If you dig into SoFi's (NASDAQ:SOFI) Q3 earnings report, it is easy to see that the financial services division is the largest drag on earnings of the company's three main business segments. It's been the smallest contributor to quarterly revenue and has never turned a contribution profit, which shows how profitable a segment is. In fact, SoFi's financial services division regularly generates a contribution loss between $24 million and $40 million.

But despite the bad financial performance, the financial services division is arguably the most important to SoFi's success now and in the future. Here's why.

Services drive the flywheel

SoFi is seeking to become the digital bank for all a person's financial needs, targeting high-income earners who are poorly served by their current financial institutions. Its lending division currently offers student loans, personal loans, and home mortgages. Its technology platform, Galileo, assists other fintech firms with front- and back-end functions. And its financial services division offers a number of products, including the SoFi Money cash management account, the SoFi Invest online brokerage, and the SoFi credit card.


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If you've been following SoFi, you've probably heard a lot about its flywheel strategy, which involves getting customers to use multiple products the company offers. When SoFi can get members from its base of nearly 3 million to purchase two or more financial products, they become a lot more profitable to the bank because there is no customer acquisition cost for that second product.

The financial services division is key to bringing customers onto this flywheel. SoFi at the end of Q3 had nearly 1.2 million cash management accounts, more than 1.2 million SoFi Invest accounts, and more than 65,000 credit card accounts. CEO Anthony Noto said on the Q3 earnings call that these three products accounted for 73% of total cross-selling in the quarter. When a member from SoFi Money, Invest, or the credit card takes out a loan with SoFi, the value of that customer jumps to more than $1,600, twice that of a customer who solely took out a loan.

CFO Chris Lapointe also said that if you add SoFi Relay to the mix, that would bring cross-selling from the financial services division to nearly 85% of total cross-selling. SoFi Relay allows members to manage their credit scores and all their financial accounts in one place. It doesn't generate revenue, but as Noto said on the earnings call, it gives SoFi a lot of data on its members by showing it how many credit cards they have, for example, or what they might be paying on an existing personal loan. SoFi can then use this data to target customers and see if they want to refinance their credit card or personal loan with SoFi at a better rate. Or if the company sees a high cash balance in a Money account, it can offer a financial planning session, which may lead to that member opening a brokerage account.

Driving the ecosystem

Despite the contribution losses from financial services, the segment powers the whole flywheel because it draws members in quickly and then primes the pump for cross-selling. It has also roughly quadrupled revenue year over year.

I imagine management will want this segment to be much more profitable over time, but it has said financial services will remain in "investment mode." However, financial services will likely get much more profitable if SoFi can obtain its much-anticipated bank charter. With the charter, SoFi will be able to hold all the deposits it gathers, which it can use to fund loans with improved margins or simply invest into securities that generate interest income. For now, though, it's OK for financial services to lose money because it's powering the flywheel that is generating all the lending revenue.

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