Five things to know about SoFi as it goes public

Noto’s past experiences across the worlds of tech and finance gave him the impression “that no one had really built a financial-services experience on one digital platform and used data to drive great value,” he told MarketWatch.

The financial-services company is set to go public shortly in the coming weeks through a merger with Social Capital Hedosophia Holdings Corp. V IPOE, -5.29%, a special-purpose acquisition corporation, or SPAC. The deal, announced in early January, is expected to provide up to $2.4 billion in cash proceeds — which includes a $1.2 billion private investment in public equity, or PIPE, led by Chamath Palihapitiya, the chief executive of Social Capital — and assigned an $8.65 billion post-money valuation to SoFi.

The SPAC route has proven popular over the past year, though less so for companies of SoFi’s size that have some name recognition. Noto told MarketWatch that a SPAC merger made sense for his company because it allowed SoFi executives “to provide a more holistic view about where the company is going in the near term versus the long term” when speaking with potential investors.

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Here are five things to know about SoFi as it prepares for its public debut.

All things finance

SoFi offers a range of financial services, including brokerage and investment accounts, various loan offerings, a credit card and small-business financing. The company’s target customers are those it calls “high earners not well-served,” or people who have taken out financial offerings from multiple banks.

The company argues that there’s a “lack of an integrated one-stop shop on one digital platform” when thinking about what traditional banks are able to offer, according to a slide deck included in the SPAC merger announcement. SoFi positions itself as the only company offering a suite of varied financial services in one place.

SoFi’s view is that consumers are better served when they deal with one provider for various aspects of their financial lives, since decisions about money are often intertwined. “If we just help with investing and don’t help in buying a house, [members] could dig a hole taking out too much debt,” Noto told MarketWatch.

Of course, this strategy holds benefits for SoFi as well. By marketing additional offerings to existing customers, those new product sales become more profitable. Nearly a quarter of SoFi’s product sales are made to existing customers, led by home loans at nearly 70%.

SoFi’s strategy resembles what can be seen in China, where companies like Ant Group have built financial “super-apps” that combine multiple elements of financial services in one offering. A true super-app hasn’t yet emerged in the U.S., but companies like SoFi and PayPal Holdings Inc. PYPL, -0.18% are trying to broaden their capabilities to resemble them.

A tech mind-set

Just as social-media companies talk about growing their daily usage, SoFi is also striving to become an everyday staple in people’s financial lives.

The company provides a feed of financial information that Noto likens to the news feeds on Twitter and Facebook Inc.’s FB, +2.72% platforms. SoFi has its own daily podcast and newsletter, and it also brings in third-party content, using data to determine what’s most relevant to a particular user.

SoFi customers, known as members, have access to perks like free coaching from a certified financial planner or free estate-planning services for those looking to draft wills. More than 1.7 members had borrowed through SoFi or used its SoFi Money brokerage product as of the company’s SPAC deal announcement, and SoFi targets 3 million members by the end of 2021.

“Once you’re a member, you’re always a member because we want you to come back every day,” Noto said. That way, users may be more likely to consider SoFi for an additional financial product once they hit new life-cycle milestones.

SoFi is led by Noto, who took over as chief executive three years back after formerly serving as the chief operating officer of Twitter, the co-head of Goldman Sachs’ technology investment banking group, and the chief financial officer of the National Football League.

Bank on it

SoFi is among a handful of fintech companies that have shown the desire to go deeper into financial services by obtaining a bank charter.

The company plans to acquire Golden Pacific Bancorp Inc., a small community bank, in pursuit of that effort. SoFi had already received preliminary approval from the U.S. Office of the Comptroller of the Currency for a national bank charter back in October, but it was still waiting on other approvals. By taking over a small bank, SoFi can apply for its charter through a “change of control” process, which is generally quicker than applying for a new charter.

SoFi currently has to partner with existing players to provide Federal Deposit Insurance Corporation (FDIC) insurance and to offer interest rates currently, according to Noto, so obtaining a bank charter would allow the company to take on those functions on its own and achieve a lower cost of funds.

“By being a bank, we will be regulated by fewer entities in a more uniform way at a national level,” Noto said — SoFi is currently regulated by states that can have different rules.

Growing revenues, widening losses

SoFi generated a net loss of $141 million on revenue of $394 million during the first nine months of 2020, after losing $117 million on revenue of $378 million in the first nine months of 2019.

The company expects losses to swell again next this year, to $238 million from an estimated $220 for all of 2020, before narrowing to $13 million in 2022. SoFi predicts it will become profitable on a GAAP basis by 2023, projecting $200 million in GAAP net income in that year.

While the bulk of SoFi’s revenue comes from lending, the company expects the business to become more balanced by 2025 with greater revenue from financial services and the company’s technology platform.

A rising tide

SoFi is positioned to benefit from a broader shift toward digital banking through its Galileo platform, which uses application programming interfaces, or APIs, to let companies build financial services offerings. The APIs enable account setup, funding, direct deposits, money transfers, bill payment and other capabilities, SoFi said in a release announcing its acquisition of Galileo for $1.2 billion last April.

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“By building for SoFi, we know what’s needed,” Noto said, so SoFi can leverage the Galileo platform for itself while also offering the API functions to partners.