SoFi makes most of its money from interest and the sale of student, home, and home loans

As hot a sector as FinTech has been in recent years, with $ 105 billion in venture investments in 2020, the third-highest year ever, one segment is struggling, at least when it comes to public markets: corporations focuses specifically on lending.

In 2014, there were two companies in the industry whose IPOs were just a week apart, and both of them went broke. Someone was OnDeck Capital, which went public in December of that year and valued at $ 1.5 billion. It quickly fell below its IPO price, however, and never surfaced again; It was acquired by Enova in 2020 for just $ 122 million.

The other was Lending Club, which also went public in December 2014. The company raised nearly $ 900 million in technology’s largest US IPO in 2014 and valued it at $ 8.5 billion; However, Lending Club was shaken by a scandal in early 2016 when it was revealed that it was co-founder and CEO Renaud Laplanche had resigned fafter a after an investigation into potentially illegal loan sales. The company never fully recovered and is now trading at $ 15.53 per share, a hair above its $ 15 IPO price.

Those two examples seemed to signal that the credit startup boom may have gone broke, but now there are some signs of life: In January, consumer installment loan provider Affirm held its IPO, rising 98%. The company, valued at $ 23.6 billion, is now trading at $ 60.74 per share.

Shortly before Affirm’s debut, financial services platform SoFi also announced that it would go public via a SPAC merger with Social Capital Hedosophia Holdings Corp V, a blank check acquisition company founded by Chamath Palihapitiya. The deal would value the company at $ 19.6 billion.

Founded in 2011, SoFi was founded as a provider of refinancing options for student loans. Since then, the company has also offered other types of loans, including home loans, personal loans, and debt loans, while also introducing non-loan financial products such as money management and investment products and a credit card.

“We are a member-centric, one-stop-shop for financial services that enables members to borrow, save, spend, invest, and protect. Our mission is to help our members achieve financial independence in order to realize their ambitions, ”the company wrote in its filing with the SEC.

“For us, financial independence does not mean being rich, but rather the ability of our members to have the financial means in every phase of life to achieve their personal goals, such as a home, a family or a career of their choice – easier said they have enough money to do what they want. “

The company’s turnover is divided into three segments: LEnding, financial services and technology platform with their The lending business remains by far the largest sales driver.

Borrowing

The credit segment consists of interest and sales of Student loans, personal loans, home loans and related services.

“There are many different ways that companies make money from lending – some make their money on loan origination fees and get paid when a borrower takes out a loan, others by holding the loan and making money on the interest the borrower pays , and others, by selling loans afterwards, are turned into investors while keeping some of the property to themselves, “the company wrote in a blog post.

SoFi makes money with the latter two methods: Interest, but mostly through securitisations and entire loan sales. When selling total loans, the company sells a group or pool of loans as a whole to investors, while in securitization the loans are combined and their combined cash flows pay certain investor groups, so-called tranches, in a specific order.

“The buyers of these securitisations are institutions like pension and insurance funds, as well as other asset managers, who pay an upfront premium for the future potential cash flows from the loans. We can make money on securitisations because investors trust the quality. “Our loans,” the company said.

SoFi generated $ 331.9 million from its lending business in the first nine months of 2020, representing 84% of total revenue of $ 394 million; This included $ 139 million in net interest income, which the company defined in its S-4 as “the difference between interest income earned and interest paid to finance loans.”

Net interest income was $ 271 million, of which $ 244 million was from loans and $ 18 million from securitisations.

technology

The second largest sales driver for SoFi is its TTechnology platform segment, the consists a minority stake in Apex, a provider of securities custody and clearing services, and in Galileo, a provider of technology platform services to financial and non-financial institutions, acquired in April 2020. Galileo offers services such as account setup, account funding, direct deposit, authorization and processing, payment functions, and balance checking functions.

For the first nine months of 2020, Galileo generated $ 52.2 million, or 89% of total net sales of $ 58.8 million for the Technology Platforms segment and 13% of SoFi total consolidated net sales.

The company earns fees on the Galileo platform in two ways. The first is the technology platform fees, which are based on access to the platform and are transaction specific.

For example, SoFi offers event pricing, which includes a specific fee for account setup, an active account in the file, use of program, event and authorization APIs, card activation, authorizations and processing, and card top-ups. In addition, the company also offers “partner pricing”, which is the back-end support that it provides to Galileo customers; This includes live agent customer service, chargeback and fraud analysis, and credit bureaus.

In total, fees for the technology platform amounted to $ 51.6 million of Galileo’s revenue.

Galileo’s other source of income is program administration fees, which the company also calls “card program fees”. These are transaction fees that are incurred in the creation and administration of card programs by banks. Under these agreements, Galileo provides card administration services and earns income from the fees of the payment network and the card program generated by the card program.

Financial services

Finally, the smallest of the three sources of income is the company’s Financial Services segment, which consists of Cash Management and Investment Services. This includes SoFi Money, a digital, mobile cash management service through which the company generates interest income from deposits at member banks as well as payment network fees from SoFi brand debit cards issued by member banks.

SoFi also offers a mobile investment solution called SoFi Invest; The company does not charge trading fees other than trading cryptocurrencies, but instead generates interest income on cash balances it holds as well as through brokerage income through stock lending and payment transaction agreements.

The company also offers the SoFi credit card and SoFi Relay, a personal financial management product.

Financial Services revenue for the first three quarters of 2020 was $ 7.8 million, or 1.8% of total revenue.

(Image source: sofi.com)

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