It has long been known that digital online personal finance company SoFi wanted a formal banking charter. The company, which goes public through the Chamath Palihapitiya Blank Check Company Share capital Hedosophia Holdings Corp. V (NYSE: IPOE), received conditional approval for a national banking charter late last year. More recently, SoFi announced plans to purchase the small Golden Pacific Bancorp based in Sacramento, Calif., to accelerate these efforts.

While you can’t rate SoFi exactly like a traditional bank, if you start to look at it more through the lens of a bank investor, you may start to see some of the value it brings to the table.

Looking at him like a bank

SoFi offers a buffet of financial products and consumer services. The products include student loans, personal loans, and credit cards, as well as cash management accounts and online brokerage for people to invest.

From a high level, SoFi looks attractive as a bank as the company has the capacity to capture that much value of the more than 1.7 million members currently on its platform, a number the company hopes to reach 3 million. members by the end of this year.

SoFi seeks to create a “financial services productivity loop,” where it sells multiple products to each of its members. He wants his brokerage clients to take loans from the company and his borrowers also store their deposits with SoFi.

This in turn will reduce customer acquisition costs and significantly increase profits on some loans and products. The business can then pass the savings on to the consumer through lower loan rates or higher yielding savings accounts. So far, this strategy appears to be paying off, with 65% of the company’s home loans coming from existing clients. Every traditional bank seeks to get the most out of each of its customers, but that’s no small feat considering that more than half of Americans still use more than one bank for their financial needs.

Attractive banking features

A banking investor might take a look at SoFi and see the potential for the business to create a very strong deposit base, a diversified revenue stream, and possibly much better profitability.

The important thing about SoFi becoming a bank is that it will soon be able to hold deposits on its balance sheet. This will greatly improve the profitability that the business can make on the loans. Currently, SoFi chief financial officer Christopher Lapointe said the company uses warehouse finance lines to fund its loans. These warehouse lines cost the business 2-4% interest, depending on the interest rates. As a bank, SoFi can use the money from its SoFi Money cash management products as deposits to fund its loans. Those funds will cost a lot less right now than 2% to 4% in interest, and with membership expected to hit 3 million this year, the company should have no problem collecting deposits.

The other cool thing about SoFi is that the company expects to diversify its revenue. Currently, SoFi derives 83% of its revenue from loans it holds on the balance sheet or sells on the secondary market. But very few banks today are successful relying solely on credit. When interest rates fall, loan income can drop dramatically. And when there is a sudden downturn, such as a global pandemic, borrowers can suddenly default and lending activity can dry up.

But by 2025, SoFi expects to have three strong revenue streams from loans, technology platform fees, and financial services. Its lending business is expected to be much more profitable by then just by using deposits to fund its loans. Technology platform fees will continue to increase since SoFi’s acquisition of Galileo last year. Galileo is a payment processing company that enables other fintech companies to set up payment capabilities such as bank accounts, virtual cards, bank transfers, etc. The company reported more than $ 51 million in fees in the first nine months of 2020.

The company also expects to make a lot more money from the financial services it offers, including its cash management services, online brokerage, credit card offerings, and more. The company is not profitable yet, but with all of these things on the move, SoFi expects to grow adjusted net revenue from $ 620 million in 2020 to nearly $ 3.7 billion by now. 2025, which should translate into much better profitability.

Image source: SoFi investor presentation

Potential risks

SoFi is always more of a high-flying tech company, so it invests significantly in its operations which is why its expenses continue to exceed its revenues and the company continues to report losses. Obviously, this is not unexpected, as SoFi continues to develop its capabilities and you would prefer the company to invest for the long term now.

But once the company is officially public and develops the desired capabilities, it must think about better control of expenses and show investors a clear path to profitability. For the record, it looks like SoFi already has a good plan, but many tech companies are struggling to show their way to profitability.

Another area to watch closely is credit quality. Here, I may have a little concern because two of the company’s main products, personal and student loans, may be riskier asset classes.

Loan quality seemed to hold up fairly well for SoFi during the pandemic, with the majority of deferred borrowers resuming their payments. But it’s always something to watch out for. SoFi stresses that it lends to borrowers with high FICO scores, but this is not always a good indicator during a recession. It will be interesting to see how many loans SoFi has on the balance sheet once it has a bank charter.

A convincing stock

SoFi has several features that many traditional banks could only dream of. It succeeds in extracting more value from each of its customers, which decreases customer acquisition costs and increases profitability. I also believe SoFi should be able to build a strong and relatively inexpensive repository base with its massive and growing membership. The company’s plan to significantly diversify its revenue by 2025 is also strategically compelling. Therefore, if it manages to hit its goals on time, SoFi looks like it could be a high growth stock.