Regional banking crisis is attracting deposits for digital services, says Truist's Andrew Jeffrey
The banking landscape is changing and it's not just private equity as we were just discussing. I made the recent bank turmoil. My next guest says we could see more of a shift to digital banking and see it pick up speed. As a result, he's initiating SOFI with a buy calling it the future for the industry, the stock down today, but up 9% so far this year. Joining me is the analyst behind the call, Truis Andrew Jeffrey. Andrew, it's good to see you again. Welcome.
Likewise, Kelly. Thanks. Why SOFI and not, you know, Paypal is it block whoever owns Cash App, or why not Robinhood? I mean, why this one? Sure. I mean, we like Cash App too. I think it has obviously demonstrated a lot of consumer value. I think the thing about SOFI that makes it different is it really it's truly a bank. It's an FDIC, insured depository institution.
It has terrific vertically integrated technology from our standpoint, leading app with a very slick UX. And most importantly, it's a chief beneficiary of some of the disruption we've seen in the banking industry. You can see the company has increased its deposit tenfold over the last year, and it's deploying those deposits into what we view as very profitable, predominantly personal loans, also some student loans and mortgages, all through a single app, all day to driven. We think that really sets it apart. So when I think about all of these fintechs, you know, I think, OK, Robinhood, I'm going to go trade stocks. I think, you know, who else? Cash App, obvious, Venmo, obvious. SOFI, I think refinanced student loans, right? Like, what? How would SOFI, how would I be involved with SOFI, right, at this point, if I'm not in that particular market right now? You're right about how the company got its start.
It has subsequently diversified pretty significantly. Its biggest product is personal loans. And the idea is you attract people to the platform to use the checking and savings account, especially with a very high 4.2 percent yield, which is obviously a lot higher than banks. That's how they're attracting deposits, although that funding cost is less than the secondary markets for their loans. So it's helping their margins. And then they really help you, as they say, get your money right, make better financial decisions, but perhaps consolidate debt, lower interest rate, payments, et cetera.
You know, I'm a customer myself, and I was attracted initially by the high APY, but certainly being able to consolidate my accounts in all in one place, have a look at all of my assets in one place, get free financial advice, et cetera, I think is a truly differentiating aspect. I suspect it's going to play to a younger demographic. But I think that's fine. I think that's the future. So I guess my concern is a little bit like we saw with direct-to-consumer e-commerce plays. In other words, over time, are they going to have to have a high cost to compete and retain and attract customers through, like you said, either offering very high yields on their accounts or simply through advertising? I mean, at some point, these all these fintechs are a commodity, and it's all about who's best known most out there with marketing spend. And a lot of the consumer DTC plays have blown up as a result because their business models aren't sustainable.
Yeah, I think it's a fair question. This company does have very strong unit economics, about three times LTV to CAC. I think the best thing about the model is that once they acquire a customer or a member through the top of the funnel via their financial products, they don't need to acquire that customer again. So you've got the customer on the platform, he or she is engaged with the products and then begins to see the merits of additional monetizing lending products. I think the other thing that really distinguishes SOFI is their tech platform. Embedded finance, the ability to allow non-financial companies to offer financial services is a $3 trillion market in growing very fast. It's only about 15% of their revenue today, but I suspect, especially starting next year, that growth is going to, the growth in that segment is going to accelerate.
That's a profitable business. This is an intrinsically profitable company, in my view. 23% ROE at the bank today, not necessarily at the holding company, but it is profitable on an EBITDA basis. We estimate about $280 million this year. So I think it's already proven out the profit point. Now it's got to grow fast enough and grow profitably and underwrite well in a disciplined way and maintain its charge offs. And in that respect, it's very much a bank.
It's funny how the bank crises have made me and I think many people almost wary of a financial company that's growing too quickly because we now know what a red flag that is. Just a real quick final word, Andrew, on this embedded finance, which is super interesting. So they're providing kind of banking or finance tools or payments tools to other kinds of companies. Just explain that for a minute. Yeah. So probably the easiest product to understand would be a product called Earned Wage Access. It's the ability to go to an employer and say, hey, you can offer to pay your employees any way they want to be paid.
That's one example of financial service. So if somebody wants to be paid daily or weekly, they can tailor their pay. That would be one example. Point of sell lending is another example. These are all solutions that non-financial companies can bring to their customers without actually having to be finance companies or banks. All right, Andrew, thank you very much for your time today. We appreciate it.
My pleasure. Have a good weekend. Andrew Jeffrey, you too, of Truist.
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