Over the past two weeks I have been studying about what it takes for a company to reach a trillion dollar valuation. Based on professor Scott Galloway’s proprietary T-Algorithm I will analyze what improvements SoFi bank should make to get there and where it currently stands. (As a side note, I highly recommend subscribing to Prof G or taking his courses over at Section4.)
Laying the Foundation
SoFi started back in 2011, the company grew rapidly year over year and they are now celebrating having more than 2 million members. The company recently IPO’ed under a SPAC deal lead by Chamath Palihapitiya under the ticker symbol $SOFI and has been getting a boost by the r/wallstreetbets community. The company started out with loan refinancing and has been been steadily expanding its services into crypto, stocks, insurance and banking services.
Personally, I use SoFi because of the wide array of services it provides and the integration capabilities with banks, brokerages, and mortgage lenders.
Using the T-Algorithm we can plot SoFi against it’s competitors to see where it currently stands.
For my comparison I have only selected companies that offer checking accounts and are purely online. I did not include large banks like JP Morgan or Wells Fargo because in my opinion they are not considered Fintech banks.
Appeals To Human Instinct
Robinhood is sexy, the company promises commission free trading and they have recently rolled out IPO investing along with a checking account for managing your cash. If you look at the screenshots on r/wallstreetbets you will see my fellow apes posting Robinhood options crashing down to $0 with some traders loosing fortunes. Robinhood is a status symbol, we are at the point where asking someone if they are on Robinhood is synonymous with trading stocks. Robinhood clearly appeals to human instinct, more specifically the genitals. When a company appeals to the genitals the goal is to make the brand synonymous with seeming more attractive. Robinhood users are attracted to gaining riches and the r/wallstreetbets community highlights the winners and celebrates the losers. Most importantly, Robinhood gives people investing the investing tools and leverage to live out their Wolf of Wall Street dreams.
While Robinhood wins in appealing to human instincts, SoFi appeals directly to the gut. With SoFi you get more for less, they give you everything completely free. You park your cash, trade stocks and can view your assets without paying a dime, in fact they will pay you every day that you log in to the app. Unfortunately when it comes to appealing to the gut, it becomes a race to the bottom, whoever can provide the most services at the cheapest price will win.
Unfortunately when it comes to appealing to the gut, it becomes a race to the bottom, whoever can provide the most services at the cheapest price will win…
People working at Amazon, Facebook, Google or Apple have immediate brand recognition. While SoFi is making its way there, the brand is not as widely recognized as Robinhood. Having Robinhood on your resume can be seen as a career accelerant and working there can be the jumping off point to any other FinTech company, additionally as soon as the company IPO’s this year, instant millionaires will be minted.
Growth + Margins
One thing most FinTechs have in common is that they are growing rapidly. FinTechs are focused on growing their user base and are willing to operate at a loss to continue growing. Both Robinhood and SoFi are currently unprofitable, while it is projected that SoFi might become profitable in 2023. It’s extremely important for SoFi to continue growing, once optimum growth has been achieved the bank can begin to trade growth for margins.
A good example here would be Ally Bank which has the first mover advantage for online only banking. Ally has a large existing user base and they where the original online bank. While Ally continues to grow, the bank is profitable and working on improving those margins.
Rundle (AKA “Recurring Revenue Bundle”)
Is your bank so amazing that you’re willing to pay a for a subscription service? Does this bank offer more than just banking? Robinhood has the “Gold” subscription for $5 a month that provides insights into the market, better data and margin investing. SoFi is completely free and does not have a recurring
revenue strategy outside of loans. Among all the Fintech’s out there is one with a resemblance of a Rundle; M1 Finance.
M1 Finance has a subscription service that offers margin investing, custodial accounts, discounted borrowing rates and increased checking account rates of up to 1%. M1 finance has a subscription service worth paying for. While the company is still expanding its list of services, M1 Finance is definitely on the right track to creating a solid Rundle.
The importance of a Rundle has been praised and highly rewarded by Wall Street. Rundles such as Amazon Prime and Microsoft’s Office provide great value to both stock holders and its customers. For SoFi to develop a Rundle the company would have to look into providing a premium service such as managed portfolios bundled with reduced interest rates, and added benefits.
It’s critical for Banks to be vertically integrated, most FinTech banks do not have their own bank charter and instead use an array of services from larger chartered banks to provide their banking solutions. When Robinhood first started, they used Apex Clearinghouse (currently under SPAC) as a middleman to validate their transactions. As the company grew, they created their own clearinghouse with the goal of providing this a service. Robinhood removed its self reliance on the middlemen and highlighted how important it is to vertically integrate during the Gamestop fiasco.
SoFi has also invested in vertically integrating and actually owns a small part of Apex Clearinghouse, most recently they acquired Galileo for payment processing and have been looking into getting a bank charter in order to provide higher checking account interest rates.
A great example of how vertical integration will help SoFi reach a one trillion dollar valuation is by looking at Amazon. Amazon has built a great IT infrastructure that dominates the cloud hosting space. On top of hosting, Amazon has taken over their supply chain by building a massive fleet of vehicles to remove their reliance on the postal service.
Banks have a really great Benjamin Button effect. The more customers a bank attracts the more money available for loans, as customers age they increasingly need more services to match those stages of life.
SoFi knows this is their competitive advantage, the bank started out with re-financing student loans, those student’s started working and started making disposable income so they began to offer home and auto loans. Those working people began to build wealth and SoFi came out with checking, credit and stock accounts. SoFi has been growing with the needs of its aging user base and has only been getting better.
As the largest short squeeze in history was about to commence, I was strapped to my phone looking for an entry. If this baby took off, I wanted to go with it. It was common knowledge among the r/wallstreetbets crowd that Friday was launch date, Wednesday morning the the stock took off. Gamestop made a 104% percent jump, at this point there was no going back we were going to the moon, except we could not hop on. Gamestop trading was halted, you could no longer buy the stock. How do you keep people from squeezing a stock? You prevent users from buying and only let them sell to the “institutions”... Robinhood made the wrong move, and the fastest loss of trust in a company ensued, the apes were furious. Robinhood went from being one of the most beloved upcoming fin-techs to the most despised overnight.
Robinhood worked tirelessly to regain its credibility, all people wanted was a sincere apology. The app is still great and many users are back on it, however the r/wallstreetbets group is no longer on their side and has been promoting it’s competitors.
How do you keep people from squeezing a stock? You prevent users from buying and only let them sell…
Fortunately for SoFi, Chamath Palihapitiya, whom is hailed as the new Warren Buffet has spearheaded their SPAC offering. The man who is part owner of the Golden State warriors and was on the opposing side of the Robinhood debacle has only grown in likability and has promoted SoFi as a wealth building opportunity for the new generation of investors.
Robinhood gets a bad rapport for using confetti. Sure, it entices you to invite friends to the app and win free stocks. The app looks like a Tron 2.0 game and is visually stunning, their interface for selling options makes selling complex strategies look like a cakewalk. In my opinion Robinhood has a great UI/UX team behind it and is not really a game other than the already existing stock market game.
On the other hand SoFi does have a real gamification aspect to it. SoFi has a point system that rewards users for logging in to the app and viewing their balance and checking their credit. Each additional service that you use has an opportunity to earn points and you can even redeem these points for cash, stocks or crypto or payments on your loans. SoFi does not shy behind their gamification because users are rewarded for monitoring and improving their financial health.
Differentiation and Investment
After discussing the different companies in the T-Algorithm Grid we can now use Prof G’s differentiation and investment grid.
Using the grid above we can determine where our limited focus should be. While SoFi has some strong characteristics, it’s unfortunately lacking in two important departments. SoFi does not have a great Rundle strategy and is also lacking in being seen as a career accelerant. SoFi must also improve in appealing to human instinct if it wants to compete with Robinhood and increase their vertical integration efforts.
SoFi has some really great core competencies and the company should continue to invest in maintaining growth through user acquisition. In SoFi’s case growth and the Benjamin Button effect are symbiotic. As SoFi’s customer base grows, they are able to provide more competitive services and learn from customer engagement to improve their application. The modern day bank branch is no longer a physical one and Fintechs are now competing for the most valuable type of real estate: the home screen. SoFi is able to use its gamification to provide users a healthy way of keeping track of their finances and has a wide array of services to back them up at whatever stage of life they are in.
Chamath Palihapitiya is a well known investor and has grown in popularity over the last couple of years. It is important for SoFi to take advantage of having the backing of a welled like character and leverage his likeness to increase its user base.
For SoFi to reach a trillion dollar valuation, the firm must improve in three distinct areas and make them into a core competency.
Appealing To Human Instinct
SoFi provides so much value to its users, however when first selecting a bank, many people look at which bank offers the best interest rate to make their decision. SoFi offers free banking services and does not have a premium or subscription version of its product which is why it appeals to the gut (consumption). It benefit’s the users financially to use SoFi bank along with all their services, however when it comes to the gut it’s a race to the bottom and there can only be enough space for one player.
SoFi must continue to appeal to human instinct but should instead strive to move into the heart and souls of potential customers. SoFi can benefit from the network effect and having users that promote the product because they love and trust the company is crucial.
All of SoFi’s services target the mission of the company, SoFi want’s its users to “Get their money right”. SoFi has an app that allow’s you to keep track of ALL of your assets. You are able to track stocks, crypto, loans and mortgages using the Relay service. User’s have free credit monitoring and are offered tips on how to improve their credit scores.
SoFi’s mission is believable and is delivering on it as well, however in my opinion the mission is not aspirational enough. Compared to Airbnb’s mission “to help create a world where you can belong anywhere and where people can live in a place, instead of just traveling to it.”, I would argue that SoFi’s mission could become more aspirational.
SoFi must learn to master branding and visionary storytelling, their mission is too similar to Wells Fargo’s “we want to satisfy all of our customers’ financial needs”. SoFi has had a great story so far, it has provided services to the younger generations and improved their offerings as they grew in age and needs. SoFi should focus their investments into branding and visionary storytelling so that it can become a core competency.
SoFi needs to get a bank charter if it want’s to compete with the big guns, SoFi currently depends on multiple banks to provide its financial services. Cutting out the middleman and owning their supply chain will benefit both the company and its users. On top of banking and loan’s SoFi also provides payment processing through Galileo. Galileo powers SoFi’s money accounts and is used for other banking platforms as a service. SoFi should continue to expand into payment processing and expand its offerings to compete against services like Stripe, PayPal and Venmo.
Having a banking as a service platform can help SoFi continue to vertically integrate and provide a B2B revenue stream that can help differentiate SoFi from its existing competitors.
A word of caution
Apple is coming for financial services sector and has the capital to do it better than anyone else. Apple already has core competencies in vertical integration, visionary story telling and growth. With the click of a button, Apple can deploy its own banking service to its more than 1 billion active users and controls the supply chain to do so.
For a company like SoFi to set itself apart it must continue to grow and compete for the valuable real estate on the home screen. SoFi must learn to differentiate itself from its competitors and provide unmatched financial services.
(** Disclaimer : This is not financial advice. I use SoFi Banking and own SoFi stock so I am biased towards the company.**)
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