SoFi is a one-stop-shop for financial services. It aims to provide consumers with excellent products for all major needs and events. It further pushes to delight them to the point of never going anywhere else. That creates key cross-selling and acquisition cost benefits. It also owns its tech stack, has no branches and possesses a bank charter, which all give it the rare ability to combine the cost edges that incumbents and fintechs each enjoy. It also sells its tech stack to customers like H&R Block and Robinhood. My SoFi deep dive can be found here.

SoFi generated $84.2 million in non interest income from financial services vs. $42 million expected. This is highly important to note. Financial services growth has been powered by balance sheet optimization, or getting more interest income from its existing base of assets. Non-interest income growth, conversely, is separate from this temporary boost and shows you what longer term segment growth can look like. This is the most important metric to gauge whether or not financial service momentum can stay rapid. 230%+ Y/Y growth this quarter tells us that it can. More nuance on this later.

SoFi trades for 61x forward GAAP earnings (probably closer to 50x-55x following revisions). GAAP earnings are set to compound at a triple digit clip through 2026.

SoFi added $2.4 billion in consumer deposits Q/Q. It added just $1.4 billion in total deposits because it swapped out more brokered CDs to lower its blended cost of capital.

While we have to wait for the quarterly filing for updates to more capital ratios, SoFi did offer total risk-based capital ratio (TCR). It also continues to expect TCR to stay over 16% entering 2025. This compares to a 10.5% regulatory minimum and leaves it with a lot of flexibility.

A theme of the call was how “battle tested” SoFi’s business now is. Through a pandemic, a loan moratorium, a historical rate hike cycle and volatile macro (including a regional banking crisis), it has consistently delivered 20%+, margin accretive revenue growth. Noto sees that as crystal clear proof for SoFi having not years, but decades left of strong top line expansion… regardless of backdrop.

For the last several weeks, we’ve dissected how the perfect storm was forming for SoFi to lean back into lending originations and balance sheet growth. Rate cuts have begun to drag down benchmark yields, inflation is coming down, its credit underwriting keeps outperforming, the employment rate is full, broad student loan forgiveness looks unlikely and its capital ratios are well in excess of regulatory minimums. As Noto puts it, 2025 should offer a better exogenous backdrop than SoFi has enjoyed in 7 years. Now it’s time to lean back into the marketing engine… embrace more rapid member growth… and watch the cross-selling engine work its magic like it has for years.

For some early signs of it leaning back into lending:

While it will grow the balance sheet through more lending, it won’t do so rapidly like it did in the past (especially for personal loans). Instead, it will use that as one loan tool in the tool kit, with the loan platform as the other centerpiece. More on this platform later.

SoFi bears love to pick on fair value premiums propping up revenue, but that was not the case this quarter. SoFi again hedged away all fair value gains during the period, with the Q/Q premium boosts being irrelevant for overall results.

“The fair value gains in the quarter were significantly more than offset by our hedge losses and the negative impact from spreads widening. Net-net, we did not see a positive impact on the reported revenue from the change in marks, net of hedge losses and new originations.”

CFO Chris Lapointe

But we got even more evidence for fair value markings being entirely fair. First of all, Lending Club boosted its own fair value premiums (and actually pocketed a revenue benefit) due to the same improving assumptions that SoFi cited. Secondly, and more importantly, SoFi executed personal loan sales at a gain on sale margin of 105.9% vs. markings of 105.7%. Furthermore, its 102.6% gain on sale margin for home loan sales was well above most recent markings there. This is capital market buyers with access to the very best data telling you they’ll pay more for SoFi’s loans than marking indicate. All in all, SoFi sold $1.3 billion in loans in total. Notably, it also sold off $312 million in senior secured loans at par value.

“The $312 million transaction demonstrates clear market support for the marks on these loans with $312 million of our senior secured loans sold at our market value.”

CFO Chris Lapointe

“We are well capitalized heading into a better environment.”

CFO Chris Lapointe

Lending Platform:

SoFi’s overarching loan platform was the standout of this report. I think it’s important to work through how revenue here is accounted for here and the various pieces of this business.

The platform includes rejected borrowers that SoFi matches with investors on its marketplace (called Lantern). If the offers from others are accepted by borrowers, SoFi gets a referral fee, which is financial services revenue. This bucket now also includes loans that the firm originates on a third party’s behalf directly on SoFi’s own site/app. That’s for borrowers within its credit band and outside of it too, as the company pushes to become as asset light as it can be.

It collects both servicing revenue and up-front cash payments for sending this credit to other partners. The servicing revenue is classified as lending revenue, with the cash payments considered financial services revenue (like for referrals). When SoFi originates a loan, holds it on its balance sheet for an extended period of time, then sells to capital markets (like the $1.3 billion mentioned above), that’s all considered lending revenue.

As briefly mentioned, this is how SoFi can maximize origination growth without taking unwanted balance sheet risk or stressing its capital ratios. This means SoFi gets all of the customer data from borrowers and an easy ability to cross-sell more products. It’s a fantastic way for SoFi to say yes to more people and use lending as a widened top-of-funnel.

This quarter, the loan platform reached $1 billion in total volume originated for others. This represented $56 million in high margin, low risk fees for SoFi’s financial services segment. That result powered a lot of its non-interest growth. The company continues to have excess borrower and capital market demand for its loans and this is how it can best take advantage.

“We have loan funding commitments for Q4 and 2025 with several other partners besides Fortress.”

CFO Chris Lapointe

The Rest:

But we want SoFi to be a structural grower. Rate cut cycles don’t last forever. Products that aren’t reliant on funding appetite from loan buyers must turn into promising growth stories for this business to find consistent growth across cycles. Signs here are positive as well.

If we exclude the impact of the loan marketplace, non-interest financial services revenue still rose by at least 109% Y/Y. Interchange revenue rose by 211% Y/Y to cross $12 billion in annualized spending and credit card volume growth early on is robust. Monetization per product also jumped from $52 to $81 Y/Y while total financial services products excluding crypto rose 47% Y/Y.

The cross-selling engine is also ingraining SoFi as a hyper-efficient, low cost customer acquirer. 32% of all new products were opened by existing members during the quarter while 20% of new members added a 2nd product by day 30. 70% of SoFi Invest products added Q/Q were also from existing SoFi Money users. That means no added acquisition costs and sky-high incremental margins.

Another quarter of SoFi expressing significant optimism in winning large deals, but not being ready to announce them yet. It did sign two Mexican banks and SoFi is using Galileo for its bank sponsor program. Leadership remains confident in multi-year tech platform revenue targets and called the pipeline “stronger than ever.” Time to put some points on the board here. This was the lone weak spot amid a sea of positives. They cited some recent wins that are now ramping and we shall see what kind of impact that has on 2025.

SoFi again offered compelling vintage analysis to explain its continued conviction in life of loan loss rates peaking between 7%-8% for this cycle. Q4 2022 - Q4 2024 vintages boast a 3.3% cumulative loss rate, with 51% of outstanding principal remaining. This is more than 30% better than 2017, which is the last time loss rates approached 8%. The lead vs. 2017 performance is the largest for its newest vintages. Of the remaining principal for vintages Q1 2020 - Q2 2024, loss rates would need to be nearly 30% worse than the 2017 peak to breach its target. It has never seen loss rates be remotely that bad; macro is now improving.

“Newer vintages have returns of 2x vs. 2017 with ROE over 30% (not a ceiling, per Noto).”

CFO Chris Lapointe

Like last quarter, SoFi sold off a chunk of late-stage delinquent loans to realize positive fair value on the assets. Without all of this help last quarter or this quarter, net charge-off rate would have improved from 5.4% to 5.0% Q/Q. It remains confident that delinquency and charge-offs on a % and absolute basis have peaked this cycle.

A few notes on net interest margin (NIM):

I wanted more from the tech platform and got much more than I wanted from everything else: members, products, margins, capital market access, financial services explosion, lending snap-back. It was all better than I wanted. I’d also just like to point out how impressive the loan marketplace’s growth was this quarter. Macro is helping… but fantastic execution and strong consumer traffic are too.

As I said in the earnings preview for Max readers, I thought a great quarter could easily be shrugged off after a fantastic stock run. That’s exactly what happened. This company continues to march towards or beyond its 2026 targets and continues to trade at a valuation where those targets should be significantly rewarded.

As Max readers know from my lack of email before the report, I did not place any put hedge into earnings. I do that very sparingly, and I didn’t want to bet against brightening macro and a stellar team. I sat on my hands (we really just need a time machine). I didn’t touch my already very large stake today.

“We're early in our transformation journey, and we have a lot of work ahead to get to where we want to be. However, I'm proud of what we've been able to achieve in the last year, and it gives me conviction that we're taking the necessary steps to unlock the full potential of PayPal and Venmo over time.”

CEO Alex Chriss

More demand metrics:

Transaction revenue rose 6% Y/Y; other value added service (OVAS) revenue rose 2% Y/Y. Lower credit revenue from tightening parameters hurt this growth bucket. PayPal is now through parameter tightening and ready to slowly grow originations again.

OpEx will be higher in Q4 to support more marketing. That will lead to a Y/Y decrease in Q4 EPS, which isn’t concerning given the annual guidance raise and currently elevated costs to fix the business.

PayPal trades for about 17x forward earnings. Earnings are expected to rise by about 17% this year and by 9% next year.

Two things are true here:

Venmo monetization is showing strong signs of gaining steam; PayPal’s checkout modernization is happening quickly. It has enjoyed outperforming early product adoption, liquidated non-core assets, rapidly repositioned Braintree for profitable growth and now raised profit guidance in two consecutive quarters. The all important transaction margin dollar strength is also primarily related to core business strength, with interest on consumer balances being a secondary factor. That’s encouraging, as rate cuts will mean noninterest income must pick up slack from lower yields on consumer balances.

It also overhauled its tech to conjoint point solutions and drive better interoperability. That means two things. First, it can actually take advantage of its leading datasets across its massive consumer and merchant bases. When all of the data from its previously siloed products can “talk” to each other, that drives better insight, better personalization and better customer experience. Secondly, modernizing its infrastructure is unleashing more rapid change. For example, PayPal will move from 5% of merchants on its newest mobile checkout flow to 100% in the coming months. PayPal’s old team painfully migrated merchants one at a time. It was so slow that the end of one upgrade cycle bled into the beginning of another. Not good and no longer true. This should mean more consistent iterating, split-testing and data-driven tweaking to ensure its flows are world class.

Early on, the new mobile checkout flow is lifting vaulted conversion rates (not guest checkout) by 100 bps and guest checkout by 400 bps. Latency is also down 45% vs. the old product and it’s also boosting buy now, pay later adoption for merchants.

As a reminder, PayPal recently launched PayPal anywhere. The initiative extends PayPal’s already compelling online rewards program to offline settings. Now, customers can select a category to receive 5% cashback and can stack these discounts with more savings from in-app promotions. Top categories so far include gas and groceries to offer clear evidence of the brick and mortar push working. PayPal has hundreds of merchants offering these deals including DoorDash, Instacart, Domino’s etc. More tools include an “auto-reload” minimum balance option to replenish when needed, a new PayPal Debit Card integration into the Apple Wallet and more in-person tap-to-pay functionality.

How can PayPal afford program perks? First, merchants are happy to foot part of the bill for promotions, discounts and cashback for access to PayPal’s vast customer traffic. They come out well ahead. Secondly, PayPal Anywhere users are more valuable for the company. They 5x omni-channel spending with the company, just two weeks after adopting this product. That makes offering a few extra % to consumers easy to do… and delightful for them. With all of this utility in place, it’s leaning into a large marketing campaign (with Will Ferrell) to boost awareness. So far, already 1 million debit cards have been issued to new customers since late this summer. This will also launch in Europe next year, where easier tap-to-pay access should lead to even better results.

Business profiles and sponsored listings for Venmo weren’t included in the vision for the platform this quarter. I reached out to Alex Chriss to ask if anything has changed. The answer is no. This remains a key focus in addition to Pay with Venmo. Thank you to him for the response as always.

This was Braintree’s second quarter in over two years of profitable growth. Conversations with merchants on price hikes are going well. The Q4 2024 revenue miss was also related to this. PayPal is losing some volume from Braintree clients by hiking volume. CFO Jamie Miller gave an example of moving from 95% of volume to 75% for a customer. This means lower revenue in the near term, but more profit in the near term. That’s why profit guidance was raised while Q4 revenue growth is expected to be lower than what leadership wants. That will last for a few quarters as the company sheds the low quality Braintree business from its book. Good decision in my mind and an easy revenue miss source to digest. Expect revenue estimates for next year to fall and profit estimates to modestly rise.

“I've personally been involved in a number of these conversations, and I'd characterize them as very healthy and very strategic.”

CEO Alex Chriss

PayPal’s modernization and decision to stop Braintree’s predatory pricing are all paying dividends. They’re changing the narrative on how valuable PayPal can be as a partner (through innovation like Fastlane and unique cash back programs) and how willing it is to be a team player. This has already needed Fiserv, Adyen, Global Payments, Buy with Prime and Shopify collaborations and/or contracts all in the last quarter. Per CEO Alex Chriss, many more of these arrangements are coming.

“As we shift to a commerce platform, more leading players have partnered with us to add value to our mutual customers.”

CEO Alex Chriss

“Our Fastlane focus right now has been on adoption, and we'll continue to drive that up.”

CEO Alex Chriss

PayPal expects the financial contribution from Fastlane to ramp throughout 2025. Most large merchant adoption will happen in Q1 due to holiday and processor integration timing. 30% of guest checkout with access to Fastlane is opting in, with PayPal gaining direct access over all of that data to sell more product.

Really good quarter in my view. I boosted my stake by about 12% today and raised my average cost base in doing so. The only weak spot is the Q4 revenue guide, which is weak for good reason. Everything else is great. The profitable growth turnaround is in full swing and my confidence in Chriss is at record highs. Tech stack modernization… faster innovation… more selective growth… tighter focus… a better partner… that’s the new PayPal.