Here's Why SoFi's Banking Charter Could Be a Game-Changer

Fintech disruptor SoFi (SOFI 2.70%) has officially received regulatory approval to become a bank. At first glance, it might not seem like this will change much, as SoFi already offers loans, money management accounts, and many other features you might expect from a bank. However, in this Fool Live video clip, recorded on Jan. 20, Fool.com contributors Matt Frankel and Jason Hall discuss why a bank charter could be a game-changer for SoFi and its investors.

Matt Frankel: SoFi, if you have not seen ticker symbol, SOFI, the mobile-first fintech platform is officially becoming a bank. They had entered an agreement a while to go to buy Golden Pacific Bancorp. I think that based near where Jason used to live in California.

Jason Hall: It's up in San Francisco. It's a small local bank.

Frankel: Yeah, it's a small bank.

Hall: Yeah. Really small bank.

Frankel: But the point was to acquire a banking charter in the process of buying a charter. That's what they are buying. They don't really care about the branches.

Hall: With that said, I think that they did target a bank that they could buy, that had the right leadership that would fit within the larger organization to continue to run it.

Frankel: Sure.

Hall: Because if you didn't, regulators weren't going to approve it and it was going to be harder to go forward because even if you manage to get a buy, you're going to have to find somebody to run that part of your business.

Frankel: Great. Like Jason or I could go to regulators and say we're going to start and run a bank and they would laugh us out of the office. You have to have a better leadership team in place, with experience, things like that.

Hall: Right.

Frankel: SoFi is becoming a bank. At first it might not sound like anything is going to change. If you look at SoFi's products, they currently have a bank alternative account called SoFi Money, that essentially provides most functionality that checking and savings accounts do. They are already making most types of loans you could want. I think auto loans are the one big exception that they don't make right now. They offer a range of investment products. They have a brokerage account, they offer cryptocurrency. Did you know that SoFi actually had six of their own ETFs?

Hall: I did.

Frankel: Some of them are really neat actually. The SoFi Gig Economy ETF (NASDAQ: GIGE) is my favorite just because it's a real trend. One of my favorite, the favorite ticker symbol, the SoFi Weekly Income Fund that makes a distribution every day on Friday. Its ticker symbol is TGIF. How cool is that?

Hall: You got to love it.

Frankel: But big range of financial products already is the point, and it might not sound like anything is going to change, but the thing to know is that these financial products are all offered through third-party banks on SoFi platform. SoFi can't make loans directly, they can't hold customer deposits directly. They need to rely on banks to do that. Now that's not the case, Jason, why does that matter?

Hall: It's exactly what we were just talking about with Bank of America. When you're a bank and people deposit money into your bank, you owe them that money. That's liability, the deposit's a liability, but you get the cash and then you get to use the cash to do things like make loans. That's really powerful. Because in this environment, you benefit from that low cost of capital.

If you're SoFi, what are your options today? You can sell shares. With the stock action we've seen over the past year, that's a terrible thing to do. You can raise debt and you're probably going to pay a higher interest rate for that debt at SoFi scale. Thinking about risking it, if I want to lend that money and the risk, it probably will cost them more money that they would pay out on that debt than they could earn, lending the money back out to somebody else. It completely flips the script and allows them to get a better cost of capital to do all of the other things that they are paying other banks a portion of the proceeds to be able to do.

Frankel: Yeah. It's not only that, it allows SoFi to compete more effectively.

Hall: Absolutely.

Frankel: Because right now, let's say SoFi wants to offer a checking account. It doesn't have SoFi checking, but the CEO made it clear that's coming now that it's approved. If SoFi was offering that through a third party and wanted to give people, say, a 2% interest rate on their checking accounts. They would have to go to that third-party bank and say we want to give our customers a 2% interest rate, can you do that? They would say no. SoFi can do that. If they have SoFi checking and if they are the bank, they can set whatever interest rate they want. If they know they can lend that money out at 7% or 8% interest, sure they could set a checking account that's two or three percent interest to overshoot the competition.

It gives them a tremendous competitive advantage when it comes to recruiting new customers and having people keep all of their savings there. I have a SoFi account. It's not nearly my primary account. But if you're going to tell me, you are going to start paying me a few percentage points, better interest on my savings than my bank does, of course I'm going to move my money over there. It gives them a big competitive advantage, not only on the cost of capital, as Jason just mentioned. But on being able to compete with other banks on interest rates as much as they want.

Hall: It levels the playing field.

Frankel: It completely levels the playing field and it allows SoFi to use, its biggest advantage right now is one that it's cool. It's done a great job of getting a younger customer base that could be customers for life. Their cost structure is much lower than legacy banks. They don't have a branch network to worry about. They've built their proprietary technology, everything's automated. Now they can pass those savings on to their customers through higher interest rates on savings, and better interest rates are loans than third-party banks would be able to offer. I'm a big SoFi bull and even after it's up, I think something like 30% over the past few days. Even after that it's just back to where it was about a month ago. This is still a fairly valued stock in my opinion. I think it was higher than it was today when it first went public. It was one of the SPAC IPOs. This was IPOE.

Hall: Yeah IPOE. I think the key thing there is, it should be trading for higher because it's stronger now it's bigger, has a lot more customers that generates more cash flow. But still on a pure valuation basis. If you believe in the story, if you think this is going to do all the things that you and I, Matt, think it's going to do. I think you could call it a steal.