The least profitable division of SoFi could be the most important

If you dig SoFi‘s (NASDAQ: SOFI) Report on the third quarter results, it is easy to see that the financial services division is the biggest drag on the results of the three main business segments of the company. It was the smallest contributor to quarterly revenue and never generated a contribution profit, which shows how profitable a segment is. In fact, SoFi’s financial services division regularly generates a contribution loss of between $ 24 million and $ 40 million.

But despite the poor financial performance, the Financial Services division is arguably the most important to SoFi’s success today and into the future. Here’s why.

Services drive the wheel

SoFi seeks to become the digital bank for all of a person’s financial needs, targeting high income individuals who are underserved by their current financial institutions. Its loans division currently offers student loans, personal loans and mortgages. Its technology platform, Galileo, supports other fintech companies with front-end and back-end functions. And its financial services division offers a number of products, including the SoFi Money cash management account, SoFi Invest online brokerage, and the SoFi credit card.

Image source: Getty Images.

If you follow SoFi, you’ve probably heard a lot about its flywheel strategy, which involves getting customers to use multiple products the company offers. When SoFi can get its nearly 3 million base members to buy two or more financial products, they become much more profitable for the bank because there is no customer acquisition cost for that second product.

The financial services division is essential in getting customers on this wheel. SoFi at the end of the third quarter had nearly 1.2 million cash management accounts, over 1.2 million SoFi Invest accounts and over 65,000 credit card accounts. CEO Anthony Noto said during the third quarter earnings call that those three products accounted for 73% of total cross-selling in the quarter. When a SoFi Money, Invest or Credit Card member takes out a loan with SoFi, that customer’s value climbs to over $ 1,600 – double that of a customer who only took out a loan.

CFO Chris Lapointe also said that if you add SoFi Relay to the mix, it would bring the financial services division’s cross-selling to almost 85% of total cross-selling. SoFi Relay allows members to manage their credit scores and all of their financial accounts in one place. It doesn’t generate any income, but as Noto said on the earnings call, it gives SoFi a lot of data about its members by showing it how many credit cards they have, for example, or what ‘they could pay on an existing personal loan. . SoFi can then use that data to target customers and see if they want to refinance their credit card or personal loan with SoFi at a better rate. Or if the business sees a high cash balance in a Money account, they may offer a financial planning session, which may lead that member to open a brokerage account.

Manage the ecosystem

Despite the financial services contribution losses, the segment is fueling the entire flywheel as it quickly attracts members and then prime the pump for cross-selling. Its turnover has also quadrupled year on year.

I imagine management will want this segment to be much more profitable over time, but they said Financials will stay in “investment mode”. However, financial services will likely become much more profitable if SoFi can get its much-anticipated banking charter. With the charter, SoFi will be able to hold all the deposits it collects, which it can use to fund loans with improved margins or simply invest in securities that generate interest income. For now, however, it’s normal for financial services to lose money, as they fuel the flywheel that generates all loan income.

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