How It Works: How SoFi Makes Money
How It Works is an ongoing series here on our blog, exploring and demystifying topics about which we hear often from our members and the public. Today, we’re taking a look at how SoFi makes money.
[UPDATED 5/15/20 to include the latest information on how SoFi makes money.]
[UPDATED 9/25/19 to include information on how SoFi Crypto makes money]
[UPDATED 5/7/19 to include information on how our SoFi-branded ETFs make money]
[UPDATED 3/6/19 to include updated information on how SoFi Invest makes money]
[UPDATED 11/29/18 to include information on how SoFi Money makes money! We also updated how we make money on our Invest product.]
SoFi is able to offer products and services at competitive rates to members because we pride ourselves on our efficiency. As with any time a company implements a new or different way of doing things, people may wonder, “Is there a catch?”
We’re here today to explain how we make money—it’s something we think every consumer should know about the companies they do business with, in finance or any other sector. Since we offer a variety of products, we’ll break this down by product area.
Our Lending Products
First, our lending products (that’s Student Loan Refinancing, Personal Loans, Private Student Loans, and Home Loans). There are many different ways companies make money in lending—some make their money on origination fees and get paid when a borrower takes a loan, others by holding the loans and making money from the interest the borrower pays, and others by selling loans after they’re made to investors while maintaining some ownership for themselves.
We employ a blend of the last two approaches at SoFi, but primarily make money the third way, through securitizations and whole loan sales. The buyers in these securitizations are institutions like pension and insurance funds, as well as other asset managers, who pay a premium upfront for the future potential cash flows from the loans. We’re able to make money through securitizations because investors trust the quality of our loans.
This enables us to have access to funds at a very competitive rate—often, on par with large commercial banks with big balance sheets—without “selling” our relationship with our members.
We then pass those savings on to our consumers by offering them loan products at an interest rate below their current rate, but above our cost of financing. This represents a win-win: the member saves money on their loan payments and SoFi makes enough money to keep doing what it’s doing.
Who Buys SoFi’s Loans?
Who buys SoFi’s loans? Investors like pension and insurance funds, as well as other asset managers. They are willing to pay a premium above the principal value of the loan upfront for the future potential cash-flows.
We sell these loans in two ways: (1) “whole loan sales” where we sell a group (called a “pool”) of loans in their entirety to investors, and (2) “securitizations” where we group the loans together and their combined cash flows pay specific groups of investors (called “tranches”) in a specific sequence. Having multiple ways to sell our loans ensures we have cost-effective financing and reduces the risk that the market disrupts our business.
To break the process down more simply, here’s an example: let’s say SoFi extends a student loan that pays 5% annual percentage rate (APR) for five years with the principal due at the end of those five years. If our borrowers were paying 7% APR originally, for example, they now save a whopping 2% APR each year. Nice!
The value of the total loan is 125% of the original loan amount (5% APR x 5 years in interest; 100% in principal). We sell the loan to investors for 105%. For taking on the risk of loan repayment, investors will get 20% (125% – 120%) over five years; SoFi will get 5% upfront to cover its cost of borrowing funds, its operations, and the memberships perks it offers to its clients. Double nice!
Our Investment Products
We also offer Active Investing, the ability to buy and sell individual stocks and ETFs (and fractional shares of them, called Stock Bits), without any account minimums or commissions. Through Active Investing, we earn revenue in a variety of ways, all of which help to keep the service free for our members!
We earn interest from both uninvested cash held in the account (through an FDIC sweep program that also helps keep your cash safe) and from securities that are lent to institutions that need to borrow shares.
We also earn a small amount of money from rebates that we receive from market makers through our clearing firm, Apex Clearing, for choosing them as our execution partner. This practice, called payment-for-order-flow, has been the source of some debate , but we have heavily researched the practice and have found it to be in the best interest of consumers (as we said above, it is one of the things that allows us to offer this service without commissions). It’s important to note, as a regulated broker-dealer, we are always legally required to give you the best price, called Best Execution, on the stocks or ETFs you want to buy.
On SoFi Crypto, we make money by applying a markup of up to 1.25% to all transactions.
You may have heard that we recently launched our own SoFi-branded ETFs. We make money on those from the expense ratio on the ETFs multiplied by the amount of assets purchased, minus the expenses it costs us to run the ETFs.
Given that we waived the fees* for the first two (SoFi Select 500 and SoFi Next 500) until June, 30, 2020, we’re actually losing money on those. For SoFi 50, the expense ratio is 29 basis points and for SoFi GIGE, the expense ratio is 59 basis points.
Our Deposit Account
With SoFi Money®, like with other debit and credit cards, we earn a small amount of interest on the money in the accounts and from the merchant with each swipe of the debit card.
But unlike most banks, SoFi has lower costs from doing business online, so we pass those savings on to our members in the form of higher interest paid on deposits—and we don’t charge extra account fees on top.
We also offer term life insurance through our partnership with Ladder. For life insurance, we earn a set marketing fee every time a member submits an application for life insurance.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
*Investors buy and sell ETF shares through a brokerage account or an investment adviser like ordinary stocks, brokerage commissions and/or transaction costs or service fees may apply. Please consult your broker or financial advisor for their fee schedule. The Fund’s investment adviser has agreed to waive its Management Fees for SoFi Select 500 ETF and SoFi Next 500 ETF until at least June 30, 2021.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC .
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates are a bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION. Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.