Personal finance startup SoFi to acquire payments platform Galileo for $1.2B

Dive Brief:

Personal finance startup SoFi plans to purchase Galileo Financial Technologies for $1.2 billion in a cash-and-stock transaction, the two companies announced Tuesday.
Galileo, an application programming interface (API)-based payments platform that powers many challenger banks, including Chime and Varo, says it processed over $53 billion of annualized payments volume in March, up from $26 billion in September.
"Together with Galileo, we will partner to build on our companies' strengths to drive even greater financial technology innovation, making those products and services available to both current and future partners," SoFi CEO Anthony Noto said in a statement. "[W]ith Galileo, we can enable a broader ecosystem of companies to join us in helping the world achieve financial independence."

Dive Insight:

As part of the deal, Utah-based Galileo will continue to operate as an independent subsidiary of Social Finance Inc., and Galileo CEO Clay Wilkes will remain chief executive, the companies said.

"SoFi has built a very strong diversified financial services company focusing on a full suite of financial services. These are products that many of our leading fintech clients are asking for," Wilkes said in a statement. "Distributing products through our enterprise class API is the vision behind this combination. I think it's very powerful."

The two companies have an existing relationship. SoFi began using Galileo's payment platform for its cash management account, SoFi Money, last year.

SoFi should be viewed as a threat to traditional banks, rather than just an industry participant, as the deal gives the startup the technology to scale to support direct-to-consumer and B2B service and revenue models, said Bryce VanDiver, a partner at consultancy firm Capco.

"Specifically, the acquisition provides infrastructure services that enable basic banking functionality, such as account opening, funding, transfers, bill pay, that power digital banking today," he said. "SoFi will look more like a traditional consumer bank with core services in banking, lending and payments after this acquisition."

The bank infrastructure and API banking category has increasingly been a focus in recent fintech acquisitions, VanDiver said, citing Visa’s planned $5.3 billion acquisition of data aggregator Plaid, which was announced in January. VanDiver said many in the industry view the service-focused model as “the next generation of banking.”

SoFi's plan to diversify its business amid current market conditions is a "smart strategic move," Sam Maule, managing partner for North America at fintech consultancy 11:FS, told Banking Dive.

As more customers turn to digital channels amid the coronavirus pandemic, Noto said the timing was right for the Galileo deal.

"We’re on the precipice of a transition to digital from physical finance," Noto told CNBC. "It’s going to serve people in this environment and the need for mobile financial services is only going to accelerate."

But Maule said the deal could raise potential conflict-of-interest questions surrounding data because many clients in Galileo’s portfolio are SoFi competitors.

"What’s fascinating is, it makes the likes of Monzo, Robinhood and Chime service customers of SoFi, a sentence I never thought I'd say," Maule said.

That might create an opportunity for Galileo competitor Marqeta, another payment processing platform, if some of those firms look to move because of data concerns, Maule said.

"[It’s] a risk I’m sure SoFi factored in when examining the acquisition," he said.

The deal is made up of $75 million in cash, $250 million in seller financing debt and $875 million in company stock, sources told CNBC.

SoFi, which was last valued at $4.8 billion, launched in 2011 with student-loan refinancing. The company has since expanded to personal and mortgage loans, refinances and wealth management, as well as stock and cryptocurrency trading, according to CNBC.

A glitch in Galileo's platform caused an outage at Chime over the course of several days last October.

Other Galileo customers include fintechs Revolut and TransferWise.