditional commercial banks. Until now, SoFi leveraged bank partners for its products, which required those partners to agree to deposit and loan terms like interest rates.

With its own bank charter, SoFi can pay its members whatever interest rate it chooses on deposits. Given its structure, it can afford higher-than-average rates, which is sure to attract new members and deepen relationships with current account holders.

The bottom line is it no longer needs to co-operate with other banks, it can compete. And few banks, if any, have the customer loyalty SoFi enjoys. The banking charter is truly a trojan horse for SoFi that provided it a permit to enter an industry that is well-established but slow-moving. SoFi, on the other hand, has a history of moving fast, innovating, and delighting customers.

Will SoFi Stock Recover?

All signs point to a swift recovery for SoFi stock — and not just because of the bank charter news. The company already showed promise in its previous form, primarily due to its runaway growth. SoFi delivered astonishing year-over-year increases in everything from total members to sales in 2021, and those increases are even more impressive when compared to 2019 — something that most tech companies can’t say. According to the Q3 2021 earnings report:

• Members – increased by 96 percent year-over-year
• Lending Products – increased by 15 percent year-over-year
• Financial Services Products – increased by 179 percent year-over-year

It appears possible — even probable — that sales which have quadrupled in the past three years is a trend which will persist in 2022 and beyond. In short, SoFi stock is a smart buy.