Figure Technologies appears to be one of the few companies to find a viable use case for blockchain in the financial industry — cutting down the costs associated with loan origination.
Earlier this year, the 2-year-old firm spun off its blockchain technology into a separate entity called Provenance.
The idea is that it can help lenders, whether fintechs or traditional banks, reduce the costs associated with various loans and pass the savings to consumers. Figure developed Provenance as part of its digital home equity loan platform that enables consumers to receive approval in minutes and funding in as little as five days.
"If you look at what we've done on the [home equity line of credit], for example, the industry pays over $5,000 to originate a HELOC. It takes 45 plus days to do. We can approve it in five minutes and it costs us a couple hundred dollars," Mike Cagney, the founder of Figure and co-founder and former CEO of Social Finance, said in a recent interview.
Cagney said he wants to expand Provenance's use cases into other areas, including as a banking platform in Southeast Asia, and even municipal bond issuance with MUFG, which recently contributed to a $103 million Series C funding round led by Morgan Creek Digital. Figure is now valued at $1.2 billion.
Following is a transcript of the interview, which has been edited for length and clarity.
In a video announcing Figure's latest funding round, you mentioned the need to raise greater awareness of blockchain. How can this be accomplished?
MIKE CAGNEY: People have been approaching blockchain with the idea of, "Can I do this on blockchain?" and not, "Should I do this on blockchain?"
You need a compelling reason, because blockchain is not the easiest technology to work with from a processing infrastructure standpoint. It introduces some very particular challenges rooted in the fact that it's immutable and you can't change the information that's on there, but also in the processing power.
When we attacked this, we said we wanted to deliver an economic benefit that's shared by everyone in the ecosystem, from the consumer through the downstream securitization takeout. And the original thesis on the HELOC was 90 basis points. We realized closer to 135 basis points as part of what we've done. And a lot of that goes to the consumer in terms of a faster process or a better rate.
And so the way that you have to drive adoption is not because people want to be doing something on blockchain. I don't know that a normal consumer would care. In fact, they might be concerned they're on bitcoin now, which obviously isn't an accurate representation.
Adoption has got to come in the form of a better experience. And if you look at what we've done on the HELOC, for example, the industry pays over $5,000 to originate a HELOC. It takes 45-plus days to do. We can approve it in five minutes and it costs us a couple hundred dollars.
Figure’s latest funding round brought with it a unicorn valuation. We’re seeing more fintechs reach this status. What does that say about the current market for fintech funding?
In our case in particular, we were very focused on the investment thesis for the money that came in. In fact, the term sheet for the round was actually at a higher valuation. And I pushed the valuation down.
The reason I did that is I wanted to be sure that I could deliver the right level of return to the investors if we collectively could deliver the milestones that we have in front of us for the next six to 12 months.
And look, I've been in the entrepreneur space for a long time and I have been through ups and downs. When you've been through the downs, you understand what a down round looks like and the pain that comes with that. Those things actually do happen.
We tried to be pretty pragmatic and we felt that within Figure itself is a financial platform. We have the ability to deliver a reasonable multiple on the valuation that was put into place. But I think if you then layer in the blockchain and the Provenance upside that's there, it was somewhat of a unique situation where it was a growth capital dollar amount for a venture-type return profile. I think that's what attracted the enthusiasm.
Speaking of Provenance, Figure spun off the blockchain tech into the separate entity. The idea at that point was to have banks and fintechs use Provenance. Where does that stand today?
Caliber [Home Loans] is using Provenance now for HELOC origination and we have about half a dozen large mortgage originators that are in a queue to use it either use it for HELOC, or to use if for first lien.
We've got a bunch of fix and flip originators that are in a queue to get onboarded to do fix and flip origination on Provenance. We're doing some transactions on first lien mortgages where we're taking existing portfolios that others own. In this case, it’s Fannie Mae’s RPL mortgages and putting them on Provenance and then financing and ultimately securitizing them.
In fact, there was a transaction that happened a couple of weeks ago that was a milestone transaction, between Jefferies Financial Group and an asset manager where they traded bilaterally on Provenance. It was the first transaction that Figure wasn't on one leg of the transaction.
What we had to do as Figure was we had to de-risk the technology, demonstrate the economic benefit, and demonstrate the efficacy. I think we've done that very squarely within the asset origination space. Our issue right now is we don't have a mechanism to rapidly onboard the folks who want to get on and start using provenance.
We've created a [software development kit] to expedite that. We're starting to use third party consultants to onboard people who want to be onboarded. So I'd expect over the next quarter you're going to see a pretty significant uptake of originators using Provenance.
Do you anticipate traditional financial institutions using Provenance?
I can tell you that we’re working with a ton of banks. They’re providing warehouse financing on the blockchain, both for ourselves and for people who are buying our assets.
There are also a handful of national banks that are looking at leveraging Provenance in the same way Caliber and others are doing for asset origination. And you’re going to see bank adoption on the originator sides, and not just on the financing and take out side.
You also mentioned in the video other areas where Provenance can go next. Can you give some examples?
We’re focused on funds on blockchain, which means running the transfer agent and capital management, and running custody where we think we can introduce some efficiencies both with securities as they exist off blockchain, but potentially over time, securities that exist on blockchain and we see an enormous market for that.
We run two funds that we're moving on to Provenance and we're engaged with a bunch of other institutions to talk about moving funds on. And I think it's going to be everything from private equity and venture funds to hedge funds and ultimately to public funds. We're not there yet.
And then outside of the U.S., there are couple of things that we're doing. We're working with MUFG on the idea of doing a municipal bond issuance on blockchain, on Provenance. We think there's a lot of interesting efficiencies that can come from that.
In Southeast Asia, we're exploring a bunch of different opportunities to pursue, using Provenance as a banking platform, both as a traditional banking platform and then also as a Sharia-compliant banking platform.
