The first part of this article went into detail about Sofi’s banking charter and how that gives it an edge over its competitors. This article will talk about the different business segments within Sofi and how they have grown over time.
The first segment of the business is the Lending Segment. This segment is by far the largest revenue driver for the company with around 57% of the company's revenue coming from this segment in the second quarter of 2024. This segment offers a wide variety of loans such as personal, student and home loans as well as creates an opportunity for users to refinance their existing loans. Refinancing loans involves taking a loan to pay off another loan but paying the new loan at a lower interest rate to the original. Sofi also has the capabilities to hold onto loans on their balance sheet when it is more favorable as they have been doing in the more recent quarters because of higher interest rates in the United States. Sofi is well above its capital ratios and minimum requirements set by the regulators which gives Sofi the leeway to scale lending and offer out personal loans at a much faster pace. As discussed in the previous part of this article, the banking charter enables Sofi to obtain capital at a much cheaper cost that its competitors which allows it to offer cheaper loans to than its competitors allowing it to gain more market share from its non-neobank competitors. Sofi’s lending business has been profitable for several quarters now which allows it to reinvest its profits to further scale the business.
The second and probably the most important part of their business is the financial services segment. The financial services segment is the glue that links the entire business together. The financial services has several major segments with each serving an important role to the company. The financial services segment was created in line with serving Sofi’s goal of becoming a one-stop, all in one, experience for a consumer. The first part of the segment is called Sofi Money. Sofi Money offers customers checking and saving accounts. A checking account is a debit account where users can store the money they will be spending through their debit card for a very small interest. Sofi makes money from checking accounts through an interchange fee they receive every time the card is used. The savings account is one of the methods Sofi obtains money to use in the lending segment. Sofi uses the savings account to attract users to the platform and it acts as a major source of capital for the firm. The second part of the segment is Sofi Invest. Sofi offers an investment platform in an attempt to allow users to perform all of their financial activities within the platform like their mission states. Although the investment platform Sofi operates is not the best for traders or very active investors, it is perfect for the long term buy and hold investors that make up the larger demographic in the US and is Sofi’s target audience. The third part of the financial services segment is their credit card platform. This platform has not been very successful for Sofi yet but the management has still made massive improvements to the platform recently launching two new credit cards for users. The fourth part of the Financial services segment is Sofi relay which is what truly differentiates Sofi’s offerings. The relay platform allows users to link all of their various accounts including the ones outside Sofi and helps them monitor their balances, investments and debt across their various holdings all from one platform. Finally, the most important part of the financial services segment for Sofi as a business is their loan platform business. Sofi takes a risk off approach to lending which results in thousands of customers being refused loans from Sofi. The way the loan platform business works is that Sofi can partner with different firms and use their money to lend. Sofi immediately receives a fee and transfers the loans to the firm. This allows Sofi to retain the members with no extra acquisition cost and increases their potential member base and potential growth. These segments are so essential for Sofi because they create a productivity loop for users. When a user signs up for one product from the business, Sofi can eventually sell them products from the other segment which increases the revenue generated from the same user without any additional marketing costs to acquire a new user.
The final part of the business is the technology segment. The technology segment for Sofi came from two major acquisitions totaling around 2 billion dollars. The technology platform can be broken down into 3 products that can be offered from Sofi or subsidiaries of Sofi. The first product is a card issuance service. This technology allows other financial institutions to issue and process cards such as credit or debit.
The second product Sofi offers is the technology they use to manage micro parts of a financial institution such as the technology needed to accept digital deposits or the technology needed to do checking products or any service Sofi provides. This platform makes it easier for new financial institutions to scale quickly because of the rapid pace of product offerings they can use. The third product is what is known as a cyberbank core which is basically an operating system for banks. Banks require a core for every product they want to run and they tend to use multiple cores throughout their system for the different products they offer. However, Sofi’s offering is extensible to offer various products all under one core which reduces the number of cores banks need from how many ever they have to just 1. This will be a major cost saver for banks and will aid in faster innovation. In fact, Sofi expects to save between 60-70 million dollars annually through integrating their core. When you compare the size of Sofi relative to some of the largest financial institutions, using this core could save them hundreds of millions of dollars annually.
Thank you for reading. In the final part of this series of article on Sofi, I will be going over the financials and future revenue and profit prospects.
