Okay. Welcome, everyone, to the UBS Financial Services Forum conference here in Miami. I am joined by Tim Chiodo. I'm the lead Payments, Processors, and FinTech analyst here at UBS. And I'm joined by my colleague, Jill Shea. Jill Shea is a U.S. consumer finance analyst. Jill, thanks for being here.
Thank you.
Of course, we are both happy to be hosting the CFO of SoFi, Chris Lapointe. We have a great set of questions here to go through with Chris. We're going to start with a little bit of recapping some of the recent financial guidance that was given, both for the coming year and for the medium term. We'll get into a little bit the loan origination trends and the lending segment before moving on to financial services, technology platform, and then potentially a few miscellaneous questions at the end, time permitting. With that, Chris, and to the whole SoFi team, thank you for being here today.
Thanks for having us. Really appreciate it.
Okay. As we mentioned, we're going to start by talking a little bit about the outlook recently provided by SoFi. So we'll start with the top line, and then we'll move on to margins in a little bit. But for the top line, so 2024, really fast growth in tech platform and financial services, but a slight slowdown in lending. Maybe just talk a little bit about this year's growth and then that reacceleration or the three-year CAGR.
Yeah, absolutely. So in terms of 2024, it's going to be a transitional year for us at SoFi where the vast preponderance of the growth is going to come from our tech platform and financial services businesses collectively. They're going to grow at about 50% year-over-year and are going to comprise about 50% of the overall revenue pie in 2024 for the full year. And that's up from about 38% in 2023. In terms of the growth by segment, financial services, we're expecting to grow about 75% in 2024. Our tech platform is going to grow about 20%. In our lending business, we are taking more of a conservative approach given the macro uncertainty with respect to rates as well as liquidity concerns across the broader industry.
In terms of the outlook for 2023 to 2026, we are expecting compounded growth of 20%-25% across the entire business. Financial services is going to grow about 50% on a compounded basis. That's going to be driven by continued growth in our deposit franchise as well as corresponding net interest income. We're also going to see continued growth and acceleration in overall spend and interchange revenue. We saw really good momentum over the course of the last several quarters, whereby in Q3 of 2023, we had about $1.2 billion of spend. In Q4, that accelerated to $1.5 billion of spend or $6 billion of annualized spend. In 2024, Q1, we're seeing another acceleration, and we could expect to see double-digit percentage sequential growth in overall debit spend on the platform. We're expecting to see continued momentum in that business.
We're also expecting to see further monetization in our invest business. We rolled out options and margins last year. We just rolled out mutual funds and alts as well. And the IPO market is starting to become more favorable, and we're really pleased with the pipeline that we have there with potential customers. And then on the lending as a service business, that's been a nice grower for us, high-margin business. And that will continue to show really good momentum in 2024 and throughout 2025 and 2026, especially as we are taking a bit more of a conservative approach on our unsecured personal loans. In terms of the tech platform, that growth is going to be about 25% compounded growth over the course of the next three years.
That's going to be driven by continued momentum of existing customers as well as new customers that we are starting to sign up. As a reminder, we've shifted our overall strategy to focus on more durable revenue and diversified revenue streams by talking with and providing solutions for larger financial institutions, larger brand names with big installed bases, et cetera. Then lending, we are taking more of a conservative approach in 2024, where revenue is going to be about 92%-95% of 2023 revenue. Our personal loans originations will be flat to down. Student loan refinancing will grow modestly, and home loans will grow correlated with rates. In 2025 and 2026, once we get more visibility into the macro and hopefully rates stabilize a bit, we'll be beyond a presidential election. We would expect to see an acceleration in growth in lending.
Overall, 20%-25% compounded growth across the entire business fueled by growth in tech platform and financial services.
Chris, thank you for that excellent recap. I think we covered top line quite well. Let's move on to margins. So you mentioned expecting to exit this year, 2024, with roughly 30% EBITDA margins. And generally, in the past, you've talked about the business operating at roughly a 30% incremental EBITDA margin target as the way you look to manage the business. Maybe just talk about what that means for margins this year and over that 3-year period.
Yeah. So in terms of overall margins, we've done a really nice job of dropping more to the bottom line. Over the course of the last several quarters, we had higher pull-through at over 40% incremental adjusted EBITDA margins. That's been driven by a few factors. First is top line revenue growth outpaced expectations. Second is the average revenue per member has exceeded our expectations. And then third is we are seeing really good leverage across each and every one of our functional expense lines. Specifically speaking, if you're to look at our sales and marketing as a percentage of revenue and look at 2023 versus 2022, we saw a few hundred basis points of overall margin improvement. And that was a function of a number of things. First, brand. We're making significant investments in brand and brand awareness.
If you're to rewind back to when we started launching these financial services products back in 2019, our overall brand awareness was just 1%-2%. So every time you ask 100 people name three financial institutions, we would only come up 1%-2% times. Fast forward to where we are today, we're now hitting upper single digits on a consistent basis, which is quite phenomenal given it's only been a few years. Now, we're not where we want to be yet. And the likes of JPMorgan and Bank of America and larger financial institutions are 30%-40% unaided brand awareness. But we've done a really nice job of slowly and steadily growing that unaided brand awareness over time. The second thing that's driving margin improvement is we're just getting better at targeting our potential members.
That's obviously aided by the fact that our investments in brand are making those dollars work that much more efficiently. And then the third thing is we've been able to maintain really healthy levels of crossbuy. Right now, 30% of all products that are taken out are coming from existing members on the platform, where we don't have to pay a second customer acquisition cost. So those three factors combined are what's really driving the operating leverage that we're seeing in sales and marketing. We're seeing really good operating leverage across the other lines as well. Research and development as a percentage of revenue was down 100 basis points year-over-year. That was a function of the migration from being on-prem in the cloud for Galileo. Our operations expense line is about 200 basis points better than what it was in 2022.
That's a function of starting to realize the benefits of the investments that we've made in automating our onboarding funnels and other tools and resources. And then our G&A has improved by 800 basis points year-over-year. And that's a function of the leverage that we're seeing in stock-based compensation, but also a function of the investments that we've made over the course of the last several years in preparing to become a bank and a public company. And we haven't had to grow headcount meaningfully over the course of 2023. So looking forward, you can expect to see continued leverage across all of those functional expense lines. Sales and marketing, specifically, you could expect to see modest growth in dollar terms in 2024, which is kind of in line with the current rhetoric around the cautious approach we're taking to lending.
Chris, thank you. Points well taken on the sales and marketing with the unaided brand awareness helping the performance marketing and also the crossbuy chipping in. A lot of things moving in the right direction. Thank you. With that, I'm going to pass it to my colleague, Jill, and we'll begin the discussion around loan origination trends.
Yeah. So thank you. So in terms of loan originations, you touched on it a little bit already, but personal loan origination slowed down into this year, student loans to grow modestly, and then the home loans sort of correlated with rates. In terms of that growth, you mentioned that you're limiting growth just given the macro. Is there appetite to throttle that up or down depending on your comfort level with the macro picture, or do you plan to hold tight to that slower pace of origination growth?
Yeah. What I would say is when we provided that guidance during the earnings call, it was based on the best information that we had at the time and our view on the broader macro. I think looking forward, I think an awful lot would have to change for us to take a different stance on originations over the course of the next 12 months. There's still a ton of volatility with respect to rates. If rates do come down 4-6 times as expected, what does that actually mean and imply? Yes, it may be great for a refi business, but does that necessarily mean that the economy is doing well and we should accelerate lending? So we would have to evaluate at the given point in time, given all of the factors that are at play.
But right now, a lot would have to change, and a lot more certainty with respect to the macro would have to change for us to get comfortable.
Okay. Thank you.
But I mean, the only other thing I would say there is we are able to operate very nimbly and allocate capital as necessary to maximize shareholder value and the return on those invested dollars. So similar to what we've done in different rate environments over the course of the last five, six years, we can act nimbly if the option presents itself and deploy capital appropriately.
Okay. That makes sense. So maybe just in terms of balance sheet management and decisioning to grow the overall balance sheet size, can you just talk about growth of the balance sheet versus loan sales, securitizations, or utilizing your forward flow agreement? Should we think about the balance sheet as sort of flattish this year? And then maybe could you just talk about the investor appetite for loan sales?
Yeah. So what I would say is the growth in the overall balance sheet is obviously a function of a number of things. It's based on the originations that we do, the sales that we do, the paydowns or amortization of those loans on the balance sheet. Given where we're sitting today and our posture on flat-to-down PL originations, modest growth in SLR, and growth correlated with rates on the home loans business, coupled with the fact that we do have really robust demand from credit borrowers, more than we've seen over the course of the last few years, we expect a growth of the balance sheet to be relatively modest.
I think from an investor perspective and how you can think about it is that the originations will grow roughly 15% or so over the course of the next few years, and the balance sheet will grow in the mid-teens level as well. So that's the best guardrail that we can provide at this time.
And then perhaps turning to the funding side of the equation, your total deposit growth was quite strong last year, up $11 billion, and your deposit growth continues to outpace your loan growth. Is that a trend that we should expect could continue? Is there targets you have in mind in terms of how much of the loan book you want funded by the deposit base? Then maybe a second piece to that would be just any tailwinds to the funding costs, just given the mix shift.
Yeah. What I would say in terms of the overall growth in the deposit franchise, we've had really good success since opening the bank of growing that at a pretty healthy clip. Over the course of the last six quarters, we've grown it by over $2 billion or so. And right now, the overall funding stack is that we're funding about 65% of our loans via our deposits. We do expect that trend to persist going forward of generating more than $2 billion of deposits for the foreseeable future. And there are a number of ways that we're going to be able to deploy those deposits. Right now, we have $6 billion of higher-cost funding in the form of warehouse lines. We have about $3 billion of warehouse lines that are drawn today. And we also have brokered deposits that have a higher cost of funding as well.
So we have about $6 billion of deposits, higher-cost funding that can be displaced by these member deposits at a lower rate. In addition to that, we can deploy these deposits against other interest-earning assets and other vehicles. We started doing senior secured loans, which generate a good return for us, and there are other avenues there. So we're not necessarily capped in terms of overall deposit growth just by the consumer loans that we're originating.
Then perhaps drilling down into net interest income a bit more, very healthy trends there, and their NIM was up last year. Can you just talk about the NIM dynamics and the interest rate positioning of the balance sheet, just both in context of a Fed that's potentially cutting as well as in context of if we get higher for longer?
Yeah. So in terms of our overall NIM margins, they were 6% at the end of the year. And we've been really great about being able to expand our margins over the course of the last few years. If you look at 2022 versus 2021, we expanded our NIM margins by about 145 basis points. If you look at 2023 versus 2022, we expanded our NIM margins by about 44 basis points. So really good success in expanding those NIM margins. And that's a function of a few things. One is obviously the fast growth in our deposit base and having a deposit beta that's less than 100%. And then second is having a loan pricing beta that's north of 100%. So looking forward, we do expect to be able to maintain very healthy NIM margins north of 5%.
That's a function of being able to displace that $6 billion of higher funding, the higher funding stack that I just talked about. And that will offset some of the headwinds that we may face as a result of a declining rate environment and still being able to maintain a higher APY for our deposit customers as well as some of the headwinds that we may face as a result of a mixed shift in the balance sheet towards lower-yielding student loan refinancing assets. But net-net, we expect to be able to maintain really healthy margins north of 5%.
Great. And then maybe turning to credit quality. We're seeing delinquencies and charge-off rates normalizing back to pre-COVID levels. Can you just talk about the health of the consumer and your expectations for credit quality as we move forward?
Yeah. We've been pretty consistent in terms of messaging our overall expectations for losses over the course of the last several quarters. What we've said is that we expect losses to return to pre-pandemic levels. And our posture and our stance remains the same. We expect to get back to 7%-8% life of loan losses in the early to mid-part of 2024. What gives us confidence in that level is that we have really good visibility, obviously, into our net charge-off levels and rates. And if you were to look at Q4, about 15% of our net charge-offs came from credits that we have proactively taken out of the system. And that represents about 3% of the overall unpaid principal balance of loans on the balance sheet. And that's expected to get down to under 1% by the end of this year.
So that gives us a pretty good sense. In addition to that, we've made other credit cuts in Q4, as Anthony alluded to on the call, for a number of reasons given our view on the macro. In terms of the specifics about some of the credits that we've taken out historically that are embedded in that 15%, what I would say is we're pretty surgical in how we approach our overall cutting of credit. It could be based on industry information. It could be based on the channel with which we're acquiring those members or originating those loans. So there's not one, two, three, four specific attributes that are unique to the credit that we have taken out. But more importantly, we've identified pockets of credit that weren't performing as well.
We're able to act nimbly and quickly and cut those credits out immediately such that we don't have a runaway NCO rate.
And then maybe just touching on a piece that you just mentioned, you reduce your credit box. Can you just talk about what you've done there and how you think that plays forward?
Yeah. We've been originating loans since 2011. We have a ton of experience. We're constantly iterating on our underwriting models. We're very surgical about how we're cutting credit based on channels, industry, other dynamics. We're on the fourth generation of our underwriting model right now and have done a really good job of getting to a place where we have great visibility into early-stage delinquencies and losses such that we can cut these credits out, similar to what we've done over the course of the last 12-18 months.
Okay. And then maybe lastly for me, just on capital, capital ratios improved quite meaningfully in the Q4 given book value growth, loan sales, and some of your capital optimization efforts. Can you just talk about capital ratios and where you would expect to run in 2024 and 2025 in light of your balance sheet expectations?
Yeah. We've done a good job of managing the overall balance sheet from a capital ratio perspective. You saw that in Q4 where we had our Q1 since opening the bank where we had an increase in our total risk-based capital. As you noted, it went from 14.5% - 15.3%. That was a function of the growth that we had in net income and tangible book value as well as a few capital optimization trades that we put on. If you were to look forward over the course of 2024, what I would say is that we're going to maintain a risk-based capital ratio north of 14%. And that's well north of the regulatory minimum of 10.5% and north of where we could actually operate the business. But again, we're taking a more conservative view to underwriting. And there's more headroom beyond that 14% if we wanted.
Great. Thank you. I'll turn it over to Tim.
All right. We're going to switch over to financial services. So the main topic there I want to dig into is Direct Deposit. So you recently said that more than 50% of newly funded accounts are setting up Direct Deposit, which is an impressive number. Could you talk about how do you make that happen? It's marketing. It's cross-buy. What are the things that you're doing to make that number as high as it is and some of the things that you could do to maybe even take it higher?
Yeah. It comes back to some of the things I was talking about in terms of how we're generating that leverage. Part of it's overall brand awareness that has improved quite drastically over the course of the last several years. We've made it a priority to get direct deposits in the door over the course of the last few years since opening the bank. So it's a top priority of ours. It's been aided by brand awareness. It's been aided by product differentiation. We offer an industry-leading APY at 4.6% if you do direct deposit with SoFi. We differentiate across a number of different vectors, fast selection content, and convenience. We want to be the fastest place where you can come and open a checking or savings account.
We want to be the fastest place where you can go pay a friend, the fastest place where you can do bill pay. We want a product that works better when used together with other SoFi products. So that, coupled with the higher rate, is what's been really driving the overall growth in deposits. Then in addition to that, there are other features like $2 million of FDIC insurance that we offer to our members, which is higher than the normal $250,000. We ended up rolling out that feature within days of the Silicon Valley banking situation, which created a lot of loyalty and trust with our existing member base and helped continue to drive deposits for us every single quarter since. We feel great about it. That trend will persist.
Okay. All right. Great. Thank you, Chris, on direct deposit. We're going to move to technology platforms. I think a good place to start is just to hit on some of the household names that are already working with and have been working with Galileo or the tech platform for some time just to bring it to life, maybe if there are a few that you could share with the audience and what you're doing with them.
Yeah. What I would say is we've had really good growth in terms of end customers, end customer accounts on the platform. We're at 145 million. That's been growing quite consistently. We don't disclose, obviously, all of the customer names that we work with at Galileo for a whole host of reasons, whether that's competitive or desires of that customer. But what I would say is we've had great success over the course of the last several quarters, as we've mentioned, signing up a number of new customers. We did a large POC with a top five U.S. bank. We just signed up Experian. And that's progressing really nicely. So while I can't go through all of the customer lists, there are a few there for you to go with.
That's a good highlight. Thank you, Chris. Okay. Let's talk a little bit about the issuer processing business. So historically, a little bit more debit. Recently, been talking a little bit about credit. Maybe just talk about those two and then also just the product roadmap in general and all the expansion of capabilities within Galileo.
Yeah. What I would say is at the highest level, Galileo offers products across three areas: payments, banking, and lending. And more importantly, we offer managed services to our end customers that enable them to manage, host, and operate those services that we offer them. The way that we think about our overall product roadmap is in three dimensions. First, we look at the end customer segments that we're going after. Second is the geographies at which we're offering our products and solutions. And then third are the actual products themselves. Within the segment vertical or the way we think about it, historically, we've gone after smaller fintechs and neobanks and had really good market share there. Given the recent acquisition of Technisys, we've shifted focus.
We've gone upstream in terms of customers in order to create more durable and diversified revenue that will set us up for decades to come. We're now focused on large U.S. financial institutions and banks. We're focused on large brands with large installed bases and then established fintechs and neobanks. In terms of the overall geography, geography expansion is much more broad than just expanding to new markets. It's about creating products and solutions that are tailored and curated for the end users in a given specific geography. We've done a really good job of creating those tailored solutions and services. Right now, we're in the process of expanding in 17 different countries across North America and Canada as well as South and Central America. From a product perspective, we've had really good success of rolling out new products and services.
We recently launched our payment risk platform, which enables end users and B2B customers to plug into our APIs and manage risk of payments. We recently launched Smart Data, which is a service that leverages Mastercard's very robust global data set and provides unique insights to our end customers. And then we also offered a corporate credit solution, which is a service that enables our end customers or B2B customers to manage expenses more efficiently. So overall, really good product roadmap in great dialogue with customers across all of those segments. And we couldn't be more excited about the pipeline.
Excellent, Chris. Let's hit on one of those that you mentioned, which is on the traditional financial institutions. One of your competitors made similar comments. We totally appreciate that, that sometimes the roadmap or the timed implementation or RFP processes can be longer for those traditional banks. But what are the traditional banks coming to you for?
So the traditional banks are coming to us for a number of different reasons. They're coming to us. Historically, we weren't even in those conversations because we were purely doing debit processing and API calls with our Galileo business. Once we got the Technisys once we acquired the Technisys business and everything that's happening with the broader banking ecosystem, people have a need and a desire to modernize their tech stack and replace their existing cores and have them such that they're extensible and customizable across their entire product suite. So right now, we have folks coming to us who want to do core migration across all of their products. You have large financial institutions who have a different core for every single product that they offer.
They have different mobile app applications, et cetera, which makes it really hard, obviously, to target customers and to have all of your databases talking to one another and serve the customer in the way that they should be served. So we have a lot of banks coming to us saying that they, as a result of the fragmented core stack that they have as well as the push from regulators who are forcing people to modernize their tech stack and have much more real-time visibility into both the assets and liabilities on their balance sheet, wanting to come to us and use our solutions. Now that in addition to that, they're coming to us for traditional debit processing as well because we are now cloud-based. It's scalable.
We can offer a comprehensive set of solutions that can live with them beyond just debit processing and into other products and services. So it's kind of a mixed bag of what they're coming to us for. But it's a combination of debit processing as well as full core migration.
Okay. Excellent. Yeah. That was one thing I wanted to clarify. But it seems like you tackled that in terms of it's not just an add-on core. And many times, it's literally migrating off of a legacy or alternative provider that's been there for years.
Exactly. It's a legacy provider that's been there for years or a homegrown solution that they have. Oftentimes, we'll come in. We have to obviously prove out our value. We may start on one product or one service or start with new customers for a specific set of products. Then over time, we would migrate the entire core into one. Yeah, it's a mix across the various customers that we're talking to.
Okay. Thank you, Chris. Let's talk about another type of customer for the technology platform that maybe gets less discussion. But platforms, meaning marketplaces or point-of-sale systems, they have needs in terms of card issuance as well. Could you talk about either naming or not naming the names of those customers but the types of services you're providing for them?
Yeah. It's kind of a mixed bag. We aren't disclosing, obviously, any of the customer names. But like I said, we have products across lending, payments, and banking. And the types of products and services that they're coming to us for span the gamut of those three verticals. They come to us for managed services, et cetera. You have large technology companies, large brand name customers who are looking to roll out a debit processing business or a rewards program. And they need our debit processing capabilities. So again, it's kind of a mixed bag across the types of offerings that we're able to go to market with. But the good news is we have the Galileo business, which is rooted in the debit processing and API calls.
Now we have this core infrastructure that we can go to market on a joint product offering to these customers to offer them solutions that are curated and tailored to their needs at any given point in time.
Okay. So this, I think, last one here on tech platform, so RFPs. What percentage of these wins do you think involve a formal RFP process? And then the common question we get is, who do you see also as a part of those most often, your competitors?
Yeah. I would say the vast majority of the deals that we're winning today have an RFP process given the size and scale of the customers and the products and the services that we are offering. In terms of who we're seeing in RFPs, it depends on the product and the offering. You have the legacy incumbents who are on their first, second, third generation of modernized cores. So we see them oftentimes. We aren't seeing a lot of the pure digital processing businesses in RFPs. It's more of the legacy incumbents. Or we're displacing existing homegrown technologies.
Okay. Thank you, Chris. All right. Well, it looks like we have a few minutes left. So I'm going to chill. I'll work in one of these and then maybe pass to you for one more of the additional. But one question we get often, and this is not just on SoFi but across other companies that we cover, how should investors be thinking about the tax rate once we get to 2026, 2027? What are some of the things that might change there? And how should we be modeling that?
Yeah. What I would say is for 2024, what you could assume is that we still have a pretty large balance of net operating losses that have been built up over the course of the last several years. So until we release those NOLs, you could expect a tax rate that's at or near 0%. Going forward, once those are released, you could expect more of a normalized corporate tax rate consistent with everyone else.
Okay. But through the 2026 period, it still should be in the zero?
Through 2024 is where you could expect a low tax rate. And then beyond that, it would be.
2024. Okay. Thank you. Okay.
So maybe just looking at your three-year anniversary of owning a bank charter since early 2021, can you just update us on the benefits you've achieved with the bank charter and how they translate into increased profitability for SoFi?
Yeah. There are a ton of them. It was one of the best strategic decisions that we obviously made as a company because it's providing us with a really sticky source of low-cost funding for our loans business. I couldn't imagine going through the cycle that we've gone through over the course of the last 18 months with the rate volatility that has happened and the overall credit market without having this low-cost source of funding. So right now, we've got just south of $19 billion of deposits. These deposits have a cost of funding that's about 200 basis points less than our next alternative source of funding. So take, for instance, in a scenario where we didn't have a bank and we had to rely on that next alternative source of funding, 200 basis points is $20 million on every single billion dollars of loans that you're originating.
We have $20 billion of loans on the balance sheet today. The numbers start adding up in terms of the overall savings that we've been able to actually realize as a result of having the bank charter. We are thrilled with getting the bank charter. We still have a lot of room to grow in terms of deposits in order to displace that higher-cost funding warehouse lines as well as brokered CDs. But we couldn't be more pleased with the progress that we've made with having the bank. It's opened up a ton of doors for us both from a cost perspective but also in additional products and services that we can offer to our members and then in the future, other end customers.
Well, to Chris and the full SoFi team that made the trip down to Miami, we really are glad to have you here. We appreciate you being on stage with us. Thank you, Chris.
Thanks, Timothy.
Thank you.