- SoFi started as a peer-to-peer lending network at Stanford where alumni would make low interest loans to current students.
- Today, SoFi offers personal finance solutions that allow users to borrow, invest, spend, and insure their assets.
- In January 2021, SoFi went public via a SPAC (Special Acquisitions Company) with Social Capital giving it a valuation of over $8 billion.
SoFi offers a range of financial services from financial planning to loans and investments. They operate in a highly competitive space against extremely well-funded companies.
How do SoFi make money? They have a diverse business model, earning from several revenue streams. Find out how it works below.
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What does SoFi do?
Founded by James Finnigan and Ian Brady in 2011 with headquarters in San Francisco, SoFi currently has more than 1,500 employees working out of ten offices across the United States.
SoFi provides offline events connecting students with alumni. These relationships help students create mentorships and guidance they need in their college lives and as they enter the working environment. The SoFi model launched in April 2012 and was an instant hit. The company turned that success into its next funding round in a $77 million Series B.
The company used the funding for its expansion into more than 50 universities across America.
Within the first year of its operations, the company issued more than $100 million in new loans to students. According to the company, it only ever had two lenders default, and that was because they passed away, not because they couldn't pay.
Today, SoFi has more than 2 million members using the platform. It's one of the leading FinTech startups in the US, having raised more than $2.5 billion across 14 VC funding rounds.
How does SoFi work?
SoFi, or Social Finance, is a leading fintech offering students various services and financial products. The company provides five products, namely,
With SoFi Borrow, the users can access consumer loans. Such as personal, student, home loan, and private loan facilities. Users also have the option of refinancing loans made with the company.
In some instances, SoFi may work with a third party when issuing a loan. An example would be one of its partners, Zillow Mortgages.
With the SoFi invest product, users have the chance to invest and trade in ETFs and stock portfolios or purchase cryptocurrency. SoFi also offers robo-advisory services and a range of IRA accounts.
Using the Spend facility, users can get a branded SoFi credit card with a cashback rewards program available through selected merchant partners. You also get credit score monitoring, and the app assists you with tracking your spending.
The SoFi Protect product gives users the option of purchasing insurance with its partners. Lemonade provides homeowner’s insurance, while Root is responsible for managing the auto insurance division.
The SoFi Business offering gives business users the tools and educational materials they need to increase employee financial literacy and awareness of their financial situation.
Some of the tools offered on the platform include the student debt navigator and recommendations for over 500 college savings accounts and student loan contributions.
SoFi offers its mobile app for Android and iOS users, as well as desktop clients.
How SoFi makes money
SoFi makes money from peer-to-peer loans, securities lent to other financial institutions, insurance policies, and processing fees for debit and credit cards they issue.
As mentioned, SoFi started as a peer-to-peer lending marketplace connecting students with alumni that provided loans at a 0.75% interest rate. However, times changed, and the company no longer runs this model. Now, SoFi creates loans through its other network partners.
In some cases, SoFi may use its collateral to underwrite loans itself. SoFi monetizes the loans it issues through a process called "whole loan sales." SoFi bundles the loans under an agreement, selling them to institutional firms and investors like pension funds.
The institutional buyers pay SoFi a premium upfront so that they get access to the cash flows generated through the loan origination process.
The SoFi Invest product allows users to trade stocks and ETFs. They also can purchase crypto, buy fractional stocks, or choose automated robo-advisory strategies that do the investing for them.
SoFi makes money from its Invest platform through the securities it lends to other financial institutions that need to borrow shares for clients looking to short the market or cover short positions. It also earns through the FDIC-insured sweep programs.
SoFi also generates revenues through rebates from market makers that it receives for offering payment for order flow services to HFT firms. SoFi also collects a 1.25% markup on all cryptocurrency purchases made through its platform.
As mentioned, SoFi offers a range of insurance products to its users. The top four product categories provided by the fintech include the following.
- Renters Insurance
- Homeowners Insurance
- Auto Insurance
- Life Insurance
The insurance business is capital intensive. Therefore, SoFi partners with other companies in the industry to spread the risk of its operations. SoFi earns a referral fee every time it sends a new customer to one of its insurance partners and they sign up for a policy.
The amount the company earns depends on its agreement with the partner and the type of policy purchased by the consumer.
SoFi launched its debit account and credit card facilities in 2018 and 2020 in partnership with MasterCard. Users can create and access their accounts directly through the app without the need to connect them to a separate bank account.
SoFi also earns on transactions, collecting a fee every time a user swipes their card. MasterCard gets the bulk of the transaction fee, but SoFi receives a small percentage of every charge.
SoFi also earns interest on the cash in its client deposits. It loans the funds to banks and other financial institutions, earning interest at the interbank rate. Interest on cash creates a sizable revenue stream for the company.
Future growth engine
SoFi launched its IPO back in January of 2021, going public through a SPAC (Special Acquisitions Company) with Social Capital.
Social Capital Hedosophia Holdings assigned a valuation of $8.65 billion to the company. SoFi intends to grow its user footprint across the market and invest in acquisitions and future growth vehicles.
In October of last year, SoFi also applied for its bank charter, which would reduce its cost of funds and allow SoFi to capture additional revenues.
As a leading fintech company in the space, SoFi competes with a number of other fintech and online personal finance companies such as Credit Karma, M1 Finance, RateSetter, Funding Circle, Avant, Lending Club, Upstart, LendingTree, and CommonBond.