4 Ways SoFi Aims to Outgrow the Fintech Market

Shares of SoFi technologies (SOFI -4.31%) ended Monday up 12.5%, even as a total Nasdaq Composite (^IXIC -1.02%) fell almost 2% that day. It was no surprise: SoFi released its fourth-quarter and full-year results yesterday, dampening expectations for revenue growth and improved profitability.

The company also gave strong guidance for about 27% revenue growth in the coming year, while saying it would achieve profitability on a generally accepted accounting principles (GAAP) basis by the fourth quarter of 2023 — a major milestone. The strong guidance was at odds with some other financial and fintech companies that are becoming more cautious in the current environment.

Here are four different ways this rising fintech star is outperforming its rivals and aims to keep growing.

Personal loans exploded in 2022, and will continue to increase

Some thought SoFi would be hurt by the federal student loan moratorium, as its old core product was student loan refinancing. That proved somewhat true, as student loan originations fell by nearly half in 2022, from $4.3 billion to $2.2 billion.

But SoFi made up for it, sometimes with huge growth in the personal loan segment, where originations grew from $5.4 billion in 2021 to $9.8 billion in 2022.

Some may view that acceleration with trepidation, especially with fears that the economy could enter a recession in 2023. But management was also quick to point out that its personal loans target customers with high FICO score (about 747) and an average income of $165,000.

Also of note is that SoFi acquired a banking license in January 2022. It was ideal timing since the license allowed it to take in low-cost customer deposits, which have already grown to over $7 billion.

Without the license, it would have had to sell or securitize the loans it originated, and with many loan buyers pulling out last year, SoFi might not have been able to grow its originations as quickly — or at all. Having deposits allows SoFi to steal market share from other fintechs that do not have their own banking license and thus rely on third-party loan buyers.

And management notes that it only has about 6% market share in personal loans, so it has room to grow even while being conservative on underwriting.

SoFi guided for more “modest growth” in personal lending in 2023, which is perhaps justifiable given the economy. Regardless, with the student loan moratorium continuing through at least June 30, it looks like personal loans will once again drive much of SoFi’s growth in 2023.

Financial services are picking up

In 2022, SoFi was also able to increase financial services tremendously. These include SoFi Money checking and savings accounts, the credit card, SoFi Relay credit monitoring and the SoFi Invest brokerage with its growing range of features.

Income from financial services is quite small compared to lending income, but it is increasing rapidly. It rose 189% to $168 million in 2022. Although it saw contribution losses also grow to $199 million (where costs and expenses exceeded revenue), it made a contribution loss margin of 119%, which was an improvement from 2021, when the coverage ratio was 232%.

Image source: Getty Images.

SoFi Invest added a number of features in 2022, including margin trading in February, extended trading hours in June, Web3 and smart energy exchange-traded funds in August, and options trading in November. The company also launched a pay-in-four payment plan in December for those paying with SoFi accounts.

Management noted that revenue per product for financial services nearly doubled from a year ago and grew 25% sequentially in the fourth quarter to annual revenue per product per person of $40 — if average revenue per user of SoFi’s financial products continues to grow, should see positive operating effect on a larger scale this year.

Further out: International and SME growth

While personal loans and financial products should bolster SoFi’s 27% guided growth in 2023, CEO Anthony Noto also mentioned two other different ways for the company to expand beyond this year.

First, SoFi acquired its other fintech platform company, Technisys, last March, merging the cloud-based banking platform with its existing Galileo banking-as-a-service platform, which it had acquired in 2020. During the quarter, management noted that Technisys inked its first digital deal in Mexico, and Galileo also reported strong growth in Latin America as well.

On the conference call with analysts, Noto said, “The opportunity to expand geographically is greater than you could imagine.” But he added the reminder that SoFi is going to ramp up its investments, and looks set to penetrate Latin America without any other major geographic expansion plans this year.

In addition to geographic expansion, Noto also said that the small and medium-sized business (SMB) space could become another attractive market over time, as it is still a consumer company at the moment. He said many of their customers run their own small and medium-sized businesses and have asked for business checking and savings products.

In fact, many had asked SoFi for Paycheck Protection Program loans during the pandemic, but it had to redirect them to other banks set up to provide such loans.

Noto said that now that the company has a banking license, it may well expand into the SMB space, which is “a big opportunity for us.” While the SMB space isn’t on SoFi’s 2023 spending plans, he said, it could get there in the second half if the economy does better than feared and SoFi reaches profitability earlier than expected.

As of now, however, it appears that SoFi will take a more measured and deliberate approach to international and SME opportunities. Therefore, this year the company should aim to penetrate further into existing markets within personal loans, financial products and Latin America with Galileo and Technisys. Based on the results and the latest outlook, there are many opportunities within these existing markets in 2023.