SoFi: What They Do & How They Make Money

What Does SoFi Do?

SoFi’s divides its business into four major categories:

• Lending
• Technology
• Financial services
• Insurance.

We’ll explore each of these below.

SoFi Technologies Inc. History & Business Model

SoFi was started in 2011 by four students at Stanford University: Mike Cagney, Dan Macklin, James Finnigan, and Ian Brady. The idea was to create a social lending platform that brought together student loan borrowers, alumni, and institutional investors. Borrowers got lower rates on their student loans than were offered at the time, and investors received a financial return.

Initially, SoFi raised $2 million from Stanford alumni for Stanford students. It then raised $77 million in Series B funding and expanded to over 50 universities, loaning upwards of $100 million. The social nature of SoFi encouraged both mentor-ships and peer-to-peer affiliations.

In October 2013, SoFi announced that it had raised $500 million which was available to refinance student loans at 100 eligible schools. Some of that money included lines of credit from Morgan Stanley and Bancorp. By 2014, additional rounds of funding allowed SoFi to expand into mortgage lending in over 20 states, and into personal loans.

In 2015, SoFi raised $1 billion from SoftBank, and it announced that it had funded $4 billion in loans. In 2016, Moody’s rated Sofi triple-A when the company announced it had 175,000 borrowers whom it refers to as “members” with a total loan volume of $12 billion.

In 2017 and 2018, SoFi experienced difficulties, with then-CEO Mike Cagney resigning in the wake of allegations of sexual harassment and not adhering to compliance controls. In 2018, SoFi settled a claim made by the Federal Trade Commission (FTC) that the company was making false claims as to how much money could be saved by refinancing student loans.

In 2019, SoFi entered into a 20-year deal with two NFL teams, the Los Angeles Rams and the Los Angeles Chargers, to name their stadium SoFi Stadium. The following year, SoFi bought the payments company Galileo and the investment application 8 Securities.

SoFi Ticker & Stock Price

In 2021, SoFi went public through a Special Purpose Acquisition Company, or SPAC, at an $8.65 billion valuation. It trades on the NASDAQ exchange under the stock symbol SOFI. As of March 25, 2022, SoFi was trading at $9.01 per share.

4 Ways SoFi Makes Money

1. Lending

SoFi makes lending income from:

• Net interest income: which SoFi describes as “the difference between the earned interest income and interest expense to finance loans.”
• Securitizations: in which loans are grouped together and their aggregate cash flows pay collections of investors, called tranches, in a specific sequence.
• Whole loan sales: a group or pool of loans is sold to investors such as pension and insurance funds who are willing to pay an upfront premium for future cash flows; SoFi’s loan bundles are considered highly secure because its borrowers almost never default, and this allows SoFi to charge higher than normal premiums.

A real benefit of SoFi’s lending model is that it doesn’t charge origination fees, insufficient fund fees, or late fees. SoFi’s repayment terms on its private student loans are five to 15 years, and the terms on its refinancing loans are five to 20 years. SoFi provides a six-month grace period on all of its private and refinancing loans.

The current interest rate on federal student loans is around 4% for undergraduate students and 5.5% for graduate or professional students. According to Bankrate, private student loan rates for both undergraduate and graduate students range from 2.99% to 12.99%.

2. Technology

SoFi’s technology platforms include:

• Apex Clearing: provides investment custody and clearing services.
• Galileo: provides digital banking, card issuing, payments processing, and B2B payment services.

3. Financial Services

SoFi’s financial services offerings include:

• SoFi Money: cash management accounts that are similar to checking and savings accounts and have no minimum balance requirements and no monthly fees; SoFi earns interest on deposits, and in partnership with MasterCard, from payment network fees from SoFi-branded debit cards.
• SoFi Invest: SoFi offers a $0 account minimum and $0 trading commissions except on cryptocurrency transactions; SoFi earns income from share lending to other financial institutions whose clients want to short the market or cover their short positions, and SoFi also receives rebates from market makers for order flow services.
• Automated Investing: SoFi’s robo-advisor product automatically builds and re-balances portfolios; SoFi charges no management fees.
• ETF Management Fees: SoFi charges annual management fees on its suite of ETFs which include SoFi Select 500 (SFY), SoFi Next 500 (SFYX), SoFi Social 50 (SFYF), SoFi Gig Economy (GIGE), and SoFi Weekly Income (TGIF).

4. Insurance

• Term life insurance: through their partnership with Ladder, Sofi earns a marketing fee when its members submit an application for insurance.
• Homeowner’s insurance: through their partnership with Lemonade.
• Auto insurance: through their partnership with Root Insurance.

SoFi Valuation

SOFI has a market cap, or net worth, of $7.20 billion. Its enterprise value is $10.62 billion, and it currently has 799.63 million shares outstanding.

Over the last 12 months, SoFi has had revenue of $984.87 million and losses of 483.94 million.

Bottom Line

Today, SoFi has over 1.5 million members across the U.S. and Canada. It employs over 1,500 people at its 10 offices around North America. Due to the moratorium on student loan repayments, recently SoFi’s stock has taken a beating but past performance is not an indicator of future results.