Why SoFi Loan Platform Business (LPB) Need Attention

It is the loan platform business (LPB). We know that there have been investors who are bearish that SoFi’s capital would eventually be constrained and this would mean SoFi’s growth would slow down. But as I looked at the latest earnings in details, I think how we looked at SoFi’s growth need a different perspective.

In Q3 2024, SoFi has already managed more than 30% growth in the number of members entering their ecosystem, so their revenue will continue to grow at very healthy rate above 20% each year.

The key here is the reasonable cost of customer acquisition (CAC), this can apply to whatever product they are adopting, then SoFi will be able to generate a healthy return.

One more important to note is SoFi will also have some of their members cross sell into their other products. This leads to greater lifetime vale (LTV) of each member at very low additional cost.

SoFi continue to grow the member base and as long as the product is good enough to keep these members around, SoFi is finding ways to monetize them.

With this LPB, SoFi can now compete with LendingClub’s marketplace business, they would be seen competing for those borrowers. One advantage that SoFi might have is the built-in advantage of their close-up ecosystem which will lead to greater customer retention, cross sell, and repeat sales. T

This would mean that SoFi’s one-stop shop could have market share continue to shift to SoFi. Most of SoFi’s members are not there for a loan, but will go to SoFi as one of their first options if they are looking for a loan.

Leveraging the existing user base is a powerful advantage of SoFi's model.

If we were to look closer at where is their target demographic for member growth, we will understand that it falls under this group, HENRYs (High earners, not rich yet).

Based on the U.S. Income By Age, these are people who are between the ages of 20 and 45 who make $100k+, but still have not become high net worth individuals.

From the chart below, we can see that the 90th percentile income for individuals does not cross $100k until sometime between the ages 30 and 35. Around 36% of the US population is between 18 and 45.

If we were to assume that and 15% of these people make more than $100k., this means that only about 18M people in the US possibly qualify as HENRYs.

SoFi will end the year with around 10 million members. This means that SoFi would need to expand their offerings to more than just HENRYs in order to continue to grow.

SoFi target this group because they have the highest LTV. The likelihood of this group default on the loan is less likely because of their higher income. This is important for SoFi to consider because how SoFi target the demographic of their customers would mean the risk that SoFi is willing to take from holding loans from lower quality borrowers.

So if LPB might solve this issue for SoFi, where SoFi can expand their credit box and originate those loans, but the risk is transferred out and SoFi still make money from these customers through fee.

And these borrowers would need to service the loan and will end up become members and be part of the SoFi ecosystem, customer might view SoFi as their lender because they are using SoFi existing system to pay their loans, so these customers could be cross-sell with SoFi other existing products, yet SoFi does not need to bear the risk of default as it is on another provider’s balance sheet.

So LPB gives SoFi the flexibility to expand their credit box, and expand the customer base, without the risk that typically comes with doing so.

One thing to note is that SoFi took a portion of some of the borrowers which are deemed not qualified, but helped them by using SoFi underwriting expertise to originate the loans on behalf of others, such as Fortress. Then they immediately transfer these loans within days or weeks to the balance sheet of their partners.

By providing the marketing, underwriting, and other services associated with originating the loans, SoFi was paid pretty well, and it is a win-win as SoFi managed to sign up any new customers acquired this way as new members and keeps a small ongoing revenue stream from servicing the loans.

The result was an explosion of a brand new business line, with the LPB bringing in a total of $61.2M in revenue in Q3. Thanks to SoFi, this revenue from this new business (LPB) was separated from the previous referral revenue in the 10-Q.

Total revenue from the loan platform business in Q3 was $55.6M in fees, with an additional $5.5M in servicing revenue. Of that $55.6M in fee revenue, $13.3M was from the referral via loan platform business, but we are seeing this new product (LPB) which SoFi started in Q3 went from zero revenue to $42.2M in just a span of one quarter.

On the servicing side, there was $5.5M in Q3 and a total of $12.2M recognized cumulatively in the year to date. Considering that we are looking at LPB adding around $44M of extra revenue in its very first quarter of operation.

And considering the other noninterest revenue from the financial services segment, which includes interchange revenue, brokerage revenue, and the referral business which only came in at $40.2M in combined total, the new LPB contributed more to the top line in this Q3 2024 earnings.

Not forgetting this is the very first quarter for LPB. Moreover, this revenue collected is a fee that SoFi collected in cash immediately, so there is absolutely no loss share agreements or financing agreements.

But one thing we need to be aware is it might be too early to project how LPB might in future earnings, but we as investors need to take note of this new product as one of the possible main revenue contributor.

From what I have found out, the Loan Platform Business could be a game changer for SoFi business model moving forward, I would not doubt if this brand new business which already has around a $200M annualized revenue run rate would be one of the key revenue contributor in the next earning.

The LPB allows SoFi to expand their credit box and target demographic without increasing their risk profile. Moreover, what the revenue source give is a completely capital light with high incremental margins revenue.

So the market analyst providing SoFi price target might not have priced in this brand new business when providing updates, but I would continue to monitor and see how the development of this new SoFi business goes.

Appreciate if you could share your thoughts in the comment section whether you think SoFi would be able to gain much more from this brand new business (LPB) from the next reporting quarter.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.