SoFi (SOFI 7.15%) has already done an excellent job of evolving from a niche student loan company into a large financial ecosystem that is designed to replace customers' traditional banks. And in full disclosure, I use SoFi as my primary bank and don't really miss my brick-and-mortar bank at all.
Despite its impressive growth, there are still several things SoFi doesn't offer that could help grow its deposit base and loan portfolio over time. For example, SoFi doesn't offer CDs to its banking customers, which are quite appealing to savers looking to lock in today's elevated interest rates. It offers a user-friendly brokerage platform with some excellent features, but doesn't support advanced options trading yet. And there are some account types SoFi doesn't offer -- for example, the inability to open a custodial investment account for a minor makes it impossible for me to completely ditch my traditional online broker.
The point is that there are numerous levers SoFi could pull in order to make its platform even more appealing as an all-in-one solution. But there's one in particular that I'm excited about: credit cards.
NASDAQ: SOFI
Key Data Points
SoFi's credit card business has massive potential
To be clear, SoFi already has a credit card business. It has one credit card product, and it's a solid cash back card, offering 2% back on purchases. But it isn't a standout, and the same thing (with more features) can be found through other banks. This is why credit card balances only make up about 1% of SoFi's loan portfolio currently.
However, management has made it clear that this is a focus area for the future. The fintech innovator's leadership referred to a "broader credit card portfolio" as a growth driver in its 2023 year-end earnings call, and has said that the credit card business is in "full investment mode."
What could SoFi's credit card portfolio eventually look like?
SoFi has done a great job of creating unique financial products so far. For example, its brokerage platform was the first to roll out IPO investing for all investors, even those with small accounts. And while we don't know any details at this point, SoFi could carry over the same focus on true innovation to its credit card business once it is ready to scale it. (Note: SoFi is deliberately slowing down its loan growth in the current climate, but that won't last forever.)
One big consumer pain point that causes hesitation to even apply for a credit card is the high interest rates that come with them. As of this writing, the average credit card interest rate is about 25% in the United States. Instead of offering an introductory 0% "teaser" rate, maybe a product with a low permanent interest rate for highly qualified customers could be a hit.
SoFi can also leverage its favorable cost structure (no branch network or legacy infrastructure) to offer better rewards programs than its competitors. Most major credit card issuers either have large branch infrastructures or focus on consumers with mid-level credit, and SoFi has a major advantage. We've already seen fintech disruptor Robinhood (HOOD 4.61%), which has a similarly low cost structure, roll out a new credit card product with a class-leading 3% cash back rate, and SoFi could create products with similarly appealing rewards and perks.
To be clear, I have absolutely no idea what specific credit card products SoFi might have in development. But this remains a massive growth (and profit) opportunity for the business.
How big could this be for SoFi?
First off, the economics of the credit card business can be fantastic. The average credit card interest rate in the United States is about 25% right now, and SoFi's cost of funds (deposits, etc.) is about 4.4% as of the first quarter of 2024. Even when you factor in the typical 3%-7%% default rate in the credit card industry, there's still room for a double-digit margin.
As it stands now, SoFi has about $273 million in credit card loans on its balance sheet. For context, JPMorgan Chase's (JPM 2.28%) credit card business has about $205 billion in balances and a 3.32% annualized net charge-off rate. Capital One (COF 6.38%) has a $150.6 billion credit card loan portfolio, and a 5.9% net charge-off rate. In fact, Capital One earned $5.3 billion in net interest income from its credit card business in the first quarter of 2024 alone.
To be clear, even with flawless execution, I don't think SoFi's credit card portfolio will be anywhere near as large as those of the big banks anytime soon. But the point is that the credit card business can be an extremely profitable one, and there's a reason these other banks have leaned into creating appealing credit card products to such an extent. We'll have to wait and see what SoFi has in the works, but if they get the credit card expansion right, it could be a massive growth driver for many years to come.
