Figure, founded by former SoFi CEO, is the newest blockchain unicorn. But why?

Markets•December 6, 2019, 5:34PM EST
UPDATED: December 6, 2019, 6:13PM EST
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Figure, founded by former SoFi CEO, is the newest blockchain unicorn. But why?
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Quick Take

  • Some thoughts on Figure’s figures, and the HELOC market

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This post first appeared in Ryan Todd's weekly Genesis column, The Interchange, and is a Genesis preview for our Daily subscribers.

U.S. consumers currently hold just under $14 trillion worth of outstanding debt, almost $1.3 trillion more than previous highs set in Q3 2008. 

Pop quiz. What is the only U.S. consumer debt product that has continued to see Y/Y declines in outstanding volumes since 2009, and is now almost half the size since then?

It's certainty not student loans... and Americans likely will never get over their cards.

No, it's home equity lines of credit (HELOCs), which had an outstanding balance of just under $400B in Q3, or ~3% of total U.S household debt.

 

Here's another question: name the blockchain-adjacent company that now officially has the two largest funding rounds within Crypto and Blockchain verticals in 2019? 

It's ex-SoFi CEO Cagney's Figure, which specializes in HELOC loans — on the blockchain! — and just closed a $103 million Series C round, on top of a $65 million Series B in February. It's also the blockchain industry's newest unicorn, minting a post-valuation of $1.2 billion.

Founded almost two years ago, Figure has since raised more than $220 million to provide home equity loans on its native blockchain network Provenance, claiming that the tech has enabled the company to approve loans in “as little as five minutes” and provide funding within five days; vs. typical HELOC industry originations which take 4-6 weeks to get cleared and funded.

The company also secured up to a $1 billion asset-based financing facility through Jefferies, with lines of credit from both Jefferies and financial services company WSFS Institutional Services. In coverage of the Series C, PYMTS reports that Figure has originated over $700 million in loans; while Bloomberg reported in Q1 that Figure had provided ~1,500 home equity lines of credit in 36 states, lending more than $1.5 million per day with the expectation of doubling that amount every few months.

Some back of the napkin math, but assuming Bloomberg and PYMTS were correct (big IFs), and the credit facility still has some capital remaining, suggests that the daily originations are actually slightly below $1.5 million (and haven't doubled every few months).

I'll admit, when news broke earlier this year (courtesy of Bloomberg) of Cagney's second attempt at fintech glory, I was skeptical. The HELOC market in my mind just isn't a product to get excited over, and for too long I've heard of the promise of blockchain within securitized/asset-backed finance, only to see the industry still stuck in PoCs.

However, after revisiting some of Cagney's recent talks (Lendit and ABS East 2019), which include discussions on: what's going on under the Provenance hood, unit economics of the new blockchain-oriented origination system, as well as the long-term opportunities within the securitization industry (a multi-trillion dollar industry), I'm definitely starting to lean more towards the hype.

Don't get me wrong, I have more questions than answers around the valuation, but I can see how Cagney was able to get the checkbooks to open.

In a Lendit keynote speech earlier this year, Cagney detailed Figure's expectation to unlock blockchain-driven cost synergies by reducing origination times from 40 days to just minutes, and the ability to remove auditors and trustees within securitization deals. He estimated in aggregate, the business could see a 150-200 basis point cost takeout within securitized lending, which Cagney believes gives Figure a $40-60 billion TAM. 

Elsewhere, at an ABS East 2019 Conference in September, Cagney provided one of the more detailed responses as to how the Provenance system actually works in practice throughout the origination cycle, and how Figure leverages banking partners like Silvergate Capital (recently IPOd) to help with on and off-ramps:
[The value of the Provenance blockchain] is an immutable instance of a loan [and all of the loan details] that you can prove the provenance of, such that when I fund a loan, I push money to Silvergate... They deliver me a token on the blockchain that represents a claim on that cash. I then sell that token back to the bank with instructions to release fiat from the loan, which [immortalizes] the funding transaction. When the loan is paid, money comes into the bank, delivers a settlement token on the chain, amortizes the loan, and then sends the cash to our account.
Mike Cagney
 
In Cagney's words, the value add of this system is not only the provenance of the loan document, but the ability to verify that it was originated correctly, how various loans are performing in a large book, whether certain loans are pledged to someone else (encumbered), etc. Now, I'm not an ABS/structured products guy, but I've spoken to a former colleague who has worked in structured debt-finance, and it's interesting to hear them verify some of Cagney's quoted pain points.
 
According to Cagney, securitization should see "about 20 basis points" of cost savings by consolidating the owner trust, and not having a custodial bank or pay agent; while the cost takeout opportunity is already being realized within originations, at 60 basis points of reduced origination costs to date. He also believes overtime, assuming network effects (currently only 2 originators on the platform, with "20 ready to be on-boarded soon") there will be visible rate enhancement cost savings due to real-time data into collateral performance.
 
While I'm bullish on the opportunities in securitization, the other touted lending opportunities don't really do it for me.
 
The Provenance whitepaper and additional reports onsite suggest that the Provenance system improves recovery rates on loans, stating that, "when a loan defaults, the comprehensive, immutable loan record on the blockchain will speed the process and improve the rate of recovery." Which I don't really buy at all.
 
For one, blockchain doesn't solve your underwriting algo. But also, Figure isn't the only "digital" lender in the game here. Online lender Prosper recently rolled out a HELOC offering, and every online lender is optimizing across risk and collection functions. Sure, they don't have the power of blockchain to enable funding for HELOCs in 5 days (then again fintech neobanks haven't needed blockchain to disrupt industry norms ), but I'd argue that the advantage of better collections within HELOCs (the core product of the business, even though they're starting to explore into student and reverse mortgage) also is less clear compared to other consumer finance products, as HELOCs are actually the best performing +90 day delinquent loan product in the market.
 
 
Furthermore, Figure is targeting a demographic Cagney has called CLAREs, or cash light and rich in equity. Too bad "ok, boomer" wasn't a thing yet in Q1 of this year. But sure enough, when you look at the largest demographic that use HELOCs, it's by far the people aged +70 years old. Servicing these types of borrowers and minimizing charge-offs isn't going to be improved by a blockchain, but rather higher-touch customer support.
 
 
Still, none of this likely matters if Cagney can deliver on a similar SoFi playbook which included re-bundling other financial products around an original core product (student loans). Figure has recently rolled out a student and mortgage refinance product, and appears to be releasing a money market product soon. But the biggest question that's left unanswered for me is how blockchain can improve THOSE products. The securitzation opportunities seem credible, but is that really worth $1.2 billion?
 
Then again I was skeptical earlier this year after the $65 million Series B. Since then the company has more than tripled its valuation.
 
Go Figure.
 

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