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 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’re more efficient than traditional financial institutions. As with any time a company invents a new 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, 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 cashflows. 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% APR for five years with the principal due at the end of those five years. Because our borrowers were paying 7% APR originally, 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, 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.
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. Most banks charge an average of $329 in account fees per year,1 whereas SoFi Money charges zero. Not unlike Wealth, this is a newer product for us, and we expect to offer many more features and perks in the years to come.
We also offer Term Life Insurance through our partnership with Ladder Life. For life insurance, we earn a set marketing fee every time a member submits an application for life insurance.
SoFi Lending Corp. is licensed by the Department of Business Oversight under the California Financing Law, license number 6054612. NMLS #1121636.
Neither SoFi nor its affiliates is a bank.
SoFi MoneyTM is offered through SoFi Securities LLC, member FINRA/SIPC.
Advisory services offered through SoFi Wealth LLC (SFW) a SEC Registered Investment Adviser.