SoFi Technologies, Inc. (NASDAQ:SOFI) is trying to do something most financial companies have struggled to pull off: get customers to use one platform for almost everything involving their money.
The company now offers banking, investing, credit cards, loans, crypto, financial planning, and more. But the number of products alone does not create a moat. The more important question is whether all these products are making SoFi cheaper to operate and harder for customers to leave.
There are signs that both are starting to happen.
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The cost advantage is becoming more interesting
SoFi’s digital model gives it an obvious advantage over traditional banks: it does not need a large branch network. But the more interesting cost advantage may be what happens after a customer joins.
CEO Anthony Noto said SoFi is growing members 35% year over year and products more than 40% while keeping customer acquisition costs roughly stable. He also said the acquisition cost for downstream products is “basically zero” when an existing member adds another product.
That is potentially powerful.
If SoFi Technologies, Inc. spends money to acquire a customer for its checking account, it does not have to acquire that customer again when they open a brokerage account, get a credit card, or take a loan. The same customer can generate revenue across multiple products.
And this is no longer just a theoretical strategy. In the latest quarter, 51% of new products were opened by existing members, up from 35% a year earlier. Products are now growing faster than members.
That suggests SoFi is beginning to get more valuable without having to find a completely new customer every time.
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The real moat could be the relationship
This is where SoFi’s “Everything App” strategy gets interesting.
SoFi Plus and SoFi Coach are designed to pull the existing products together. Plus encourages customers to use more of SoFi, while Coach can analyze a member’s financial picture across both SoFi and outside accounts.
That creates a potential flywheel: more products lead to more engagement, which creates more opportunities to sell additional products, which increases the value of the customer and makes the economics of acquiring that customer better.
SoFi’s growing deposit base adds another layer. Deposits reached $45.5 billion, giving the company a growing source of funding for its lending business. Management also expects margins to expand as higher-margin businesses become a larger part of the mix and operating leverage kicks in.
But having an ecosystem isn’t the same as having switching costs
This is still the part SoFi has to prove. Moving a brokerage account or credit card is inconvenient, but it is hardly impossible. Customers can still compare SoFi with banks, brokers, and other fintechs. And lending remains a competitive business.
The difference is that SoFi is trying to make leaving increasingly inconvenient by becoming more useful. If a customer has their checking account, investments, credit card, loans, financial data, and premium membership all tied together, the relationship becomes more valuable than any individual product.
That is a very different kind of moat from a patent or a regulatory monopoly. It depends on SoFi continuing to give customers enough reasons to consolidate more of their financial lives on the platform.
The valuation is betting on that flywheel
At 20.7 times forward earnings, SoFi may seem reasonable at first glance. But looking at that number on its own misses the bigger picture. The business is still scaling rapidly, with revenue expected to roughly double over the next three years. If margins expand as expected, thanks to operating leverage and a growing mix of capital-light businesses, the denominator of that forward price-to-earnings, which is the earnings, is already inflated.
Does SoFi finally have a moat?
SoFi is starting to show the ingredients of one, but I would call it an emerging moat rather than a finished one. The digital model can give it a structural cost advantage. More importantly, the growing percentage of products coming from existing customers suggests the Everything App is beginning to create a real economic flywheel.
The real test is whether all these products actually make customers stick around. If SoFi can keep getting customers to bring more of their financial lives onto the platform, it could eventually become much harder to replace than a bank or fintech that only offers one or two products.
Market Sentiment
Hedge fund interest in SoFi Technologies weakened in the latest data. The number of hedge funds holding the stock fell from 47 in Q1 to 44 in Q2, while the total value of their positions declined from approximately $1.53 billion to $987 million.
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This article is originally published at Insider Monkey.
