Cynthia Chen, Figure Technologies’ chief risk officer, says “Fintech 1.0 is pretty much done.” She adds that this period, while not all that disruptive, “significantly improved operational efficiency and customer experience.” Still, she notes that 1.0 was not without its problems, and to some degree it made it harder for investors/borrowers to trust online lenders.
Being a blockchain-driven technology, Ms. Chen states that Fintech 2.0, will solve a lot of the problems that the first phase had, including those trust issues, and deliver a cheaper and more convenient way of doing business. The goal is for this to lead to more originators and asset buyers entering the space.
The Figure product is designed to rid rent-seeking activities in the financial services ecosystem. Customers will use the platform to tap into their home equity for a better rate, and the process works similarly to the services offered by a company like Lending Club in the personal debt space.
The Blockchain-based system can better the processes by eliminating third-party intermediaries that charge heavy fees for financing and securitization. Plus, as in all things, the distributed ledger creates its immutable record, eliminating most trust banks, lawyers, and auditors from the process. The Figure offering provides proof of concept on the blockchain to create high quality assets.
Figure boasts the fastest home equity loan on the planet, with approval in as fast as five minutes and payment in five or fewer days.
Challenges
The Figure team envisioned three main challenges to fully implement the protocol they wanted to create a viable and prosperous company. They needed to resolve the legal issues, comply with regulators, and get more participants.
To solve the legal issues, they hired top-notch lawyers and a senior partner at a securitization law firm to help make the smart contracts legal and enforceable. Their loans are now on the blockchain, legal, and enforceable by law.
To address regulation questions, they went to the SEC to get feedback. The company listened to the Commission’s request and has revamped securitization with blockchain technology.
Now, the third hurdle, growing the business, is Figure’s primary focus. The company seeks to be customers’ warehouse provider and omnibus account on the chain and has plans for partners to be nodes on the blockchain.
How the Platform Works
Using a proof-of-stake consensus mechanism, the Figure protocol originates, services, and securitizes loans on the blockchain. The company’s token is called Hash, and holders share revenue of the portal. Voting members decide on the governance structure.
The creation of nodes is for enforcing smart contracts, not for validating blocks. Every transaction will execute a smart contract and be its own new block. Once a person applies for a loan from Figure, all data is recorded on the blockchain, named Provenance. Once Figure issues the loan, the borrower buys Hash, which is immediately converted into fiat currency. All transactions will be made in an omnibus account and made in Hash. These transactions will happen simultaneously, so the funding of the loan has a record on the chain.
The Working Product
Figure’s first offering is a super prime HELOC loan, which is designed to help people get comfortable with creating the product on the blockchain. The protocol has been up and running for almost three months, with the first loan being originated on the blockchain on July 23, 2018. The proprietary technology is a small part of IBM’s Hyperledger security protocol, which Figure has customized significantly and added adjustments to make it work in lending.
Currently, the platform is still in test mode (fewer than 100 loans). Figure wants to make sure the infrastructure works perfectly before taking it to the large scale. Presently licensed and available in 20 states, the platform will be available in all 50 states soon. It is only available for consumer loans, and the max loan size is $100,000.
The team plans to roll out another product by the end of the year. They are looking at lease back options on real estate. Believing that mortgages are bad economics for consumers, they want to make the cash available for customers to buy their houses and live in them as long as they want.
Figure Dollars and Sense
Chen reports that Figure has seen strong institutional interest in applying to be nodes on the chain. Of the first 30 institutional investors and banks with whom they communicated, 25 of them expressed a desire to be the first node on the chain. The plan is to take 10 “really big banks” with whom they will work to develop the ecosystem and handle transactions on the chain.
Originators in the United States and Asia are interested in putting assets on the chain. Nodes currently include large banks and renowned firms from New York and California.
Using Blockchain tech to eliminate the need for a custodial bank, auditors, and other third parties should eliminate 50 percent of agency fees and reduce costs by 70 to 80 percent. Figure will charge one-third of the savings as an active fee to use the platform.
The company’s Series A round raised nearly $59 million.
Ideal Ideal Customer and Competition
Figure’s target customer comes from a group it refers to as CLARE, which stands for cash light and rich in equity. These are potential clients who are sitting on a lot of equity but not much liquidity in banks or retirement savings. The Figure offering provides that liquidity.
Currently, Figure doesn’t see where they have any competition. Chen tells us there are no other companies offering a product like this. She says it takes a well established team with a recognized CEO and history. Lending being a complicated business and blockchain being cutting-edge technology, Chen posits that it would take a lot of funding and a strong team to enter the space.
The Figure Team
Figure boasts a strong CEO and team. CEO Mike Cagney is known in the fintech community as the co-founder of SoFi, from which he stepped down as CEO last year. Cagney is joined by his wife, June Ou, who also served on the SoFi team, as chief operating officer, and who left SoFi shortly after her husband’s departure. Chen is also a proven veteran in the space, having served as LendingHome’s chief risk officer, and Sara Priola serves as chief legal counsel, a position she also held at PeerStreet.
Company representatives recently returned from a trip to Asia where they received enthusiastic responses from lenders and asset managers. The company anticipates an Asian node on the blockchain in the foreseeable future. Provenance being asset class and currency agnostic, the team sees no reason it can’t be a global chain. The company goal is to provide originators in various countries with more capital and access to a wide selection of asset classes at a very low cost.
Conclusion
I’ll be surprised if this venture doesn’t succeed. It helps people; it utilizes technology; it allows business to be transacted more easily and efficiently. Until a company comes along and provides this service cheaper, Figure seems to have a viable product with a strong double bottom line. Turning renters into homeowners and allowing homeowners to own their homes at more reasonable rates are wins for us all, and we should all be rooting for this team to succeed. It’s the kind of disruption we’re all looking for blockchain tech to provide.
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Written by Paul Keenan.
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