Lex Sokolin, a CoinDesk columnist, is Global Fintech co-head at ConsenSys, a Brooklyn, N.Y.-based blockchain software company. The following is adapted from his Future of Finance newsletter.
Mike Cagney is the co-founder and CEO of Figure, a full-stack financial services blockchain company with consumer offerings in market or on the way in lending, banking and more. In late 2019, Figure raised $103 million at a $1.2 billion valuation and continues to grow. Its Provenance blockchain promises radical efficiencies in the $400 billion annual loan origination and trading process.
Prior to starting Figure, Mike co-founded and ran SoFi, which raised over $2.5 billion and has become one of the most successful consumer fintech companies of the decade. If you want to understand how someone creates billions of dollars of value in fintech, there is nobody better to ask.
I sat down with Mike and Will Beeson of Rebank, an advisory firm, to discuss Figure’s routes to asset origination and capital markets disruption, Figure’s previously unannounced consumer banking and payments offering, lessons learned building and scaling multiple billion-dollar companies, and more.
Here are my top takeaways from the talk, edited for clarity (longer version here):
1) To build a blockchain business, build a business. For Figure, this meant focusing on the HELOC (home equity line of credit) asset class and creating the software and markets infrastructure around it.
“The pushback we got two years ago was ‘this was too much too soon, the market wasn’t ready for blockchain.’ Like, we could do proof of concepts, we can take baby steps. We didn’t want to do that,” Cagney said.
“So, we ended up creating our lending business first and foremost as a way to create a forcing function for the blockchain. We decided that we were going to originate HELOCs, which was an interesting asset class in its own right and a green field opportunity [given] where the market was.”
“The lending business had to be self-sufficient. It couldn’t be a loss leader to drive blockchain adoption. But we used that as a forcing function to get the buy side to engage and say, ‘Hey, yes, we’ll buy these assets. Well, you’ve got to buy them on blockchain’ and then explain what that was. And then we went to the sell side and said, ‘Your clients are buying these assets, they need financing, but you’ve got to do it on blockchain’ and explain what that was.”
“That’s effectively how we launched the Provenance blockchain. It wasn’t that we started the company and said, ‘boy, we’d really like to be in the HELOC space.’ It was actually an artifact of [being] a first mover, because the market wasn’t going to move first on this.”
2) Blockchain provides tangible cost savings for institutional finance above and beyond digitization. Mike suggests a 90 basis points of savings between originations, financing, and securitization. In a world of negative interest rates, that is a lot of savings.
“If you look at Figure, what it costs us to originate a HELOC, it’s in the hundreds of dollars, whereas for a traditional bank it’s in the thousands of dollars. That has nothing to do with blockchain. That just has to do with how we deal with digital notary, how we deal with digital title search, how we do automated income verification versus having a staff of people that historically have done that work,” Cagney said.
“There’s a digitization process that introduces a pretty significant savings and drives a very high contribution margin for the product.
“And then the ability to securitize that asset where I no longer need the indenture trustee or the paying agent or the custody bank I’ve historically needed, because of lack of trust, or lack of truth, I should say… there’s economic benefit to that. And so what we ended up demonstrating was actually 120 basis points of value from point of onboarding through point of sale.”
See also: Lex Sokolin – Software Ate the World, Here’s How It Eats Finance
“So, 33% higher than the original 90 that we thought. That’s all blockchain. In addition, we generate significant savings at the origination side just by re-architecting the loan origination system.”
3) SoFi has a cash account offering, which was onerous to build. Figure is targeting the payments business, and sees a partnership with retailers as the right strategy to deploy for growth. Several billions of dollars are paid in interchange fees each year, and the first company to disrupt the card networks successfully will see a massive outcome, Cagney believes.
“When we built SoFi Money, we had a bank that was effectively an omnibus bank so it integrated into the Fed settlement system, it provided a [bank identification number], it held the cash. We faced the customers directly, did all the [know your customer/anti-money laundering], etc. And the bank didn’t know the customer. [With Figure] we have these omnibus banks that do the same thing. So why couldn’t we get them to give us a [Bank Identification Number]? And then let’s build a blockchain ledger for individuals and build the same off ramps into ATM and checks and wires”.
“But the key is that if any two entities within that platform transacted, they could go through a blockchain rail, which is just a ledger of stablecoin from my account to your account versus an interchange rail. And the premise is this works business-to-business, consumer-to-consumer, consumer-to-business. So from a business standpoint, you have this incentive that ‘hey, I’m not paying interchange fees.’ It’s a real time transaction. There’s no chargebacks.”
“[For a company like Walmart] every dollar is just a straight bottom line to the profit that they don’t pay on interchange. But also we can do direct to consumer as well. It’s a really cool structure because it runs very economically and allows us to deliver a sustainable solution in underbanked and unbanked consumers. One of the things we’re talking to merchants about is using the geolocation and Bluetooth aspect of this to allow them to pay their employees same day. So it hits your time clock when you walk into the store, it pays you when you leave.”
4) Figure’s Provenance blockchain token HASH is traded privately through a Telegram group, and has a market cap of about $2 billion. This is not listed on any exchanges, which means the company is not exposed to as much speculation, and could see meaningful upside.
There is a native crypto asset, Mike told us.
“Hash, our token right now is not portable. And so it lives exclusively within the Provenance blockchain. We’ve had requests to tether hash to an exchange to allow people to trade it. So it does trade. It trades in a private Telegram group. And there’s a daily auction of Hash that happens within Provenance. So there’s a regular transacted and liquid price for it.”
“But the intent is that it should be portable. [But] once that portability is put in place, it introduces a massive incremental set of regulatory issues that we have to navigate. [Some people like Ripple’s] Chris Larsen believe there’ll be hundreds of blockchains and everything’s around interoperability. And Blythe Masters has that view as well. Blythe’s one of our advisors and helped us a lot on the architecture of what we were doing to make it scalable and secure for the financial ecosystem.
“I had the opposite view, which is, you have one blockchain why do you need any other one’s because you can basically use smart contracts to build whatever it is you need on that blockchain. And there’s massive economies of scale with a single ledger and a single registry.”
5) Cross-selling is required in fintech and in traditional financial services to build a business – a monoline company will not succeed against powerful incumbents. Mike also shares his philosophy on building new companies, which revolves around targeting big markets and avoiding direct competition.
Reflecting on SoFi and the bundling in fintech today, Mike suggests:
“My general view is it is extremely difficult to exist and be successful in a financial services business as a monoline provider. So whether you’re doing unsecured consumer, auto, whatever the case might be, you can build niche opportunity sets there. But you really can’t build business to scale. You really need a lifetime value construct and a path [to] maximizing wallet share.”
“I’ll give you a good example. SoFi does a phenomenal job cross-selling a product and my experience is that the majority of their mortgage product is cross sold to existing relationships. And again that’s a huge, huge competitive advantage when you look at what the cost is to get a mortgage to the door.”
6) Finally, Cagney had thoughts about COVID-19 and Figure’s work culture going forward. He said he’d been pleasantly impressed with his team’s productivity and purpose in the last few months. But this is a new road to travel for all of us.
“We’ve adopted permanent work from anywhere. We have offices, but no one has to go into the offices.. I worry a little bit about how we are going to maintain that focus and consistency and adhesion into culture, when we don’t have the physical proximity anymore. And I don’t know the answer to that one yet.”
“I’m a huge proponent of work from anywhere. Again, that’s another thing I’ve shifted my view on. I used to think that people did that when they didn’t really want to work.”
“Now I’ve found myself more productive, I’ve found our team more productive. And I’m a huge proponent of it. But I worry about the cultural aspect of how do you build that sense of belonging and adhesion to a common direction, common goal and common set of values if you’re all remote, and it’s not that I don’t think we can do it, I just don’t necessarily know what the playbook is, nor does anyone else, because it really hasn’t been done before.”