Here’s Why SoFi’s Long-Awaited Banking Charter Will Improve the Business

After a few difficult months for the stock, SoFi (NASDAQ: SOFI) Shareholders recently received good news when regulators approved the company’s application to become a bank. Now, SoFi will be able to complete its previously announced acquisition of Golden Pacific Bancorp and become a bank holding company.

SoFi plans to capitalize the bank with $750 million, and the bank will have $5.3 billion in assets once the deal with Golden Pacific closes, which is expected to happen in February. Following the bank charter announcement, SoFi shares soared.

Here’s why SoFi’s long-awaited banking charter will improve the company’s operations.

Image source: Getty Images.

Rationalization of operations

Despite competition in banking, many fintech companies start out as tech companies and don’t have official banking licenses – they’re not easy to get. So most fintechs tend to partner with licensed banks to do things like hold the deposits they collect from their members (unlicensed banks cannot hold deposits on their balance sheets) and grant them loans in some cases. This usually involves some sort of revenue sharing. Moreover, since banks cannot use deposits to fund loan origination, they have to resort to more expensive funding.

One of the key benefits of the bank charter will be to allow SoFi to reduce its interest expense, which is the interest SoFi pays on debt that it uses to fund assets such as loans. . According to its recent regulatory filing, the company’s current sources of financing for originations include securitization debt and warehouse financing. SoFi is paying interest on this funding of almost 4% and 1.6%, respectively. This financing is also less reliable under certain market conditions. Currently, most savings and checking accounts pay very little interest, and even many high-yield savings accounts pay significantly less interest than these higher-cost sources.

With the banking charter, SoFi will be able to transfer all deposits from its SoFi Money cash management product that it currently sends to a partner bank to SoFi for safekeeping. SoFi Money accounts exceeded 1.16 million at the end of the third quarter, so they should offer a decent source of funding which will also increase in the future. This will significantly reduce the cost of funding SoFi’s loan originations, or it can maintain both sources if it needs to grow.

Additionally, having a bank charter will make it easier for SoFi to hold loans on its balance sheet, whether to hold loans for longer periods or until completion. Most fintech consumer lenders sell loans that they immediately grant to an investor or bank for a fee. But when you hold a loan on the balance sheet, you can collect interest payments every month, and that loan ends up being more profitable over its life, as long as it doesn’t go into default.

With a banking charter, SoFi will have more clarity from a regulatory perspective on its operations. This is also another signal to investors that SoFi is a trustworthy lender. Although the company has a good reputation, given that it has been lending for several years now, I think investors see this as a good sign that a fintech company is willing to take risks on its balance sheet, even if I’m not yet sure how long SoFi plans to hold on to its loans.

In its first presentation, management showed the impact of the bank charter on earnings before interest, taxes, depreciation and amortization (EBITDA). Although the numbers have probably changed, as this presentation is now about a year old, I think it illustrates how useful the banking charter can be.

Adjusted EBITDA with and without bank charter.

SoFi investor presentation January 2021.

Take a key step

Although the banking charter has been long overdue, it has raised some questions, given the regulatory uncertainty in banking in Washington in recent months. It is also not easy for a fintech to obtain a banking charter. The charter will make the deposits that SoFi collects much more valuable and will greatly help the economy of the unit in its lending division. Ultimately, expect higher revenue and EBITDA this year and in the future with the now secure banking charter.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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