SoFi makes the majority of its money from interest and sales of student, personal and home loans
As hot of a sector like FinTech has been In recent years, with the industry seeing $105 billion in venture capital investments in 2020, its third-highest year ever, one segment has struggled, at least when it comes to public markets. : businesses focused specifically on lending.
In 2014, there were two companies in the space that had their IPOs just a week apart, and both went bankrupt. One was OnDeck Capital, which went public in December of the same year, valuing it at $1.5 billion. However, it quickly fell below its IPO price and never returned above water; 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 the biggest US tech IPO of 2014, valuing it at $8.5 billion; however, Lending Club was rocked by a scandal in early 2016 when it was revealed that co-founder and CEO Renaud Laplanche had resigned ffollowing a after an investigation into potentially illegal loan sales. The company never fully recovered and now trades at $15.53 a share, a hair above its IPO price of $15.
Both of these examples seemed to indicate that the lending startup boom may have failed, but there are now signs of life: In January, consumer installment loan provider Affirm staged its IPO and saw its stock soar 98%. The company, which was valued at $23.6 billion, now trades at $60.74 per share.
Just before the launch of Affirm, financial services platform SoFi also announcement it would go public via a SPAC merger with Social Capital Hedosophia Holdings Corp V, a blank check acquisition company formed by Chamath Palihapitiya. The deal would value the company at $19.6 billion.
Founded in 2011, SoFi was established as a provider of student loan refinance options. Since then, the company has expanded into offering other types of loans, including home loans, personal loans, school loans, while introducing non-loan financial products such as management product offerings money and investment, as well as a credit card. .
“We are a member-centric, one-stop-shop for financial services that empowers members to borrow, save, spend, invest and protect their money. Our mission is to help our members achieve financial independence in order to realize their ambitions,” the company wrote in its SEC filing.
“For us, financial independence does not mean being wealthy, but rather represents the ability of our members to have the financial means to achieve their personal goals at every stage of life, such as owning a home, having a family or having a career of their choice – more simply, to have enough money to do what they want.”
The Company’s revenue is divided into three segments: Lending, financial services and technology platform, with its The lending segment remains, by far, its main revenue driver.
The Loans segment includes interest and sales of student loans, personal loans, home loans and related services.
“There are many ways companies make money by lending – some make their money from origination fees and get paid when a borrower takes out a loan, others by holding the loans and making money. ‘money with interest paid by the borrower, and others by selling loans after they are for investors while retaining some ownership for themselves’, the company wrote in a blog post.
SoFi makes money through the last two methods: interest, but primarily through securitizations and the sale of whole loans. Whole loan sales are where the company sells a group or pool of loans in their entirety to investors, while securitizations are where its groups bundle the loans and their combined cash flows pay specific groups of investors, called tranches, in a specific sequence. .
“The buyers of these securitizations are institutions such as pension and insurance funds, as well as other asset managers, who pay a premium up front for the potential future cash flows from the loans. We can make money from securitizations because investors trust the quality of our loans,” the company said.
SoFi earned $331.9 million from its lending segment in the first nine months of 2020, representing 84% of its 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 expense to fund loans.”
Its earned interest income totaled $271 million, including $244 million from loans and $18 million from securitizations.
The second biggest revenue driver for SoFi is its Tsegment of the technology platform, which consists of a minority stake in Apex, a provider of investment custody and clearing services, as well as its Galileo, a provider of technology platform services for financial and non-financial institutions, which it acquired in April 2020 Galileo offers services such as account setup, account funding, direct deposit, authorizations and processing, payment functionality, and checking account balance functionality.
In the first nine months of 2020, Galileo represented $52.2 million, or 89%, of the Technology Platforms segment’s $58.8 million total net revenue, and 13% of SoFi’s total consolidated net revenue .
The company earns commissions on Galileo’s platform in two ways, the first being technology platform fees, which are based on access to the platform and are specific to the type of transaction.
For example, SoFi offers what it calls “event pricing,” which includes specific fees for account setup, active account registration, use of program, event, and event APIs. authorization, card activation, authorizations and processing, and card loads. Additionally, the company also offers “partner pricing”, which is the back-end support it provides to Galileo customers; which includes live agent customer service, chargeback and fraud analysis, and credit bureau reporting.
In total, technology platform fees totaled $51.6 million of revenue collected by Galileo.
The other source of revenue on Galileo is program management fees, which the company also calls “card program fees”. These are the transaction fees generated by the creation and management of card programs issued by banks. In these arrangements, Galileo provides card management services and derives payment network revenue and card program fees generated by the card program.
Finally, the smallest of the three revenue streams is the company’s financial services segment, which includes cash management and investment services. This includes SoFi Money, a digital and mobile cash management service, through which the company generates interest income from deposits at member banks, as well as payment network fees through SoFi-branded debit cards. issued by member banks.
SoFi also offers a mobile investing solution called SoFi Invest; the company does not charge trading fees except for cryptocurrency trading, but instead generates interest income on the cash balances it holds, as well as through brokerage income through the stock lending and payment of order flow agreements.
In addition, the company also offers SoFi Credit Card and SoFi Relay, a personal finance management product.
Financial services sector revenues totaled $7.8 million in the first three quarters of 2020, or 1.8% of total revenues.
(Image source: sofi.com)