New technologies usually have a gee-whiz moment, maybe even a long gee-whiz period — where the sky is the limit, and anything can happen. Then, of course, comes reality.
Bitcoin and cryptos offer a prime example, where commerce transactions have yet to be among the use cases for digital coins. Blockchain technology — its genesis as a decentralized ledger, publicly visible but anonymous and once synonymous (but not limited) to cryptos — has fared better.
Blockchain offers a real-time, immutable and permanent record of transactions (of data and value exchange), and has been embraced by all manner of firms — from banks to music companies, and retailers to governments. The goal is to reinvent the way things always have been done. In some cases, the results have fizzled. In other cases, blockchain has helped companies create efficiencies by shaving time off operations and saving on costs.
In an interview with Karen Webster, Mike Cagney, CEO and co-founder of Figure Technologies, said that the lending arena has seen markedly improved processes for borrowers and creditors.
Cagney made his comments in the wake of news earlier this month that Figure Technologies raised $103 million in a Series C funding round, led by Morgan Creek Digital. The latest funding round brings the total amount raised to more than $225 million.
Among other offerings, the company provides fixed-rate home equity lines of credit (HELOC) online, with a decisioning process that takes minutes, and funding within days. That’s a significant reduction from the time the process takes through traditional means — one month to a month and a half. The lending process takes place over the company’s own blockchain, known as Provenance.
A Case Of Blockchain Fatigue
From a high-level view, noted Cagney, blockchain has been slow to find real use cases.
“There’s a lot of fatigue around blockchain,” he said, “because people have been talking about it for years — and that it is going to transform everything. There have been some ridiculous use cases, like ‘strawberries from Mexico on blockchain,’ or ‘art on blockchain.’ And the financial use cases have been around ‘can we do this on blockchain?’ versus ‘should we do this on blockchain?’”
Recent trials and proofs of concept, such as those in trade finance, have found an actual denigration in terms of performance or cost, he added. Conversely, his own firm’s “soup to nuts” approach toward securitization targeted an improvement of 90 basis points in operating efficiencies (a basis point is 1/100 of a percentage point), but realized more than 133 basis points of benefit, tied in part to eliminating third-party costs. That’s a significant boost to process efficiency, where margins are measured in single-digit percentages.
The securitization market itself is huge, where $300 trillion of volume makes its way around the globe annually. Hundreds of millions of dollars in costs are incurred through activities meant to safeguard against risk and promote transparency, such as custody and trustee (not to mention administrative) expenses.
As for the banks and other financial institutions, the tide is shifting toward an embrace of blockchain for processing transactions. Figure Technologies said it has originated roughly $1 billion in loans, with partners such as Jefferies and Caliber Home Loans.
“You are starting to see that adoption beginning to happen,” he told Webster, “and the expectation is that [Provenance] is a utility for the broader financial ecosystem.”
Unlocking The HELOCs
Drilling down a bit, and against that backdrop, Cagney said there’s wide room for improvement in the HELOC market — untapped potential, in fact. Figure Technologies has estimated that home equity stands at a record high of more than $15.8 trillion, $6.3 trillion of which is available to be borrowed and put toward home improvement products — or, crucially, paying down much more expensive debt, such as is carried on credit cards.
Cagney told Webster that, given the immutable nature of blockchain, it functions as a registry and an exchange to help improve the HELOC lending process in an industry that has, so far, not figured out how to deliver the right solution to homeowners — in the wake of the financial crisis from a decade ago.
He said the data shows that, among prime unsecured consumer borrowers, a high percentage of them own homes with a relatively modest loan to value. The question remains: Why would they opt to pay 13 percent to 15 percent on unsecured loans when they could pay 7 percent on HELOCs? The key, he noted, is that getting a HELOC has never been as quick or easy as taking on other, pricier debt. Traditionally, it has taken just as long to get a HELOC from a bank as it has to get a mortgage.
Part of the reason for this is that banks do not promote HELOCs, since those loans cost just as much to originate and administer as mortgages (i.e., thousands of dollars) — and, obviously, for much lower balances. The economics, therefore, don’t work. However, via blockchain, Cagney said, those origination costs are reduced to the low hundreds of dollars.
In addition to unlocking a new type of lending product for consumers, the ability to see data in real time — noting who owns what — adds value beyond keeping closer tabs on asset values, as well as loan pricing and performance.
Cagney told Webster that one of the company’s senior advisors is Sheila Bair, a key regulator who helped sound the alarm about the financial crisis a decade ago. According to Cagney, Bair noted that the existence of a platform like Provenance could have pinpointed trouble spots, as well as identified where loans were housed, where leverage existed and what loans may have been underperforming across a broad portfolio of lenders.
“When we originate loans, the inputs (the credit reports, the title, the property value) … are digitally signed by the source of that data. … You don’t have to ‘trust’ what is said,” he explained. In addition, during the loan process, information is distributed in an encrypted way through tokens, while registering ownership on the chain allows for real-time, bilateral transactions.
In terms of a roadmap, he said reverse mortgages are under exploration. The demographics are such that the vertical “is super interesting. … It needs to happen.”
Thus far, there is no way for people to support their retirements without monetizing the equity in their homes, the largest asset many people of retirement age have.
“It cuts a huge amount of intermediation costs and inefficiencies out,” he said of blockchain, “because you are simply just registering ownership, from me to you. … We’ve taken the speed and convenience of unsecured lending, and brought it into a secured situation.”