SoFi’s $500 million funding round is a warning for incumbents

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US-based online personal money management startup SoFi has closed a $500 million funding round led by Qatar Investment Authority, marking the first funding round with Anthony Noto as the fintech’s CEO, after Mike Cagney stepped down two years ago.

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Rumors that the startup was in talks to raise new funds first emerged at the end of April. Investments in personal finance companies have seen an uptick over the past years, increasing from $1 billion in 2013 to $4.4 billion in 2018, suggesting there are more funding deals in the space likely going to an increasing number of players.

Here’s what it means: While SoFi nabbed $500 million, its valuation remains the same as two years ago at $4.3 billion — which could be a symptom of crowding.

SoFi’s likely to use the fresh capital to broaden its services to stay competitive in the crowded personal finanance space. The fintech’s been busy expanding outside consumer lending with new products over the last months: It launched products including cryptocurrency trading via a partnership with Coinbase, exchange traded funds (ETFs), and a cash account with a 2.25% APY.

And SoFi plans to introduce a credit card in the second half of 2019, per CNBC. The personal finance space — which includes older players like Lending Club and Prosper, as well as newer ones like Affirm, per TechCrunch — is becoming increasingly crowded with companies competing for funding.

This competitive pressure is likely part of the reason why SoFi is increasingly moving away from its focus on consumer loans for millennials into other areas of fintechs; the fresh capital will support its new ventures and enable SoFi to roll out more new products in the future.

The bigger picture: Fintech unicorns like SoFi are piling up funding, enabling them to rebundle finance and become a one-stop for financial services — which is increasingly threatening for incumbents.

Competition is forcing fintech giants to expand into new areas of finance. We’ve seen a number of big fintech firms, including Robinhood, looking to secure new funding, likely to fuel expansion into new finance areas: For example, Robinhood applied for a national bank charter last year, which would allow the startup to roll out banking products. As more established fintechs secure large growth rounds, we expect more to follow this trend and move away from focusing on one specific financial service to expand their product suite into more areas.
Incumbents should take note of this trend, as fintechs are increasingly positioning themselves as genuine and full-suite alternatives. Fintechs have typically started out with a narrow focus of solving a particular pain point for consumers. However, as more funding flows into the space, and bigger players like SoFi secure larger rounds, they’re able to become a one-stop for finance, offering consumers a large product suite for all their financial needs. Fintechs also benefit from their tech-savvy interfaces and new underlying processes, which give them a competitive edge over incumbents that often still rely on legacy systems, making innovation more difficult. Hence, with time, the likes of SoFi will probably increasingly step on the toes of incumbents to challenge their position in the finance industry.

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