Stocks of innovative fintech companies don’t seem to be taking off lately. The ARK Fintech Innovation ETF – down more than 60% in the past 12 months – started to make a comeback in July and early August, but slid sharply again in recent trading sessions.
If you’re like many investors, the risky fintech stocks in this ETF always make you a little nervous. But if you want to invest in a traditional bank that also has the explosive growth potential of a risky fintech stock, there’s an attractive option that’s not in the ARK Fintech Innovation ETF, and it looks like a screaming buy right now. moment.
You have probably heard of Sofi Technologies (SOFI -3.63%) and its increasingly popular smartphone app. What you might not realize is that this company has a handful of hidden benefits that could make it an exciting and profitable stock to own for years to come.
1. SoFi is its own bank
Unlike most challenger banks, SoFi already has a national banking charter. This allows it to offer interest rates on checking and savings account deposits that would likely embarrass your local credit union. But its benefits don’t stop there.
Before getting its charter, SoFi had to jump through hoops held by third parties, and all those third parties wanted their share of the action. Now it can use the capital held in its members’ accounts to initiate loans in a growing range of categories. Ten years ago, he started by refinancing student loans; today, it offers personal loans, auto loans, and even mortgages.
The amount of low-interest capital SoFi has to work with and the number of new loans on its books are growing by leaps and bounds. In the second quarter, the total number of SoFi members increased from 450,000 to 4.3 million, and the number of products they used increased from 702,000 to 6.6 million.
2. SoFi has its own credit risk assessment service
Traditional banks and new, smaller challenger banks routinely pay credit-scoring agencies for access to people’s three-digit FICO credit scores — and while each agency’s process of calculating those scores is a bit different, they are all based on the simple model first developed decades ago by Just Isaac and company. Today, however, some intrepid banks are assessing the risks of lending to potential borrowers using more comprehensive, artificial intelligence-based scoring systems such as Reached.
With over a million loan products generating repayment data on a monthly basis, SoFi’s internal risk assessment algorithms have plenty of data to work with. This allows the company to serve borrowers who might have fallen through the cracks of a traditional credit risk assessment without using the services of Upstart or a third party.
3. SoFi is a behind-the-scenes giant
If your business wants to make it easy and secure for customers to pay with any type of card in person or over the phone, you’re probably already a SoFi customer, even if you don’t know it. In 2020, SoFi acquired Galileo, which has the most popular application programming interface (API) for installing and running payment services and more. Investment brokerage firms such as Interactive brokers and Robin Hood also rely on the Galileo API. By the end of June, SoFi’s technology platform was activating about 117 million accounts, up 48% from a year earlier.
4. His losses are probably not permanent
Over the past year, SoFi has more than tripled the number of members using its relatively new credit card product. Between setting aside loan loss reserves for this fledgling credit card business and ambitious spending on sales, marketing, general and administrative expenses, the company ended up with a loss of over $200 million. dollars in the first half of 2022.
This loss should bother anyone considering investing in this stock, but it’s probably not permanent. SoFi significantly increased its sales, marketing, general and administrative expenses in the first half of 2021, but it has mostly maintained these large operating expenses over the past year. Despite this, his net sales soared. This is the sign of a well-run business.
It’s still a bit early to predict huge profits from SoFi, but the major advantages it has over its rivals in the challenger bank niche give it a good chance of staying on top. It’s a great stock to buy now, but only as part of a well-diversified portfolio.
Cory Renauer holds positions at SoFi Technologies, Inc. and Upstart Holdings, Inc. The Motley Fool holds positions and endorses Upstart Holdings, Inc. The Motley Fool endorses Fair Isaac and Interactive Brokers. The Motley Fool has a disclosure policy.