The SoFi Business Model – How Does SoFi Make Money?

Executive Summary:

SoFi, short for Social Finance, is a personal finance company that offers products in the field of banking, loans, investing, and insurance.

SoFi makes money via transaction fees, loan securitization, referral fees, investing in the capital markets, sweep programs, and a lot more.

Founded in 2011 and headquartered in San Francisco, SoFi is one of the leading FinTech startups in the United States. The firm has raised $2.5 billion across 14 rounds of venture capital funding to date.

What Is SoFi & How Does It Work?

SoFi, short for Social Finance, is a FinTech company that offers a variety of personal finance products to American consumers and businesses.

Its products can be categorized into 5 distinct categories, namely Borrow, Invest, Spend, Protect, and For Business.

On the Borrow side, SoFi offers a breadth of loans available to consumers. These include (private) student loans, personal loans, as well as home loans. Loans can either be issued or re-financed. In a few instances, SoFi works together with third-parties that issue the loan (for example Zillow for mortgages).

Under SoFi Invest, members can trade stocks and index funds (ETFs), purchase cryptocurrencies, or have money automatically invested via its robo-advisor product, a SoFi-managed Roth or traditional IRA account.

With Spend, users can opt in for a SoFi-branded credit card (offering cashback at selected partners), debit card, as well as credit score monitoring and money tracking via the company’s app.

SoFi Protect allows members to purchase various insurance policies, which are offered in cooperation with other providers. Homeowners and renters insurance is powered by Lemonade while the auto insurance offering is provided by Root.

Its For Business offering, as the name suggests, provides tools and educational material for firms to improve the financial literacy of their employees. Tools include a student debt navigator, recommendations for state 529 college savings plans, emergency vaults, student loan contributions, and many more.

Lastly, SoFi offers a variety of educational material that is aimed at helping its users improve their financial prowess.

All SoFi products can be accessed via the company’s website as well as its mobile phone applications (available on Android and iOS). Over 1 million members frequent its platform every month.

A Short History Of SoFi?

SoFi, headquartered in San Francisco, California, was founded in 2011 by Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady.

Prior to starting SoFi, Cagney had risen through the ranks at Wells Fargo where he ended up becoming a Senior Vice President in the proprietary trading department.

At the turn of the century, he co-founded a startup called Finaplex, a FinTech platform that created wealth management solutions for clients like Wells Fargo, Bear Stearns, First Republic, and more.

As the company’s CEO, Cagney was responsible for raising $39 million in venture funding and helped the company getting sold to Broadridge Financial Solutions in 2007.

By that time, Cagney had already moved on to start another business. In 2005, he launched the Cabezon Investment Group, a global macro hedge fund that handles family office funds.

To broaden his horizon, Cagney accepted a Sloan Fellowship at Stanford University’s Graduate School of Business (GSB) where he ended up meeting his other co-founders.

At the time, more than 60 percent of all students attending GSB actually took out a loan to finance their studies. One would assume that being a Stanford student would allow them to source loans at lower interest rates (due to the low risk of default), but the contrary was the case.

What the founding team discovered was that the students didn’t have any alternative lending option apart from the high fees (6 percent and above) they paid when taking out loans at a private bank or Federal Stafford/PLUS.

Given the low default rate (and thus risk), the founders thought that there must be a better opportunity to solve the $1 trillion U.S. student debt problem (debt has now risen to $1.41 trillion). They decided to run a pilot program for what ultimately ended up becoming Social Finance.

Within the pilot program, the founders raised $2 million from Stanford alumni. Consequently, that money was used to issue loans to Stanford students at significantly lower interest rates.

The lending marketplace that SoFi built made sense for both students as well as alumni. Students were able to save money on their loans while alumni could invest money into something that yielded almost certain returns.

On top of the loans, SoFi enabled students to connect with alumni through offline events. These connections were intended to help with their financial literacy while offering them career mentoring and in-school project assistance.

SoFi officially launched in April 2012. Its social lending model became an instant success, which in turn allowed SoFi to raise a $77 million Series B just a few months later. The company expanded to over 50 universities and issued more than $100 million in loans within the first year of operation.

Over the first few years, SoFi reportedly only had 2 borrowers default in loans – not because they were unwilling or unable to pay, but because these members had passed away.

Oftentimes, whenever a borrower was about to default (for instance by losing their job), all other members and investors were notified and consequently reached out to help them find a new occupation.

SoFi continued to add more members as well as funding to its platform. In 2015, the company raised a $1 billion Series E (led by SoftBank), which, at the time, became the single largest financing round of a FinTech startup.

The excessive funding rounds furthermore allowed SoFi to remain a public company. In the years prior, online lenders like Lending Club and OnDeck IPO’d only to see their valuations shrink to a fraction of what they once were.

The money became both a blessing and a curse. On the one side, it allowed SoFi to expand its product offering beyond lending. In the months after the SoftBank funding, SoFi expanded into other financial areas such as wealth management and insurance.

Not all of these initiatives became home runs. In 2016, the company dabbled in developing a dating app after noticing the affection its members developed for each other during the company’s meetups. The dating idea, whether fortunate or not, was never released to the public.  

On the other hand, SoFi went on the dark path that many other SoftBank-funded startups (e.g. Uber) had experienced in the years prior. In 2017, reports about sexual misconduct emerged, which spanned all the way to the top.

First, a former SoFi Operations Manager filed a lawsuit, claiming that he was wrongfully terminated for reporting sexual harassment of female colleagues by their superiors (as well as outing various managers that improperly filed loans to boost their bonus pays).

A few weeks later, reports emerged, which stated that co-founder and CEO Cagney (a married father of two) had inappropriate, sexual relationships with (former) employees, which ultimately promoted a toxic workplace culture.

They furthermore stated that he may have been overaggressive in expanding the company’s business – often while ignoring risk and compliance controls. As a consequence, Cagney decided to step down from his CEO role and the company he founded.

Don’t feel too bad for him, though. Just 3 months after being forced to leave SoFi, Cagney launched Figure, a startup that utilizes the blockchain to issue home equity lines of credit, home improvement loans, and home buy-lease back offerings for retirement. To get the company started, he received a nice $25 million investment from the likes of Peter Thiel and former SoFi backers.

To get the company back on track, SoFi’s board hired Anthony Noto, previous COO at Twitter, CFO of the NFL, and Managing Director at Goldman Sachs, as Cagney’s replacement.

Under Noto’s leadership, the company continued to add more funding to its balance sheet and expanded into other lines of business. It made some major moves along the way.

In 2019, the company closed a 20-year deal worth $400 million with the Los Angeles Rams and Chargers to secure the naming rights of their new football stadium.

A year later, in April 2020, SoFi made its biggest acquisition to date. It bought Galileo, a payment processor that powers the backend of neobanks like Chime and Monzo, for $1.2 billion in stock and cash.

A few months later, the company finally managed to become an accredited bank. SoFi withdrew its banking application back in 2017 after the departure of Cagney. Becoming a licensed bank allows SoFi to lend money and accept deposits without relying on a sponsor bank.

Today, SoFi offers its financial products to over 1.5 million members across the United States and Canada. More than 1,500 people are employed by the company, which operates out of 10 offices.

How Does SoFi Make Money?

SoFi makes money via loan securitization, FDIC sweep programs, payment processing fees, referral fees, and a lot more.

Let’s look at each of these income streams in more detail below. For the sake of simplicity, I’ve excluded the revenue generated by the firms that SoFi acquired in the past (such as Galileo).  

Loan Products

As previously mentioned, SoFi started out as a social lending marketplace that matched alumni with students seeking loans.

The loans were backed and issued by the alumni. Consequently, the alumni were the ones that received the money generated by the interest. To make money on the loans, SoFi charged a management fee of 0.75 percent to the alumni.

For its newer loan products, such as the mortgage or personal loans, SoFi either works together with other partners (Zillow in the case of mortgages) or underwrites loans by itself.

SoFi monetizes these loans through a process called whole loan sales. Lenders, in this case SoFi, bundle the loans under management and sell them to an institutional buyer (such as insurance or pension funds).

These buyers pay an upfront premium to SoFi in exchange for the future cash flows that originated through these loans. Because SoFi’s borrowers rarely default, its loan bundles are considered highly secure, which allows them to demand above-average premiums.

Investment Products

With SoFi Invest, members have the opportunity to invest their funds into various offerings. Members can trade stocks and ETFs, purchase various cryptocurrencies, buy stock bits, put money in retirement accounts, or have the funds invested automatically.

SoFi gives members all the freedom they need in choosing the way they would like to invest their money. Members can get started with as little as $1. The investment product is directly linked to the deposit accounts, so members can transfer money between these accounts at will.

Accounts are secured with up to $500,000. Buying or selling stocks, stock bits, and ETFs is free of charge. SoFi wants to encourage its members to diversify their investment portfolio.

Nevertheless, SoFi has various other income streams when it comes to their investment products. First, it receives money from both securities that are lent to other institutions (which need to borrow shares) and FDIC-insured sweep programs.

Second, SoFi earns money from rebates, which it receives from other market makers for choosing them as their execution partners. SoFi partners up with Apex Clearing to conduct the clearing process.

Third, SoFi earns a 1.25 percent markup fee for every cryptocurrency transaction conducted through its platform.

Insurance Products

SoFi offers various insurance products through its SoFi Protect division. Under SoFi Protect, members have the option to purchase the following insurance policies:

  • Renters Insurance
  • Homeowners Insurance
  • Auto Insurance
  • Life Insurance

Because insurance is both a capital-intensive and highly complex business, SoFi decided to partner up with other companies in the space. Partners include Lemonade (homeowners and renters), Root (auto), and Ladder (life).

As the mitigator, SoFi will earn a referral fee whenever it sells one of these insurance policies through its platform. The amount it earns is dependent on the policy premium and duration (i.e. expected customer lifetime value).

Deposit Products

SoFi launched debit (called SoFi Money) and credit card products in 2018 and 2020, respectively. The cards are offered in cooperation with the payment processor Mastercard.

Accounts are free of charge. Furthermore, no account fees, including ATM or overdraft fees, are applied. Instead, users can earn interest based on the cash on their accounts. Furthermore, SoFi offers cashback rewards at selected partners.

The accounts can be accessed via SoFi’s mobile app. Within the app, users have the ability to check their funds, transfer money to other SoFi users, deposit checks, and pay their bills online.

With its deposit products, SoFi generates revenue in multiple ways. First, whenever an account holder pays using the card, a payment processing fee is applied (paid by the merchant). These are normally at around 1 percent. SoFi receives a portion of that revenue and shares the rest with Mastercard.

Second, SoFi, just like any traditional bank, invests the money of its users into the capital markets, such as bonds, stocks, or index funds. The gains are banked as profit and allow them to pay out interest to its members.

Third, SoFi will earn a commission whenever its members pay with their SoFi cards. Example partners include DoorDash and Netflix. The rewards help to incentivize users to use a particular service. In turn, these cashback partners pay a referral fee for every payment sent their way.  

SoFi Funding, Valuation & Revenue

According to Crunchbase, SoFi has raised a total of $2.5 billion across 14 rounds of venture capital funding.

Prominent company investors include the likes of RPM Ventures, SoftBank, GGV Capital, Manhattan Venture Partners, the Qatar Investment Authority, Bracket Capital, and many more.

SoFi is currently valued at $4.8 billion, which means that the company has generated a 2x return for its investors (based on the money invested). As a private company, SoFi is not obligated to publicly share its revenue and profit numbers. Given that the company remains in expansion mode, it can be believed that it still operates at a loss.

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Hi folks, my name is Viktor! By day, I lead a tech team of 10 folks for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..