Figure, SoFi and the Disruption of Finance with Mike Cagney
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.
Prior to starting Figure, Mike co-founded and ran SoFi, one of the most successful consumer fintech companies ever.
In this conversation, we 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.
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Full transcript:
Will Beeson:
Mike Cagney and Lex Sokolin, welcome to Rebank.
Mike Cagney:
Thanks for having us.
Lex Sokolin:
Pleasure.
Will Beeson:
Guys, I'm so happy that we could connect for this conversation. Talk about playing to our respective strengths. Lex and I have managed to connect on a pretty regular basis recently to do some one-on-one podcast conversations and some three-way discussions with interesting FinTech guests. Lex has more of a wealth management and more recently, blockchain/crypto background, I have more of a consumer banking, digital banking background.
Will Beeson:
And Mike basically fits both of those descriptions, having previously founded SoFi, the now far and away industry leader, and I think one of the greatest products of FinTech over the past, what, 10, 15 years or so. And now more recently Figure, which combines blockchain with lending and other financial products in ways that really start to push the industry even further forward. With that as quick intro, Mike, maybe you can kick off with a bit of background on yourself and Figure, and we can dive in from there.
Mike Cagney:
Sure. So I think one of the interesting things about Figure is it's probably most known as a lending company. And yeah, obviously, that's the direct to consumer business or one of the direct to consumer businesses that we have. But the genesis of this was about two years ago, we set off to build a blockchain business. And the idea was that the financial services system is so full of intermediation that there was clearly an opportunity to use blockchain to disintermediate some of the custody/admin/administrator functions that exist within the financial landscape.
Mike Cagney:
And we came up with a concept and we wanted something very tangible to prove to go to market. And we said let's do a securitization of assets on blockchain. And the thesis was we could generate about 90 basis points of savings between the asset origination process, the financing process, the ultimate securitization process. And the framework that we had was one where we were trying to take distributed trustless immutable nature of blockchain and apply it not just to a ledger, but also a registry of ownership and exchange for the assets.
Mike Cagney:
And we came up with a structure that we felt made a lot of sense that the biggest challenge we had, well, there were two big challenges we had, one was the existing Ethereum derivatives wouldn't work for what we wanted to do. We couldn't get the scalability and throughput in terms of what we needed. And so we ended up starting with Hyperledger Fabric, but ultimately doing a very customized version of what ultimately became Provenance which is the blockchain and we had to solve the issue of a bridge between blockchain and fiat currency.
Mike Cagney:
So for example, you still fund a loan, you're funding it in dollars or someone's making a payment. They're paying it in dollars. But you need to reflect that trustless thing on the blockchain. And so we came up with this concept of Omnibus banks. But what was most interesting was we didn't have a lending business at that time. What we did is we went to some banks, and we said, "Look, we have this idea that we think will transform how we do securitization, but also how we do everything from asset administration to repo to trading of financial assets.
Mike Cagney:
And the pushback we got two years ago was this was too much too soon, the market wasn't ready for blockchain. Like can we do proof of concepts, can we take baby steps, and we didn't want to do that. So we ended up creating our lending business really first and foremost as a way to create a forcing function for the blockchain. So we decided that we were going to originate HELOC's which was an interesting asset class in its own right and a Greenfield opportunity at the time in terms of where the market was.
Mike Cagney:
So the intent 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.
Mike Cagney:
And we ended up going to the SEC and walking through what we were doing, getting their approval and dealing with the regulatory and the legal aspect of enforceability of contract and perfection of security and just all these things that had to be done. And that's effectively how we launched Provenance blockchain. So the lending business, 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 we had to be a first mover because the market wasn't going to move first on this.
Lex Sokolin:
So this was around 2018 when you were engaging with the regulators and getting the types of approvals that would make you comfortable doing this?
Mike Cagney:
Yeah, late 2018.
Lex Sokolin:
What was the temperature like then? And what is the temperature like now?
Mike Cagney:
So one of the biggest challenges and sort of a product market problem we had early on and this was really my fault and I was too dogmatic about this is we built a blockchain, and it has an underlying token called Hash. And the premise is that all the economics that get paid into the blockchain get distributed to the Hash holders. So you can think of Hash like equity in a company that has no cost structure, no management and dividends out its earnings every day. So the idea was Hash is a crypto asset but unlike most crypto assets, it yields as well.
Mike Cagney:
So it has a dividend that comes to it. And the premise was that if I was to transact on Provenance, I would be paying in Hash to do that so that there's a Hash marketplace where one can go in and buy and sell Hash and so forth. And the price to transact is indexed to a third of the fiat benefits. So if I was going to save $100 to transact on blockchain and pay $33 to do it, but I'd have to buy $33 of Hash to then pay to transact on the chain.
Mike Cagney:
And as you can imagine the banking ecosystem in particular was very reticent about this because Hash is a crypto asset and the idea of having to buy a crypto asset to transact on a blockchain, every compliance person's head was spinning. And so we moved away from this premise of having to buy Hash, and we said, "Look, you can transact in fiat currency." So if I'm saving $100, I'm going to pay $33. I'm gonna pay $33 in fiat." And what happens at the end of each day is all the fees that are paid into Provenance, effectively get distributed out to Hash holders.
Mike Cagney:
And so the Hash token is still there. And the premise of Hash is a medium for the economic distribution of usage of Provenance exists. But as a user, I don't even have to know that Hash is there. I don't have to know there's a crypto asset and once we got to that point, adoption became much easier because then the banks didn't have to deal or the funds didn't have to deal with the idea of buying and selling crypto assets to exchange on blockchain.
Lex Sokolin:
Given that we're in this territory, I want to ask you what your thought is on the mechanisms in decentralized finance today, which are replicating some of this logic with value accrual to essentially governance tokens but also tokens that are built to have cash flows distributed to holders. So whether it's the things going on with Compound or Balancer or other protocols that are growing very quickly, a couple of billion, actually, in the last two months, I think, has been locked into those protocols. There's a natural tension between how cool that stuff is versus the buy side wanting to own or touch any of it and having KYC gates around it.
Lex Sokolin:
So I guess it's a two part question in that. What do you think is the path of those protocols? Are they comparable, are they real to the types of stuff you're doing? Are they inspiring what you're doing in any way? And then number two is you've sort of packaged... You went to the buy side and got them to adopt it in a really fast way. So how do you get around institutional investors engaging with these types of structures?
Mike Cagney:
Yeah, so I think there's three salient conversations here. The first is around just digital assets. And so for example, we create loans, those loans are digital assets and getting the buy side to be comfortable with a digital asset versus a stack of paper. That's a process that we went through but one that not only were we effective at but with COVID-19, and some of the issues that have come up, that's going to become more and more of a standard way to represent assets as opposed to the way that we've done it in the past.
Mike Cagney:
You can kind of put that one on the side. Then there's crypto asset and then there's stable coin. And let me talk about both because they're both relevant in what we do. So in the context of blockchain and governance, Provenance is a decentralized blockchain. There's 12 stakeholders on it. It's a consensus stakeholder model. Those stakeholders are all financial institutions, but they needn't be, they were there because initially they provided better comfort to the people that were participating knowing that like Franklin Templeton was a stakeholder and Experian was a stakeholder on the blockchain, both are.
Mike Cagney:
But the governance structure was difficult in the beginning in the sense that if we had an administrator, and we had this concept of a quasi private blockchain in the sense that we were managing who could come on, who could come off, and we ultimately move to a different position, which was Provenance itself is decentralized. There is no control over who builds what on Provenance.
Mike Cagney:
Figure has a particular ecosystem that we built on the Provenance blockchain. And within our ecosystem, we have things like loan marketplaces where people can come in and buy and sell loans. And to be able to do that we require that you have an investor passport, which does your KYC/AML work. We require that you go through one of the omnibus banks like Silvergate to be able to transact on the blockchain, to be able to buy and sell assets, for example, in a way that's bilateral and riskless from a counterparty standpoint.
Mike Cagney:
And so the way we look at this is we have an ecosystem that is in a larger blockchain ecosystem. Our microsystem requires certain permissions and controls, but you could build an equivalent marketplace that doesn't require that. You could build whatever you want on Provenance. It doesn't require that. So effectively, we built Provenance, now we released it out. And there's an SDK that allows developers to build whatever they want onto the ecosystem. But ours exists and we require certain conditions because of the regulated business in which we operate.
Mike Cagney:
But the underlying Hash token is separated out and in the context of Hash and what does it allow one to vote for. Effectively, the token allows one to replace stakeholders. It is a proof of stake model. But there's some more complication related to that in terms of how Hash holders vote for those stakeholders. Figure owns a majority of the Hash on Provenance, but we can't vote it and that's just a governance restriction that we have. So we own the economics of the blockchain. We don't have power to control the blockchain in terms of who uses it and who doesn't use it. And I think this is very important. I think that if the more and more you move towards private blockchains, the less and less value you're getting in terms of true trustless bilateral transactions and true proof so I kind of scratch my head sometimes when I hear about banks, for example, running a self contained blockchain, and I wonder why do they do that versus just running a database because they're effectively the source of truth anyway. And so I don't understand what the value is coming out of that.
Lex Sokolin:
I think Bank of America is proudly the largest holder of blockchain patents, which is something they keep advertising. And to me seems like the opposite position you want to be in, which is how many open source commits did you make to the project? Do you see yourself building bridges into the Ethereums of the world at some point?
Mike Cagney:
Yeah. So it's an interesting question, because a couple of dynamics, one is Hash, the token right now is not portable. And so it lives exclusively within the Provenance blockchain. And there's been a lot of discussion, we've had requests to either 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. And it's actually... The market cap of Hash is about $2 billion right now. So it's one of the largest crypto assets out there. Very few people actually know about it. Somewhat intentionally at this point.
Mike Cagney:
But the intent is that it should be portable. The issue is, once that portability is put in place, it introduces a massive incremental set of regulatory issues that we have to navigate. I think there's some people that believe that, and Chris Larsen said this once to me, that he believes 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 kind of had the opposite view, which is I think if 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. So, I see interoperability happening, but it's not a pressing issue for us.
Will Beeson:
I think you mentioned toward the beginning that you identified something like 90 basis points of cost savings from the Figure model versus the traditional model. Can you just talk a little bit about what of that cost savings comes from digital versus blockchain?
Mike Cagney:
Yeah, so that's entirely blockchain savings. So there's an incremental digital benefit, just in terms of having the luxury of being able to create a new LOS, for example, when everyone else is using legacy tech. And so to put the digital aspect aside, well, 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.
Mike Cagney:
And so there's a digitization process that introduces a pretty significant savings and drives very high contribution margin for the product. Once you originate the product, because the LOS is really abstracted from the blockchain. It's the delivery of that loan packet onto the blockchain to eliminate your custody cost, your servicing and onboarding costs, your audit and QC expenses, the ability to bilaterally trade that asset real time with no counterparty or settlement risk with certainty to the buyer as to what that loan packet is, which cuts down your trading expenses, massively reduces your warehousing expenses.
Mike Cagney:
And then the ability to securitize that asset where I no longer need the indenture trustee or the paying agent or the custody bank, some of the these things 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.
Mike Cagney:
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 rearchitecting, the loan origination system, what I call the LOS.
Lex Sokolin:
For the full loan there are a number of consortia that folks are working on where they just enter the data that a loan was issued, and they share that registry. Versus there are situations where you've just got a token that references a bunch of legal paper, but the token's tradable in the way that you describe versus the sort of extreme where actually all the cash flows of the loan are going through smart contracts and people are getting paid out in stablecoins and so on. Where are you guys on that continuum.
Mike Cagney:
So we're on the extreme in the sense that when we originate an asset, what we do is we put into the blockchain all the underlying information that goes into that asset. So call it a credit report, a title report, income verification. They're all digitally signed by source. And so we're not having to do any attestation, trust us, this is a real FICO score. We entered a FICO score. It's coming from Experian with a digital signature. And then there's a smart contract that reflects our underwriting box from a third party that effectively instantly audits that asset at point of origination.
Mike Cagney:
And the point of this is that you have an immutable record that can't be changed. So there's no point to re-audit this every time it changes hands, which is what happens in the traditional space. And then one of the things that we had to bridge was this whole concept of blockchain to fiat and so I have to prove I funded an asset and 30 days from now I have to prove that it paid and so effectively, what happens is when I fund an asset, let's say for $100,000, I put $100,000 into Silvergate, they deliver $100,000 of stablecoin onto Provenance. That stablecoin's in my name. And it's effectively like a bearer bond back to the cash at Silvergate, I sell that coin back to them and ask them to fund the loan. That memorializes the funding.
Mike Cagney:
And then 30 days from now when the loan pays and money comes into the bank, the bank delivers a settlement token and stablecoin to the blockchain, to the loan holder, that loan amortizes, I own the coin, and effectively what I'm doing is demonstrating proof of receipt. And so everything is digital and integrated and running through the chain. The only issue we have in certain counties, they require a wet signature for a deed. So many counties we can do electronic deed filing and say that we have a lien on the property. In some counties you require wet signature. In that case, we use a partner like Christiana to hold on to the deed, create a digital token in the loan packet on the blockchain that says whoever owns this loan packet can come to us and claim the deed and that allows the loan to continue to trade electronically, where you're not having to move paper from custodian to custodian.
Mike Cagney:
But you have that one piece of paper, just the deed, nothing else paper in the loan packet, and you can go claim it if you ever need it. So that's in limited circumstances. In general, we're 100% digital and 100% native to the blockchain.
Lex Sokolin:
Makes sense. One of the things that folks who don't know your full background, might not know just the multidisciplinary nature of your experience and financial services, whether it is now blockchain in this particular asset class or whether it is the investment fund that you run with public trading strategies or whether it is the student lending market SoFi and then the broader pieces around it all the way to the earlier experience with the wealth management platform that kind of kick started it for you. Can you talk a little bit about how you've transitioned between these different industries? And what led you to spot opportunities? As an entrepreneur, how did you get, I guess, trained to see where the buckets of demand were, and which were a good use of time and which were a waste of time?
Mike Cagney:
So it's a great question, and I'll work backwards a little bit in terms of starting Figure and Provenance. We left SoFi. It was a group of us, and we were thinking about what we were going to do. And I had an Aha moment with blockchain where I was just, I had given a lot of lip service up until that point in time. I didn't truly understand it. And then I had some contiguous time to dig into it. And I realized how powerful a bilateral registry and ledger framework was in a marketplace that could support that. And my mind just started going crazy in all the different applications you could disrupt with this.
Mike Cagney:
One of the folks... Yuri Milner has been an investor of ours and, Yuri from DST, had sat down with me and said, "Look, if you can't build a giant business," and I think he might have said the hundred billion dollar company, he's like, "Don't do it. Just wait for the hundred billion dollar idea, wait for the biggest idea that you can go after." And yeah, I kind of laughed at him at the time because I still haven't built a 100 billion dollar company... I've built 3 billion dollar plus ones, but I was like, "You don't get 100 billion dollar opportunities that come off very often." But this is one and and this is where we got really excited and said, "Geez, there's $150 billion of market cap of asset administrator bank services, the BONYs and State Streets of the world.
Mike Cagney:
There's 150 billion dollars in exchange market cap at the top seven exchanges, we just started going through all the things that blockchain could disrupt and the hundreds of billions of dollars of market cap those entities represented and said, this is a big idea. And the issue that we had in terms of the initial frustration of why isn't the market doing this and realizing we would have to be first mover and de-risk it ourselves was find the easiest, biggest opportunity, that intersection between market impact and ease, which traditionally we would call Greenfield opportunities.
Mike Cagney:
And that's why we went down HELOC because the market had not approached HELOC very efficiently. And we knew that there was a way to do it significantly better and that we could drive a decent amount of volume to get the buy side attention to kind of kick the whole flywheel off for Provenance. And we've done that on the asset origination side. We've done that on the fund side. We have funds that we run. And we're using those to drive custody and fund admin and TA services on blockchain.
Mike Cagney:
We have a massive banking and payments application that's going on right now that we've been very, very quiet about, this is really the first time I've ever talked about it in a public forum, that we think is significant. And then we have this crazy cap table management business that we built to... We effectively moved off Carta, moved our cap table onto the system, and it's bolted onto the blockchain, where we can run secondary market for our equity, anytime that we want. We can use this marketplace for KYC/AML, and accreditation and so forth.
Mike Cagney:
And the idea is ultimately, that's our path to disrupt exchanges. One of the coolest things about blockchain is while there's been a ton of hype around it and a ton of focus on it, there's been almost nothing done substantively with it within the financial ecosystem yet, so almost everything is Greenfield. And as an entrepreneur, you've got to be super excited about that where you can go in and build massive businesses that right now the market's just not focused on it. And that's what you want, you want some air cover where you can work for a while, before the really large financial institutions, for example, come in and say, either they don't want this or they want to be a part of it.
Mike Cagney:
I've been fortunate that, kind of going the other direction, I started at Wells. My initial job, I worked at a function of the bank that consulted lots of other parts of the bank. So I got a really good understanding of lending and credit, underwriting and then I got a chance to build their capital markets and prop trading businesses. And I started an enterprise software company in early 2000. I realized enterprise software is a horrible business to be in. And I would never go back, but I've gotten to work in a hedge fund, started a hedge fund, that I still run the funds on and then SoFi, so I've been fortunate to have those opportunities, but I've always found that they've been triggered by an Aha moment, that intersection of "there's a tremendous opportunity" and "I see a path to execute into it."
Mike Cagney:
What you don't want to do. And I think one of the things I always kind of roll my eyes on when entrepreneurs say, either I'm going to be the Uber of X, that's not necessarily a great situation, or I've got a better way to do this than Wells Fargo. That's not a great situation, because the incumbents are very hard competitors to win against, and so you really want to find those situations that are Greenfield. Peter Thiel once told me on the hedge fund side, the best trading opportunities are where they're fundamentally sound and contrarian, meaning that you believe in what you're doing and nobody else is there. And that's what you want.
Will Beeson:
Can you talk any more about that banking and payments use case that you guys are considering?
Mike Cagney:
Yeah, so it's really rooted in this whole desire... Tony Morosini, one of the folks who works with us, Tony built SoFi Money at SoFi, and he's building our banking and payments platform called Cara. And we've been talking for years about the interchange and the monopoly the interchange has and how difficult it is to move off the interchange. And if you look at VISA's market cap and Mastercard's market cap, hundreds of billions of dollars, obviously interchange is a very profitable business.
Mike Cagney:
And so there was a premise, the original enthusiasm around Bitcoin was "hey, this is an alternative to the interchange." The problem is obviously, the medium in which we exchange payment is fixed and it fluctuates around. And so then there's the premise of well, what about stablecoin, and using stablecoin on the systems and that works, but how do you drive adoption. And so what we've been looking at is, I talked earlier about this whole concept of Omnibus banks, these banks that act as bridges between blockchain and fiat currency.
Mike Cagney:
And what we've said is like, 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 BIN, it held the cash. And then we had a source code license of Profile that we built the banking platform on. And so we faced the customers directly, did all the KYC/AML, the BSA, etc. And the bank didn't know the customer. And so we said, well we have these Omnibus banks that kind of do the same thing. So why couldn't we get them to give us a BIN. And then rather than use Profile, let's build a blockchain ledger for individuals and build the same off ramps into ATM and check and wire and etc.
Mike Cagney:
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.
Mike Cagney:
And effectively what we've done is we've teamed up with a company called Hoyos, which is one of Gary Cohn's companies, to build the biometric front end on the mobile app for this. This is a biometric hardened security infrastructure. And so effectively what we've done working with UMB, which is the bank we have on the back end, is we've built a platform to provide a blockchain based banking service. And we can private label that so if I was Walmart, for example, and I couldn't get an ILC because the FDIC shut me down. Well, now I can get Walmart Cash. I can private label this platform. And I have an infrastructure in place where anytime my members go and transact at a Walmart kiosk, it's going to go through a blockchain rail, not an interchange rail.
Mike Cagney:
And Walmart made, I think, $6 billion in 2019, they paid $2 billion in interchange. And so 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. And so we can offer this as a Figure branded solution to the consumers. And 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.
Mike Cagney:
And then we can also use the same geolocation for microcredit for thin file consumers. So when you walk into a Walmart, I can push you, you've got $50 of credit to spend here, you want to use it and allow people to start building credit history and so forth. So we think it's a really interesting solution. And it's one you're going to hear a lot about in the second half of this year, as we start bringing it to market. So it's built, it's working. And it's entirely based on blockchain.
Will Beeson:
Fascinating, and tremendously powerful. I totally get the large scale merchant partnership. If it's the Walmart example, that makes a lot of sense, in terms of the path to widespread consumer adoption. You have a great experience launching and scaling consumer businesses. In addition to the underbanked use case, are there other routes to consumer scale?
Mike Cagney:
Well, it's a great question, and it ties back to Lex's question earlier about how do you figure out how to approach a market. The merchants tried this a few years back with something called MCX, I think Merchant Current Exchange or Currency Exchange, and it didn't work. And there were two reasons why it didn't work, which was one, it wasn't interoperable to interchange. So, it was an either or, either use their system in their closed loop network or you used a traditional debit card. And so that was problematic from an adoption standpoint, but also they went after the wrong initial customer, they went after the Chase Platinum Rewards 4% rewards customer.
Mike Cagney:
And they're saying, "Look, give up that 4% rewards and use our platform and get something much smaller," because they're not collecting that full interchange to distribute back, and you're kind of flipping the paradigm where the rewards incentive moves from the bank to the merchant. And you're also, obviously the merchants, collecting some of the economics back and so the premise on starting with underbanked or unbanked consumers is they're not really benefiting from 4% Chase Platinum Rewards cards, and they're dealing with prepaid debit, which is full of fees, check cashing, which is full of fees, or bank accounts that really don't fit them in terms of what they're trying to do. And we think we can, in fact, we have a solution that we can run the banking aspects significantly cheaper with integrated credit in terms of point of sale credit generation to allow folks to build credit history.
Mike Cagney:
And we think this is the right beachhead. And the premise on this is that as you start migrating those folks over onto the platform, they're subsidizing those 4% reward programs, you're not going to be able to continue to offer those 4% reward programs as you build that migration. And so we think that what we're going to be able to do is build a macro paradigm shift, a merchant incentive application of using Carapay, which is the name of what we do, versus traditional interchange, and so we have to start somewhere in the beachhead, the path of least resistance is unbanked/underbanked. And they're in desperate need of a better solution, and we're happy to build that solution in there right now.
Will Beeson:
That's interesting, target users who are in need of a solution as you say, and then by doing so, effectively subvert the existing model, which is skewed toward interchange funded rewards. That's interesting. And I guess it's a point, using the underbanked, unbanked segment as a way of achieving adoption at scale, it's a point that I've heard recently from the Chimes and the Currents and the Cash Apps of the world, people who are having great success acquiring new customers, because they're not having to displace an existing bank.
Will Beeson:
And I think, who was it? I think it was Stuart Sopp, the Current founder and CEO, basically saying, there is no affluent millennial banking problem in the US that needs to be solved or in Europe, for that matter. And it sounds like some of your thinking is aligned with that from a consumer standpoint.
Mike Cagney:
No, that's right. And I think that the challenge that you have in the context of unbanked/underbanked is if you're using the traditional banking structure as your backend. So, if you're building this on top of Bancorp for example, there's no real reason to believe that you're doing something Bancorp couldn't do per se. There's a question of how do you build your path to monetization? How do you build real unit economics? How do you build lifetime value, and the challenge is the banks haven't figured out how to create lifetime value off this customer segment.
Mike Cagney:
And so I think what you need is first, a much more effective infrastructure to run the banking solution. And then a path of how you build a broader economic position through starting with microlending, for example, and building off of that as you build credit history for the consumers and allow them to either create or bolster their FICO score and so forth. And so I think what I've seen missing so far as folks have approached underbanked or unbanked is really outside of interchange, which has a cap on it, sort of the irony of interchange is you have Durbin which will basically, if you become really successful, you won't get it anymore. Outside of interchange, what is the economic model there? And I think that's one where we have a solution. And hopefully the rest of the market is moving in that direction as well.
Lex Sokolin:
To hop in on this topic. And I think this is just a broader industry question and observation, over the last decade, there's been so many themes and permutations of doing an industry in a phone and SoFi has been a leader in this, but whether it's the neobanks or the robo advisors or Lemonade with their fantastic recent outcome in insurtech, or whether it's now Square or Venmo on payments, there's the story of the unbundling, and then there's the story of the rebundling and trying to build B2C consumer economics on really large user footprints. What is your temperature on that model today? Do you think there's sufficient cross sell between the different products? Do you think the lifetime value of the B2C customer checks out on the million plus user footprints?
Mike Cagney:
And you're right, we've gone from the bundling of solutions, the unbundling of solutions back to the bundling of solutions. 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. And you really need a lifetime value construct and a path of, we used to call it maximizing wallet share and that's probably... I think the term crosssell Wells Fargo made a bad word for what they did.
Mike Cagney:
But the premise is right, which is you get huge value in being able to deliver multiple solutions into a relationship. If you think about on my HELOC for example, it costs me a couple hundred bucks to originate a HELOC. But it cost me a lot more to get the borrower through the door. So my cost of acquisition far exceeds my operational onboarding expenses related to the product. So if I spend that money, and I can sell a second product, I'm doing that at zero CAC. And so obviously near infinite contribution margin on that second solution, and that's where you need to think through both the roadmap of what you sell and what you need to do in terms of building the borrower to a point where they can execute.
Mike Cagney:
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. And one of the things that we made a mistake on trying to build our cross sell is we did wealth too early, so we used student loan refinancing as the beachhead. And we got these high net worth relatively affluent customers, but they had a lot of debt. And they had $150,000 of debt, they weren't ready to start investing, maybe outside of their IRA.
Mike Cagney:
So we didn't realize that wealth management was more of a farming exercise than a hunting exercise. We weren't going to be able to go out and get existing customers in there. But we were going to be able to nurture those relationships so that as they began to pay down their debt, we had a solution that could come in behind that and say, "Hey, now you have excess cash flow. Let us help you invest it."
Mike Cagney:
The cross sell aspect and the lifetime value aspect I think is critical to compete. But you have to be pragmatic about what you offer, and it's not necessarily what you want to offer, it's what your customers really need.
Lex Sokolin:
Yep, that makes a lot of sense. It's been extremely educational, and it's been an expensive education, to watch the sequencing of the various FinTech startups trying to create that ladder in a way that makes sense. And it's such a different path to what is potentially a similar outcome depending on what products you're starting with. An adjacent question is, off the bat, you said that B2B enterprise business is something you never want to touch again. And from personal experience, I can certainly relate.
Lex Sokolin:
You look at the large financial incumbents. And at this point I'll characterize Goldman and JP Morgan, maybe BBVA and Santander, as some of the most risk seeking ones in the space. And there are just so many examples of them launching a digital bank and then shutting it down, launching a robo advisor and then shutting it down. UBS had two different robo advisors, they killed the European one. JP Morgan had two different Neobanks, they killed one of them recently. What do you think is missing from the incumbents to be a real competitive threat to these new business models.
Mike Cagney:
And I think just to clarify, I do like B2B, but I don't like B2B enterprise softwares. I don't like selling software into a bank and then have you deal with death by 1000 paper cuts in terms of customizing software, but we have a huge SaaS business where we license our loan origination system into other financial institutions. And that's a big part of what we do. And we're thrilled to have that business. So it's not the B2B nature, it's just the idea of deploying software and having to customize, it ends up being more of a services shop than a software shop that I don't want to ever do again.
Mike Cagney:
But you raised a really interesting point in terms of why have we not seen the incumbents dominate the digital innovation side, and I think the biggest issue is because they have to disrupt themselves. So think about it, if I'm XYZ and I have a traditional wealth management function, and I'm trying to do a digital push for wealth management for the next generation consumer, for example. Unless I'm doing that explicitly as a lead gen into my wealth management function, I'm inherently creating some cannibalistic aspect or competitive aspect within my business. And I've got to deal with now my entire wealth management team that's upset, unhappy I'm doing this. Why am I doing this? And by the way, we make money. There's nothing wrong with this business.
Mike Cagney:
And I think that's the challenge. And that's the benefit that a startup has, is a startup doesn't have any of that entrenched dogma. For me to launch digital HELOC, it's not that I disrupted a traditional HELOC business that was making me a billion dollars a year. It was completely Greenfield. And so I don't have to deal with that dynamic. There's lots of other things that are really hard, you have to deal with when you're doing something from the ground up, but that's not one of them. And I think the inherent challenge that the incumbents have is they just don't have the incentive to disrupt themselves.
Mike Cagney:
It takes a lot of courage to disrupt a business. And I can tell you like for the banking payment solution that we're talking about, I won't say who but we're working with an investment bank to go out and build our merchant consortium. And the investment bank happens to be one of the largest revenue generators off of merchant acquisition, and it's hugely risky to their business for us to be successful on this. But their view was, "Look, it's going to happen one way or another, we should be at the forefront of this as opposed to reacting to it," which I thought was the most progressive view I've had in conversations around blockchain and technology with the banks in some time, and I applaud the view.
Mike Cagney:
But I think in general, it's really hard for a bank to do that. And I think they have existing constituencies that they have to take into consideration, employees they have to take into consideration, that pursuing these things means disruption to traditional lines, which means people potentially losing jobs. It's a hard decision to make, especially the businesses that are already profitable.
Lex Sokolin:
Mike, you've been an entrepreneur for a while, and have built some spectacular outcomes. It's fun work, but it's hard work. And a lot of things can go right. A lot of things can go wrong. And I think the culture and the way people build companies has also changed over time. How do you think about culture and building an environment for the company that is consistent for the future, and has that changed over time?
Mike Cagney:
Yeah, it's definitely changed for me. And in that, if you think about how I built the last company, the way we brought people into the organization was around ability, then experience then cultural fit. And then everyone talked about culture, you had to talk about culture, but we didn't really put a lot of credence into it. We didn't really define it, we didn't dictate what it was and what it meant to us. And as a consequence, what that inherently led to is, we had people that were outstanding performers, but really bad cultural fits, and that was a mistake that we made where we started Figure and Provenance we spent a lot of time, probably three months, before we even started working on the business concept in terms of what we wanted to do as an organization.
Mike Cagney:
And it was everything from what we wanted to accomplish in terms of transforming financial services to what we wanted to deliver to ourselves, to our employees, to our investors, to our members, and the idea was we were going to put culture first and we have, and I got to tell you in the very beginning, I had some hesitancy about it in terms of... I just have growing up, especially through the trading and the hedge fund environment, you're taught to value the contribution of the individual, and you don't look at the holistic ability of the team.
Mike Cagney:
And one of the things that I've absolutely shifted on is I believe it is immensely more valuable and powerful to have everybody oriented towards a common solution and working together than it is to have a bunch of outstanding individual performers that can't get along and create issues. And so that's really the biggest transformation, which is we now hire culture first. So before we even look at someone, I mean, obviously there's a cursory look at their background and experience and so forth. But before we really deep dive into what they can do, we spend a lot of time up front of are they going to be a fit here? Are they going to be aligned to what we're trying to accomplish? Are they going to approach from a value standpoint, the way that we're approaching in terms of collegial and respectful? We're big fans of Jeff Bezos' disagreeing commit, which is we can have debate and discussion. But ultimately one person makes a decision and everyone has to align around them.
Mike Cagney:
And that person isn't always the CEO, it's across the organization in terms of those decisions. And so that's been a huge awakening for me in terms of the value of cohesive culture. The biggest concern I have post COVID is we've adopted permanent work from anywhere. So we have offices, but no one has to go into the offices, and I had folks that were doing three-hour commutes that I'm super happy they don't have to do them every day now. But I worry a little bit about how are we 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.
Mike Cagney:
And 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.
Lex Sokolin:
Yep, thank you for taking that question and opening it up. Looking at the same question, for example, for ConsenSys, which is a remote first company over something like 30 different countries with people of very different backgrounds and time zones and things that they care about. For me, similarly, being remote first felt really odd. And we had the office and I went into it. And that's what I knew. And since COVID hit it has been something that you just shift on. Because there's no choice. And I think it's just been, it's not something for which there is a playbook.
Lex Sokolin:
And I think the other thing for which there's been this fundamental shift and for which there's no playbook is how much companies now have communities that create a feedback cycle that's very fast. The feedback cycle between a consumer brand and its customers has always been there. But now if you are running a crypto or a blockchain company, and you have token owners, and often that's massively distributed in a global basis. Somebody who has $5 worth of your token has an emotional connection to your brand and an ownership to your system. And you just have really fast feedback cycles between communities and products and I think in a way that just wasn't quite as present before.
Lex Sokolin:
So I find that really, I don't want to say challenging, but I find that to be a new aspect of the type of environment that we're operating in. And so figuring out what values the company stands for and how to position that is tough, but really important.
Mike Cagney:
Yeah, it is. And I think you hit on a really important aspect, which is the feedback loop. We have a thing on our website that lets you email me, and it's not my personal email, but it's an email that goes to me and I read all of them. And what we do is we try to recognize, acknowledge stuff that comes through and some things are, "You suck, you didn't approve me for a loan" and sometimes we'll look into, there's ways we can enhance the underwriting boxes, so forth. But a lot of times it's really good feedback just in terms of process or positioning or communication or ways that we can reward some of our folks that have provided really good service for folks.
Mike Cagney:
And having that open line and taking it seriously. So it's not just a marketing gimmick, I'm recognizing your feedback, and here's what we're doing. But not overreacting to anything, staying true to your brand, I always tell our folks that the employees are just as valuable as the investors and the customers. And so what that means is the customers aren't always right. And I tell my operations people, if someone calls up and starts swearing at you or treating you really poorly, you can hang up on him. You're as valuable as that customer is and as valuable as an investor is.
Mike Cagney:
And so you don't need to take that. And yes there's some firms that the customer's always right, and they train their customer service folks to sit on the phone and get yelled at, and I'm not saying one's better than the other. It's just our values are what they are.
Will Beeson:
To wrap it up, Mike, maybe you could leave us with a few thoughts on products to follow HELOCs at Figure and plans for the next couple of years.
Mike Cagney:
So, I think the biggest thing is we're going to start bringing Hash into the broader crypto market. And in doing so, we're going to start providing a lot of transparency to adoption of Provenance, fees paid into Provenance. And there's pretty significant institutional adoption on it today. And we're obviously continuing to drive that every day. But I think that's what, and this might be a little bit self serving, but that's what I'd be on the lookout for the second half of the year, the ability for people to begin to have access to Hash. We believe we're very close to the ability to run an exchange for it on the blockchain in an SEC approved way. There's a whole separate conversation we could have about our quest to make it a public security and what that means on a decentralized blockchain because you have no sponsor. But that's another discussion.
Mike Cagney:
So I think from my standpoint, that's what I'm most excited about and what I'd encourage people to keep an eye out for: the broader availability of the crypto asset and then the transparency that'll give you to the underlying blockchain business.
Will Beeson:
Excellent. Well, Mike, I look forward to watching all of your progress at Figure. Mike Cagney, and Lex Sokolin, thank you very much for joining us today.
Mike Cagney:
Thank you.
Lex Sokolin:
Pleasure. Take care.
