To The Moon

I set out earlier this year to answer the most common bear arguments against investing in SoFi Technologies, Inc. (NASDAQ:SOFI). So far I've coveredstock-based compensationand dilution,dependency on studentloans, andbalance sheet, profitability, and free cash flow. All that is left is to answer the moaters – those who say that SoFi lacks a competitive advantage and that everything they do can be easily replicated (i.e., SoFi has no moat).

I quickly realized as I started writing that I had far too much material to fit into one single article. So I'm going to break this up into two parts. Today we will talk about the customer-facing products they offer. Next time I will delve into the most misunderstood part of SoFi’s business, which also happens to be the hardest to replicate: their technology segment.

Moats Are Built, Not Bestowed

In 1995,Warren Buffett said,

“The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle.”

The most successful companies have something unique that distinguishes them and makes them unrivaled in some way. Moats can take the form of brand, technology, patents, high barriers to entry, cost savings, or numerous other competitive advantages.

Apple (AAPL) has their brand and ecosystem. Google (GOOG,GOOGL) is far and away the most used search engine. Amazon (AMZN) is the first place you look to buy pretty much anything. Here is the thing though, it isn't like some magical moat fairy came down, waved her magic wand, and granted these tech giants an unassailable position at the top of market cap mountain.

I'm old enough that I remember opening up multiple instances of Netscape to type the same search query into Lycos, Google, Excite, Infoseek, Yahoo, and (my personal favorite at the time) AltaVista to see which search engine turned up what I was looking for. I remember when Blackberry was the market leader in smartphones, and I remember buying books from Amazon when that was all they sold.

Google dug their moat by engineering a superior algorithm and caching results for commonly searched words and phrases. They became the de facto search engine because their results were consistently the most relevant and their response time was faster. At theturn of the millennium, 17% of web users visited AltaVista at least once a week and only 7% of web users visited Google once a week.Sometime around 2004, Google’s market share went above 50% and it only grew from there, They widened that moat by staying nimble and giving free or low-cost access to an ever-growing suite of products (Gmail, Drive, Photos, etc.) and making the greatest acquisition of all time (YouTube).

Apple went from failing at their current business to becoming the most valuable company in the world in less than a decade. Seriously, from the mid-90s to mid-2000s, their main revenue generator was computers, their niche market were designers, and they were getting crushed. Windows 95 cut their already single-digit market share in half and it stayed that low for a decade, hovering between 2-3%.

Apple's Worldwide PC Market Share(Reddit)

Then they built a brand. In 2006, Apple created one of the best advertising campaigns of all time with their 4-year "Get a Mac" campaign. It featured a young casual actor introducing himself as "a Mac" compared to an older more formal actor in a suit and tie who played "a PC."The adswere brilliant, firmly entrenching the idea that Macs were faster, more reliable, less prone to errors and crashes, and easier for building websites and working with movies, pictures, music, and other media. Between that and the success of their iPod, and iTunes becoming the program for creating and playing music libraries, they started taking market share back. Then they released the iPhone in 2007 and never looked back. Apple is now an entire ecosystem of hardware products that basically sell themselves because each device is excellent on its own, and, more importantly, because all of them work best together.

The point is that, with the rare exception of heavy patent protection, a moat takes time to dig and fill with water. As good companies grow, they make it deeper, wider, and fill it with sharks with laser beams attached to their heads. Anyone could have reasonably argued that Google was "just a search engine," Amazon was "just a retailer," and Apple was "just a failing computer manufacturer." Moats are the result of creative vision, leveraging competitive advantages, and exceptional execution. A moat is built, not bestowed.

SoFi's consumer business

SoFi's pitch is pretty simple, it's a "One-stop shop for all your financial needs." The products include checking and savings accounts, investment and crypto brokerage (including IRAs and robo-advisors), credit card, personal loans, student loans, mortgages, SoFi Relay (finance tracker, budgeting, and credit score tracking), insurance offerings, and other smaller products. They want to be there for and support their members (what they call their customers) through every part of their financial journey. The playbook they have islaid out byCFO Chris Lapointe (I've lightly edited his words for brevity and clarity):

SoFi Productivity Loop(SoFi)

"We have deployed a strategy that we call the Financial Services Productivity Loop, and that has three main components."

1. "The first one is creating a comprehensive set of products that are each and individually best-of-breed [...] in addition to that, we want each of those products to work better when they're used together."

2. "The second key element of our overall strategy is to have superior unit economics across each and every one of our products and vertical integration is a key component of that."

3. "The third component is investing in our fintech platform in pursuit of becoming the AWS of fintech."

I'll cover the first two points today and discuss the AWS of fintech in my next SoFi article.

Best-of-breed products

SoFi wants each of their individual products to stand on its own against all competing products and come out on top. If customers have a great first experience, it builds trust and gives them confidence to use SoFi for their next financial need. The ability to cross sell is a core part of the SoFi thesis. Each time an existing member uses a new product, SoFi gets incremental revenue without having to pay a new customer acquisition cost (CAC). Additionally, it makes the product stickier, since now the member is more embedded into the SoFi financial ecosystem. Let's look at each main product to determine how execution is going.

SoFi Checking & Savings

Checking & Savingsis SoFi’s main “top of the funnel” product. It is meant to get members in for the lowest possible CAC. They do this by offering very high APY on both checking and savings accounts. Since becoming a bank, their APY has steadily risen as the Fed has raised rates, from 1% in February to 1.25% in April, 1.5% in June, 1.8% in July, 2% in August, and 2.5% at the end of September.

Checking & Savings also requires members to use SoFi as their direct deposit to access this higher APY (they get 1.2% without it). There is also a new account sign up bonus of up to $300 tied to, you guessed it, setting up direct deposit. SoFi understands that direct deposit is the key to modern banking. Your primary bank is where you send your direct deposit. SoFi Checking & Savings is elite in most other ways as well. No fees, 2-day early direct deposit, ability to set up automated savings, vaults so you can put your savings into different buckets, overdraft protection, mobile deposit, etc. They do not offer ATM fee reimbursement, but ATM withdrawals are free through the Allpoint network, the nation's largest network, which has more than 3x the ATM locations of Chase. Cash deposits are the main drawback since they lack physical branches. Cash deposits can be made at Green Dot locations (Walgreens, 7-Eleven, Walmart, others), but there is a fee.

APY is truly the differentiator here compared to legacy institutions and most neobanks. Chime offers 1.5%, Ally offers 2.1%, and LendingClub gives 2.65% as of the time of writing. All of those are for high-yield savings and do not include checking accounts. SoFi is the only option to have full liquidity and high interest at the same time. Investing apps Wealthfront and Robinhood also offer interest on cash balances in their account. Wealthfront offers 2.55% and Robinhood offers 1.5% for most users and 3% if you have Robinhood Gold. SoFi has been above most competitors most of the time through the last 6 months, although not always at the top (as with LendingClub right now).