SoFi's CEO says there is no 'better time' to be a bank

SoFi Technologies says it's reaping the benefits of becoming a bank, which allowed it to pull in some $1.6 billion in deposits during the second quarter as other funding sources became more expensive.

The San Francisco-based company currently pays more for deposits than several other online banks, offering customers a 1.8% annual percentage yield on their money if they set up direct deposits.

But even if SoFi pays more than many competitors, its deposit-taking approach is significantly cheaper than the funding model it used before acquiring a small California bank earlier this year. And with interest rates rising, SoFi is able to increase its interest income by charging higher rates on its loans.

Bloomberg

"There couldn't be a better time to have become a bank," SoFi CEO Anthony Noto told analysts Tuesday. 

SoFi's deposits grew to $2.7 billion during the quarter, a 134% increase from the first quarter of the year. About 80% of that total is from customers who set up direct deposits, giving those deposits higher "quality and stickiness," Noto said.

The comments come as competition starts brewing in the high-yield savings market, where some banks compete to get funding from customers looking for higher rates on their deposits. The competition so far remains modest, but the Federal Reserve's large rate hikes are prompting digital banks to raise the rates they pay.

SoFi's 1.8% APY is lower than some competitors, such as Bread Financial's 2.15% APY on high-yield savings and a 2.07% rate offered by LendingClub — another fintech-turned-bank. But it beats the 1.65% APY offered by Synchrony Financial, a 1.5% rate at Discover Bank and the 1.4% rate at Ally Financial, according to DepositAccounts.com.

SoFi's deposits have "grown rapidly" thanks in part to its higher rates, according to Jefferies analyst John Hecht, who wrote to clients that the company pulled in $500 million more in deposits than he expected.

The deposits have also "provided security" for SoFi during a period of macroeconomic uncertainty and sharply rising interest rates, Hecht wrote. 

Those conditions have led to higher funding costs for online lenders that do not have access to lower-cost deposit funds. One such company, Upstart Holdings, said last month that investor caution has meant its loan marketplace is "funding constrained." 

During SoFi's earnings call, Noto alluded to "suboptimal conditions," saying that the company's deposits mean it doesn't have to access the securitization market to secure funding.

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SoFi reported a net loss of $95.8 million during the second quarter, below the $165 million loss it recorded in the same quarter a year earlier.

Its net revenues jumped to $362.5 million, up 57% from a year earlier, thanks in part to higher interest income on loans.

SoFi is continuing to see a large jump in personal loan originations, which rose to a quarterly record of nearly $2.5 billion, almost double from a year earlier. Noto attributed much of the increase to credit card holders looking to refinance their debt to fixed-rate loans as borrowing costs rise.

"Demand in this environment is going to be quite strong," he said.

The rise in personal loans helped make up for far fewer mortgage originations, which fell to $332.1 million during the quarter, down 58% from a year earlier. Student loan originations fell at a similar rate due to the continued payment moratorium on federal student loans, which resulted in fewer borrowers refinancing to private student loans.